Sara Lee: Changing the Recipe--Again

McMillan expects results in '03, but will investors wait?

Years ago, when a young and brash C. Steven McMillan wanted to get the attention of an auditorium full of door-to-door vacuum-cleaner salesmen, he brought out a 500-pound Siberian tiger. McMillan and his feline partner would wrestle, and then the cat would open her jaw, bite his arm, and pull him toward her. For the finale, he stuck his head in the cat's mouth. "If I was willing to stand up and do something they thought was crazy, then maybe walking up and down the street knocking on doors wasn't such a frightening prospect after all," says McMillan, 55, now the president and chief executive of the company, Sara Lee Corp.

McMillan is going to need that kind of boldness as he starts his second year at the helm and the second year of his ambitious overhaul of the Chicago-based conglomerate. Sara Lee (SLE ), which sells everything from Wonderbras and Kiwi shoe polish to Endust furniture polish and Chock full o' Nuts coffee, is plagued by stagnant revenues and earnings and a stock price that has fallen by nearly 30% since 1998, to a recent $22.50 a share. Over that three-year period, sales rose an anemic 1.7%, to $17.7 billion, for the year ended June 30, while operating earnings rose 5.6%, to $1.2 billion.

McMillan's answer: While his predecessor built Sara Lee into a huge portfolio of disparate brands, McMillan is consolidating, streamlining, and focusing the company on its core categories--food, underwear, and household products. So far, he has sold 15 businesses, equaling over 20% of the company's revenue, and has laid off 13,200 employees, nearly 10% of the workforce. He's also reining in a far-flung, decentralized structure.

McMillan is using the cash from asset sales to snap up brands that enhance Sara Lee's clout in key categories. He's also bulking up marketing, giving the biggest boost to brands that were taken for granted in the past. "I do believe that we are substantially undervalued," says McMillan, "and I do believe the things we're doing will enhance the growth rate of our company."

The strategy sounds exciting--just what Sara Lee needs to kick-start growth. Trouble is, the company has been restructuring for years and has little to show for it. This time, McMillan isn't promising any results until 2003 at the earliest, and many investors doubt he'll ever pull the company out of its rut. Indeed, some believe Sara Lee is headed toward a breakup in the next few years. "You've had continual restructuring over the past four years," notes Kevin R. McCloskey, a portfolio manager at Federated Investors Inc., which owns 3.5 million shares. "People thought they were going to jump-start the growth in this company, but so far, it hasn't materialized."

STORE SHORTCUT. McMillan isn't conceding anything. On Aug. 14, he closed the largest deal in Sara Lee's history, a $2.8 billion purchase of St. Louis-based breadmaker Earthgrains Co. The deal quadruples Sara Lee's bakery operations, making them the nation's second-largest, and it gives the company a direct-to-store distribution system it can use to launch new products. McMillan is also looking for acquisitions in household products and food-and-beverage niches, such as coffee, that promise higher-than-average growth. The company won't comment on specific targets, but Sara Lee is considered a potential buyer for Dial Corp. (DL ), the $1.7 billion soapmaker that went on the block in August.

In 1997, then-CEO John H. Bryan, who will step down as chairman in October, was struggling with the same issues: a product lineup that had become far too diversified, a failure to wring full value out of its most famous brands, and growth that was slowing to a crawl in the company's biggest categories. His idea was to transform Sara Lee into a lean marketing machine and leave much of the manufacturing to others. Bryan sold more than 100 factories, from hog-slaughtering facilities to textile plants, and made up a word for this radical effort: deverticalization. With the Internet becoming all the rage, analysts hailed Bryan's bold plan to create a virtual company. But the moves did nothing for profits or revenues. "Sometimes, the more chairs you move around, the more dust you see behind the chairs," says Prudential Securities Inc. analyst John M. McMillan.

Sara Lee's McMillan calls his plan, more simply, a reshaping. In practice, that has meant selling brands--such as Coach leather goods, which fetched $967 million last year--that didn't fit with Sara Lee's core businesses. McMillan says the effort should start paying off in the fiscal year ending June 30, 2003. "I am much more concerned about what this company looks like and how it is performing four years from now than I am next quarter," he says.

TOO MUCH PAPER. Sara Lee's largest customers are also driving the effort to compact the company's structure. At one time, Sara Lee had close to 200 different regional brands and other business units; McMillan is cutting that number to about 100. For years, retailers have had to do business with as many as 10 different Sara Lee meat companies. "So if you are an Ahold or a Kroger or a Safeway, you've got to deal with 10 different organizations and multiple invoices," says McMillan. Those companies are being combined into three.

Adding to the pressure to consolidate are national retailers such as Wal-Mart Stores Inc. (WMT ) and the largest supermarket chains. They're less interested in stocking regional brands, such as Sara Lee's Bryan Foods, a leader in the Southeast. "Kroger's, Albertson's--these chains don't want regional brands because they want their stores to be laid out the same no matter where they are," says David Adelman, an analyst at Morgan Stanley Dean Witter & Co. "They want the same brands nationwide."

McMillan is also attacking the problem of duplicated effort on the sales side. At a management meeting earlier this summer, the idea came up to go to Wal-Mart with one team instead of sending in a slew of brand managers for various products--something other consumer-goods companies figured out years ago. At Kraft Foods Inc. (KFT ), unified sales teams have been calling on large retailers since 1984. Now, Sara Lee is using the same approach with several of its big customers.

Brand-building is another major part of McMillan's strategy. He has boosted spending on marketing by 8% this year, to $2.3 billion, including a 30% increase in advertising. One of the new ads for Hanes stars Michael Jordan in a locker room pulling out a pair of artichoke-print boxers and a pair of long red briefs from his gym bag as other players watch. The commercial ends with Jordan saying: "Hey, as long as it's Hanes." Other key brands slated for marketing boosts include the Sara Lee flagship, which accounts for only 3% of sales, and new higher-margin products, such as Jimmy Dean snack sausages and Ball Park kosher hot dogs.

THIN WIN. But better ads may not be enough to fix fundamental problems in the apparel business. While the company nurtures new growth stars such as coffee and bite-size versions of its leading snacks and desserts, apparel continues to account for 43% of sales, and growth there is at a standstill. Sara Lee, which owns Hanes and Playtex underwear and L'eggs hosiery, has a leading U.S. market share in men's and boys' underwear, 43.1%, but that gives it little more than bragging rights because margins are so thin. McMillan is counting on more spending on brand-building to boost profits. But "the scary thing is, even if you fix that business, it's still apparel, and it's not really viewed as a high-value-added business," says Eric K. Katzman, an analyst at Deutsche Banc Alex. Brown.

Is McMillan the man who will finally ignite growth at Sara Lee? Raised in Alabama and a graduate of Auburn University, he went north to earn an MBA at Harvard University. He has spent 25 years at Sara Lee, running all of its major business lines--including the Electrolux vacuum-cleaner unit that Sara Lee sold about 10 years ago. He also oversaw mergers and acquisitions and served as president before his promotion to CEO, and he's in line to succeed Bryan as chairman. Despite his solid track record and bold strategy, at times even McMillan seems uncertain whether his plans will work. "When your stock price is not performing, you sit and agonize and say: `Well, what do I do next?"'

He may not have much time to reflect. Analysts give him about a year and a half to show results before further divestitures or even a breakup becomes inevitable. McMillan jokes that if his efforts at Sara Lee fail, he could always fall back on his experience taming tigers and join the circus. Either way, he might be someone's lunch.

By Julie Forster in Chicago

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