Campbell Is Bubbling, But For How Long?

When David W. Johnson arrived at Campbell Soup Co. 18 months ago, he found a financially ailing, inefficient company that was, well, in deep soup. Things seemed so grim that about half of the descendants in Campbell's founding Dorrance family--a powerful clan that then controlled 59% of the stock--wanted to cash eut and auction off the venerable food marketer. The other half, soup loyalists to the end, objected vigorously. A nasty blood feud ensued.

Then, Johnson--a flamboyant Australian who fancies himself as Campbell's "Top Spoon"--wielded a very big knife. He shuttered or sold 20 plants worldwide, got rid of roughly 15.5% of Campbell's 51,700-odd work force, and yanked unprofitable product lines off store shelves. The crash diet, though painful, is paying off: Campbell's profits have become the second fastest-growing in the food industry, behind Kellogg Co. More good news: The Dorrance family rebellion has subsided. On May 31, two dissident family members, Dorrance H. "Dodo" Hamilton and Hope "Happy" van Beuren, sold off 2 million shares to neutral institutional investors. Now, Dorrance traditionalists, who hired Johnson away from Gerber Products Co., hold sway.

PENNY-PINCHING. So the ever-frugal Johnson can rest easy, right? Only at his own peril. True, his cost-cutting blitz has delivered a stunning profit rebound: Campbell's net profits hit $316.8 million for the nine months ended on Apr. 28, up 31% over the year-ago period. Wall Street is looking for bang-up profits for the year, and for fiscal 1992 as well (chart). Since late last year, Campbell stock has appreciated some 78%. But there's concern that Johnson's penny-pinching ways may hurt Campbell over the long haul. It's one thing to take a machete to Campbell's bloated overhead. It's quite another to fashion a workable product and marketing strategy that will carry Campbell beyond its maturing soup franchise.

What's especially disconcerting is that Campbell's profit gains have been accompanied by anemic sales numbers--a 1.9% gain, to $4.86 billion, in this fiscal year's first nine months. Sadly, that lackluster revenue growth is likely to continue. During the `80s, demand for Campbell's soup lines, accounting for 50% of operating profits, grew by less than 1% on average, though a 2% jump seems likely this year.

If Johnson's turnaround is to last, he'll have to add much more oomph than that to Campbell's tepid sales. A team-building manager who's fond of taking executives on wilderness trips, Johnson pulled off a smart turnaround at Gerber. The baby-food maker needed serious pruning after a failed diversification. But some wonder whether the 58-year-old Johnson's vision extends beyond cost-cutting. He's "more of a turnaround guy than a long-term manager," says William Leach, an analyst with Donaldson, Lufkin & Jenrette Securities Corp.

TRIGGER-HAPPY? A case in point, critics say: Johnson has been too quick to kill new products. "We had a lot of acorns out there that would have taken 5 to 10 years to grow. What do you do when you've taken the acorns out?" asks R. Gordon McGovern, Johnson's much-criticized predecessor, who resigned in late 1989 after a barrage of barbs from Wall Street.

McGovern was never coy about gambling millions on product innovations--and a few were smash hits. The company's Great Starts breakfast meals scored big in the frozen food category, and its Prego spaghetti sauce line is now gaining on market leader Ragu. Overall, though, McGovern's new-product fling, which produced some 214 new items from 1985 to 1989, was a bust. He also moved the company into costly failures in fresh food such as salads and mushrooms. Johnson, by contrast, has quickly killed unprofitable new lines, such as Campbell's microwaveable soup-and-sandwich dishes known as Souper Combos.

Johnson is taking a more cautious approach to product development, too. Since January, the company has introduced 18 new products or line extensions, including only four new soups, according to researcher Marketing Intelligence Service Ltd. More worrisome, Johnson is squeezing more cash out of existing lines through price hikes, one reason for the company's soft sales. Take canned soup: Last year, a 3% overall price increase resulted in a 4% drop in unit sales, according to Information Resources Inc., a market-tracking service.

Price hikes have also hurt sales of Campbell's Pepperidge Farm premium-priced Goldfish crackers and its Franco-American pasta line. "They're sowing the seeds of future problems by milking their brands instead of investing in them and investing in new brands," says Al Ries, chairman of Trout & Ries marketing consultants in Greenwich, Conn. Indeed, Campbell's advertising budget--which trade publications place at $200 million or so a year--hasn't budged much from last year.

MORE SAUCE. Campbell executives shrug at such criticism. Price hikes may pinch volume for a soup season or two, but they were long overdue. So was a more judicious approach to new rollouts. "We threw a lot of products out there in the `80s without adequate pre-research," says Paul N. Mulcahy, vice-president for marketing services. Now, Campbell does exhaustive consumer research within its familiar categories such as soups and frozen foods.

Campbell executives are also quick to point out that their new profit roll won't be transitory. The company's decision to close the multistory Camden (N. J.) soup and sauce plant in 1989 is saving some $18 million a year after taxes. Meanwhile, modernization efforts under way at remaining facilities have helped boost margins. For instance, a revamping at a Prego plant in Paris, Tex., will soon double the pace of its sauce production.

There's also plenty more money to be made overseas, Campbell believes. Johnson has reorganized the company's fast-growing European operations so that executives in the field report directly to him. He has also sold off money-losers such as the company's D. Lazzaroni cookie company in Italy. At the same time, Campbell hopes to bolster its brand-name recognition in foreign markets. One example: It's now affixing the Campbell name to much of its line of frozen foods in Britain. Taken together, such moves helped Campbell International nearly double its operating earnings, to $30.2 million on sales of nearly $1 billion so far this year.

No question about it: Johnson has made Campbell into a far leaner competitor. At the same time, he's generating the kind of numbers sure to endear him to the Dorrance brood. The trick now is to make sure that his firm grip on Campbell's spending doesn't evolve into a choke hold.