Stirring Things Up At Quaker Oats

Will axing Gatorade's Doyle and other top execs help cure its ills?

When James F. Doyle plopped down on a lobby sofa at the Naples (Fla.) Ritz-Carlton for a chat with his boss on the evening of Feb. 16, he had no idea he was about to be fired. The 45-year-old head of Gatorade had led the brand to six years of red-hot growth--even as parent company Quaker Oats Co. had struggled under the weight of its disastrous $1.7 billion Snapple acquisition. Doyle and new Quaker CEO Robert S. Morrison had just finished rehearsing speeches they would give to Wall Street analysts the next day outlining Quaker's growth strategies.

But during a 20-minute chat, Morrison made it clear that Quaker's future and Doyle's would no longer converge. "It was new news to me," Doyle says. Morrison, who left the top job at Kraft Foods Inc. to join Quaker in October, told Doyle of his plan to eliminate an entire level of top management, including Doyle. On Mar. 12, Morrison announced those changes and promoted 10 managers to oversee Quaker's various brands, including Life cereal, Rice-A-Roni, and the flagship oatmeal line. All report directly to the CEO. Morrison also announced a $1 billion stock buyback.

It's all in an effort to wake the 97-year-old Chicago food company from the management torpor that Morrison says has held it back. With $5 billion in annual sales, Quaker is a relatively small player in food--less than one-sixth the size of Kraft--but its organization is more convoluted. "We have an unnecessarily complex structure," Morrison told analysts Mar. 12, adding that the jobs he cut "are no longer needed [or] relevant."

Still, analysts mourn Doyle's departure. Doyle "was one of the few no-nonsense executives in a company where there was clearly a lot of nonsense," says Prudential Securities analyst John M. McMillin, referring to the Snapple debacle. Gatorade's 8% U.S. revenue growth in 1997, to $1.2 billion, beat any established food brand, says Steven M. Galbraith, a Sanford C. Bernstein analyst.

IN THE BAG. With the new organization, Morrison makes his mark--anointing a new cadre of mostly younger execs and purging those elevated by his predecessor, William D. Smithburg. Smithburg stepped down in 1997 after Snapple was sold for a $1.4 billion loss. The divisions will no longer operate as separate fiefdoms, as Gatorade had under Doyle.

Morrison is also aiming to generate $15 million to $25 million in annual savings. The cuts are key because future revenue growth won't be easy for Quaker. Its hot-cereal business, which Prudential says accounts for 9% of revenue and 16% of earnings, isn't growing much. In cold cereals, sales grew 22% in 1997 as Quaker expanded distribution and introduced cheaper bagged products. But domestic sales can't expand forever, and bagged cereals have relatively low margins. Plus, Quaker is vulnerable to price cuts by bigger rivals such as General Mills Inc. Even Gatorade isn't without problems: It lost roughly $15 million in the often slow fourth quarter.

Internationally, the situation is downright troublesome. Only 3% of Quaker's operating earnings come from overseas, even though 21% of revenues is international. Analysts say Morrison will likely try and sell the European food business. Gatorade's Latin American business is strong, but it has struggled in Asia.

Will the changes work? At first, Wall Street was encouraged--bidding up Quaker's shares more than 5%, to as high as 60 3/8. But by Mar. 18, the stock had retreated to 57 5/16.

Meanwhile, Doyle is biding his time until a noncompete clause lets him back in the food business. He's taking a separation package he calls "more than fair" and heading off for the Caribbean and a weeklong family vacation on a 51-foot boat. You can guess what beverage they won't have on board.

Before it's here, it's on the Bloomberg Terminal.