Wish Everyone Used Dial? The Soapmaker Does
It would be an understatement to say that Herbert M. Baum was surprised when he was appointed the new CEO of the troubled Dial Corp. during an Aug. 4 board meeting. Just one month earlier, Baum--then a Dial board member and chief operating officer of Pawtucket (R.I.)-based Hasbro Inc.--sold a vacation home he owned in Scottsdale, Ariz., only a few minutes drive from Dial's headquarters. Now, he and his wife, Karen, have to rent an apartment. "I guess I should never be put in charge of logistics," he jokes.
Clearly, the Dial board disagrees. In fact, it has put Baum in charge of the biggest organizational quagmire the soapmaker has faced in its 52-year history. On July 20, the company reported that second-quarter net earnings plunged 68%, to $9.5 million, from $29.4 million in the same period the year before. It's the second earnings disappointment in a row for Dial, which along with its famous soap, also sells Purex detergent, Armour canned meat, Renuzit air fresheners, and a variety of specialty lotions and bath products. The stock has nosedived 64% in the past year, from 31 to 11.
When the board heard that third-quarter results would also miss expectations, it voted unanimously to oust CEO Malcolm Jozoff and Chief Financial Officer Susan J. Riley. The top job went to Baum, 63, who had been an executive at Campbell's Soup Co. and head of Quaker State Co. before selling it to Pennzoil. On Sept. 21 in New York City, Baum will unveil a turnaround plan he named with the acronym "SFX01." The goals? Stabilize the business. Fix or jettison problematic units. Explore options. The best one, he concedes, may be to sell a spruced-up Dial to a large suitor. At least a few major shareholders already are urging Baum to sell.
Whether Baum will be able to deliver a fat premium for shareholders is questionable, given the missteps of previous management that left the company with a slew of problems, including more than $500 million in long-term debt. In an attempt to rev up Dial, which in 1996 had just spun off a services company, Jozoff acquired businesses and launched products that the company wasn't up to running. The biggest blunder was using price promotions to encourage retailers to stock up on Dial products, causing a glut that led to this year's disappointing results. "I hope [Baum] can fix this, but I'm skeptical," says Wendy C. Nicholson, an analyst at Salomon Smith Barney. "It's been shocking to see Dial's growth hit a wall."
HEAVY DEBT. When Jozoff took the helm in 1996, Dial was emerging from a half-century under a bewildering array of conglomerates. Meatpacking company Armour & Co., using a germicidal agent, first launched Dial soap in 1948. Armour was acquired in 1970 by the Canadian bus company Greyhound Lines Inc. In 1991, Greyhound changed its name to Dial and sold the last of its bus businesses. Five years later, it spun off Viad Corp., which included a food-service unit and other service businesses. After a series of acquisitions, Dial was left heavily in debt, and Jozoff moved quickly to reduce costs, divest underperforming businesses and expand the product line.
At first, it looked as if the strategy was working: Sales climbed 12% in 1998 and 13% in 1999, to $1.7 billion. Operating profit grew 13% in 1998 and 17% last year. "At the end of 1999, board members were standing on their chairs cheering," Baum says. "But it wasn't real."
In fact, Baum says the company's sales team had boosted end-of-year numbers by "stuffing the channel"--offering retailers promotions so they would stock up on Dial products. "We had two strong years," Baum says. "To keep up the momentum, management used the distasteful practice of loading the trade with inventory--especially on Dial bar soap." The company says it will not restate earnings. Jozoff could not be reached for comment. Expecting a Y2K hoarding of canned meat, Dial loaded up stores with extra Armour Star Vienna Sausage and then raised prices, hoping competitors would follow. But there was no Y2K panic, and competitors didn't raise prices. That left shelves overflowing with Armour cans.
Retailers were also loaded with Dial's bar soap at about the same time the company introduced a version that's softer and produces more lather. Convincing retailers to stock the improved bar was impossible; they wanted to sell off the old stuff first. But Baum says Jozoff didn't inform the board of the overselling until it demanded an explanation for this year's earnings shortfall. Estimates for Dial's 2000 operating profit have dropped from $73 million to $60 million in the past month, according to earnings tracker First Call Corp. Analysts expect sales growth to be flat or down.
There are other troubles, too. Last year, Dial set out to expand its product line and acquired two small independent companies, Sarah Michaels Inc. and Freeman Cosmetic Corp., which make scented lotions, bath gels, aromatherapy oils, and other specialty products most often sold in gift packages. Dial added to them its own new line, Nature's Accents. Although such specialty products seemed a natural extension of the company's core soap business, management wasn't prepared to handle the manufacturing challenges that arose. Dial's computer system wasn't equipped to predict inventory demands for the gift packages. Baum is now trying to work out the logistical kinks, but admits they aren't likely to be solved in time for this holiday season.
CONFUSION. Also disappointing has been the joint venture signed in March with German conglomerate Henkel. The companies teamed up to market Henkel's home dry-cleaning product, Custom Cleaner, and to produce Purex Advanced, a new formulation of Purex that is a better stain remover. With a price that's $1 to $2 higher per bottle than the original, Purex Advanced is in head-to-head competition with Procter & Gamble Co.'s blockbuster Tide. So far the little guy is losing. Revenues from the Dial/Henkel joint venture in the second quarter were $11 million, making it unlikely that management will reach its target of $75 million for the full year. The problem is that consumers were confused by the ill-defined advantages offered by the more expensive version of Purex, says William H. Steele, an analyst for Banc of America Securities. Baum says he tried in vain to talk Jozoff into giving the product a completely new name. "When Volkswagen bought Rolls-Royce, they didn't call it Volkswagen Advanced," says Baum, who's now working on a "marketing makeover for Purex."
With more and more products competing for limited shelf space and consumer dollars, Baum will have to spend heavily if Dial is going to have any chance against giants such as P&G and Colgate-Palmolive Co. But his hands are tied by Dial's weak financials. The company's gross margin fell to 48.9% in the latest quarter from 50.9% in the same period last year. And its debt is on the rise. When former Greyhound CEO John W. Teets divested Dial four years ago, he saddled it with $300 million in long-term debt, estimates Jeffrey Putterman, an analyst for George K. Baum & Co. Between the recent acquisitions and Jozoff-led stock buybacks amounting to $200 million, Dial's long-term debt is now $526 million. Putterman says the company can borrow a bit more, but that would only further weaken its position. "When you have that much debt, it exacerbates your mistakes and limits your choices," Putterman says.
LITTLE LEVERAGE. This is a bad time to be a consumer-products company with restricted resources. Five years ago, a company could get a new product on shelves in the New York metropolitan area by paying $5 million in fees to retailers. Today, there are more products and fewer retailers because of consolidation. As a result, it could cost as much as $25 million, says Matt Freeman, a senior partner at Marketing Corp., a marketing services company. Heavyweights such as P&G may have extra leverage to bring fees down, but "if you're not a big company, you get whacked hard," he says.
What Baum needs to do now is work fast to clean up the mess he inherited. He has already reorganized Dial into five business units, making them accountable for the first time for their own inventory and profit-and-loss numbers. Managers will be evaluated and compensated based on their profitability. He'll spend the next several months assessing which underperforming brands might be sold.
But even if Baum is successful, it's unlikely Dial will be able to survive on its own. "Dial has some valuable brands," says Ralph V. Whitworth, a principal of Relational Investors LLC, which owns 3 million shares of Dial. "The question is, can they spread a big company's overhead costs over that small a base and still be competitive?"
Baum admits the answer is probably no, and he fully intends to welcome potential acquirers that come visit him in Scottsdale. Sara Lee, Unilever, and Henkel are among the names analysts have speculated may be sniffing around, but neither Baum nor those companies will confirm it. Only one thing seems certain: Dial, the independent company, could be facing a very short shelf life.
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