Sowing the Seeds
John Scharffenberger grows his businesses from the ground up
PHILO, CALIF.-On a frosty November morning, John Scharffenberger wanders head down over his 32 acres of Mendocino County redwoods and oaks. Whenever the lanky 51-year-old spies a fallen acorn, he picks it up and plunks it in his tin bucket. When he later lugs the bucket over to Fred and Ethel, they snort with pleasure. Scharffenberger has acorn-fed these two carefully selected pigs for almost a year. The black-and-white-spotted Fred and gray-all-over Ethel could very well be the porcine Adam and Eve of one of Scharffenberger's next big ideas-producing tasty, Spanish-style hams.
It will take another year of salting, drying, and curing before the results of this experiment can be tasted to see if his methods can produce hams rivaling the Serranos that are cherished by gourmets the world over. But Scharffenberger isn't anxious: "If it takes two years, I don't care." All his projects "take forever," he shrugs. "But they are fun and interesting."
Perfection. In a fast-food, fast-buck nation, Scharffenberger has become beloved by diners and respected by business people for growing his enterprises unfashionably slowly to maintain top quality. Scharffenberger Cellars champagne (he sold his interest in the business in the mid-1990s, but the wine is still made with the methods he pioneered) was recently rated the best nonvintage bubbly by the Wall Street Journal. And Scharffen Berger chocolate, which he cofounded in 1996 with chocolate perfectionist Robert Steinberg, is credited with helping launch America's fine-chocolate boomlet. Scharffen Berger (he added the space to distinguish the chocolate from the champagne) will sell more than $20 million worth of its silky dark chocolate bars this year.
Having two such remarkable successes in a brutally competitive field that sees close to 1,000 food brand introductions each year shows that Scharffenberger is a master entrepreneur, says the London Business School, which has invited him to teach entrepreneurship in early 2007. "For John, the pleasure is in the creation and early stages" of a business, says John Mullins, who leads the LBS entrepreneurship program. Scharffenberger has succeeded because "he has a real passion to change the world," Mullins adds. For his part, Scharffenberger says he hopes to pass on his philosophy by asking students: "How are you going to make" a new product? "How are you going to tell people why it is so good? If it is not good, maybe you shouldn't do it."
Scharffenberger's own lessons about how to transform the pursuit of something good into a business had an unlikely start at his childhood home. As a teenager, he was uninterested in business and occasionally annoyed his father with his beard and hippieish ways. George Scharffenberger, who died in 2001, bought companies such as Motel 6 and Home Insurance to build up the City Investing Co. conglomerate during the 1960s and 1970s. When tax laws and investing fashions changed in the 1980s, the elder Scharffenberger dismantled the company he'd assembled, returning billions to shareholders.
John Scharffenberger says his father was "too smart to ever give me money" for any of his ventures. But the elder Scharffenberger did sometimes talk about business to his six children, and he got them to help with his hobby of beekeeping. John also loved joining his brothers in ambitious gardening projects on the family's 18-acre home in Southern California.
Soon thereafter he learned one of his most important business lessons: Even the best-developed green thumb isn't enough to grow greenbacks. Scharffenberger graduated from the University of California-Berkeley (in his personally designed major of biogeography) and moved north to work in a winery. Unhappy with bland supermarket strawberries, he started a farm on the side. The strawberries were succulent, but he wasn't able to get enough of them to paying customers before they rotted. That's when he realized that perfecting the technique of growing and producing a delicious product was, for him, the fun beginning of a business. "Distribution is really the hard part," he says now.
He also learned to ignore conventional wisdom. His continuing interest in the influence of a place's geography on its plants and creatures soon led him to the conclusion that the Napa Valley wineries were doomed to produce poor imitations of champagne because the climate was too hot to produce the right kind of grapes. The climate a few valleys closer to the Pacific, however, was more suitable. He started growing grapes on family land in the Anderson Valley. And in 1981, Scharffenberger rented a garage in nearby Ukiah and defied local conventional wisdom by using French processes such as malolactic fermentation on area grapes. "I knew the conventional wisdom was wrong because my taste buds told me it was wrong," he says.
Reagan's toast. Since he knew by then that a good product was not enough, he hired and trained managers to run his operations so that he could spend the bulk of his time throwing parties for waiters and maitres d' and schmoozing with potential customers. "He is a great raconteur," says Tex Sawyer, whom Scharffenberger hired and trained and who now runs Scharffenberger Cellars for the new owners. The combination of a good wine and a charming salesman began to pay off. By 1988, his sparkling wine was highly regarded and was even used for the toast between Ronald Reagan and Mikhail Gorbachev at a summit celebrating the end of the Cold War.
Unfortunately, all his hard work and clever salesmanship weren't enough to put the company on a steady financial footing. So in 1989, Scharffenberger sold a controlling interest to his French competitor Champagne Pommery, which promised to invest in the new plant and vineyard. Unfortunately for Scharffenberger, in 1991, Pommery was bought up by the company that owns Veuve Clicquot. Scharffenberger soon began to clash with executive Mireille Guiliano, who has since gone on to write French Women Don't Get Fat. Scharffenberger left the company for good in 1995. Guiliano soon changed the name of the champagne to Pacific Echo, a brand that bombed. The parent of competitor Roederer bought the plant and vineyard in 2004, immediately re-establishing the Scharffenberger brand. It hopes to sell 24,000 cases in 2006 and, thanks to recent glowing reviews, more than 30,000 next year. "John set the original style and traditional blending patterns. He set the taste" that keeps winning plaudits, says Sawyer.
Scharffenberger's next endeavor showed how large a role luck and timing can play in business success. He was ready for another project in the mid-1990s, when he ran into Steinberg, whom he had known as a physician in Mendocino in the 1980s. Steinberg had quit practicing medicine to enjoy life when he was diagnosed with a rare form of leukemia. Traveling through Europe, Steinberg became fascinated by fine chocolate. He soon began making chocolate from scratch in his kitchen. He wanted to start a real factory but was having trouble. Everyone in the notoriously secretive chocolate industry insisted it would be impossible to make a profit on a small, high-quality chocolate factory in the United States. And Steinberg was stymied by many business details. So he asked Scharffenberger to join him. Though their temperaments are different-Steinberg is very much a cerebral scientist-they agreed on key business strategies such as a fanatical insistence on the very best ingredients, aiming for top quality through every step, and plenty of patience.
The best. They spent the first year scouring the world for the main ingredient of dark chocolate: cacao beans. They also experimented with antique European grinding machines that give elite brands like Valrhona their smooth texture.
Since creating a good product is only half the battle, they pitched their story and chocolate to everyone they thought could help. Steinberg cold-called Alice Medrich, author of several chocolate cookbooks. Although she gets lots of calls from would-be chocolate entrepreneurs, she was impressed by Steinberg and loved the chocolate. She agreed to join the company's board, giving the venture credibility. "They raised the level of the whole playing field" in the chocolate industry, she says. Scharffenberger shared a piece of the chocolate with his acquaintance James Kohlberg, who is a son of leveraged-buyout maven Jerome Kohlberg and runs his own investing firm. It took just one bite to get him interested in becoming an investor: "I am a bit of a foodie, but when I first tasted their chocolate, I was totally blown away," Kohlberg recalls.
They were also careful about selecting the company name. The wine business taught Scharffenberger that "people want to see the proprietor." Although the chocolate had been Steinberg's idea, they chose to take advantage of the Scharffenberger name's association with fine champagne.
They decided to ignore the industry culture of secrecy and cutthroat competition by opening their Berkeley factory to the public and were the first to print the percentage of cacao in each bar. "Transparency is something that food manufacturers owe their consumers," Scharffenberger says. "Consumers are different now. They want to know what they are eating."
Though demand for their premium chocolate soon outstripped their tiny factory's capacity, they didn't lower their standards to grow. Daniel Snow, a Harvard Business School professor who studied the company, was impressed to see them throw out an entire batch-worth thousands of dollars-because an experiment with a substitute ingredient resulted in a taste they believed was subpar. "A lot of people who have a great idea fail. But these guys did it the right way," because they expanded gradually, ensuring quality and controlling costs.
After seven years of such tactics, the chocolate was a hit, but the enterprise was unprofitable. The investors and Scharffenberger brought in an employee of Kohlberg's, Jim Harris, to run the company. Scharffenberger says he was glad to hand over the operational details, since he hated dealing with things like insurance. He must have. Harris says that when he arrived for his first day in January 2004, the company's insurance policy was set to lapse in just three hours. Harris quickly righted the finances by raising prices, negotiating purchases, and embarking on a series of experiments to find new machines that have increased production sevenfold without affecting taste.
The newly profitable company became so attractive that in 2005 Hershey's, which was looking for high-end acquisitions, offered a price that Scharffenberger says was too good to pass up-about twice the company's revenues. Hershey won't detail the numbers, but Marcia Mogelonsky, a chocolate industry analyst for the research firm Mintel International, estimates Scharffen Berger's sales are rising by more than 30 percent a year and could top $20 million in 2006.
The triumph of Scharffen Berger shows that the ingredients of success are more than just top quality and smart marketing, says Medrich. The chocolate hit the market just as companies like Starbucks were teaching consumers to appreciate better-quality coffee and medical research was revealing dark chocolate's health benefits. N either partner could have built the company alone. "It was the right time, the right place, and the right people," she says.
Steinberg is still deeply involved in Scharffen Berger, while Harris runs the company and another of Hershey's high-end acquisitions, truffle maker Joseph Schmidt. Scharffenberger does plenty of chocolate marketing and tastings. And he's enthusiastic about Hershey's plan to get mass retailers like Target to sell the company's dark chocolate, which has less sugar and more healthy antioxidants than milk chocolate. "It's good for you. It makes people happy. We don't want to make it exclusive," he says.
Organic. But Scharffenberger spends more and more of his time pursuing new ideas. Besides curing hams, he's helping to make syrah at a small Mendocino winery, Eaglepoint Ranch, that he co-owns. He's also writing a business plan for an organic cacao plantation in Guatemala that would take advantage of the soaring demand and prices for high-quality, organic beans. Planting an overstory of mahogany, teak, and rosewood that could be sustainably harvested and interspersing the forest with shade-loving cacao trees should eventually return at least 10 percent, he figures.
"This would repair a part of the Earth" that has been deforested, he says. "I want to make things better, but it has to work commercially to be sustaining." Budding entrepreneurs, take note: That sounds like something that might be on a final exam.
This story appears in the December 25, 2006 print edition of U.S. News & World Report.