A Crash Diet for Sara Lee

Having fallen behind its rivals in a brand-trimming frenzy, it's turning to new CEO Brenda Barnes to shed the slow-growers en masse

By Robert Berner

The heat is finally on in Sara Lee's kitchen. On Feb. 10 the ponderous Chicago-based food and consumer-products giant replaced Chief Executive C. Steven McMillan with No. 2 exec, Brenda Barnes. Sara Lee (SLE ) also disclosed it would shed brands totaling 40% of revenues, including its apparel business with such names as Hanes, Champion, and Playtex. While Barnes had been perceived as McMillan's successor, the transition occurred much sooner than expected. Wall Street reacted positively, with the shares up $1.32, or 5.75%, to $24.30 in midday trading on Feb. 10.

The sudden change and scope of the reorganization underscored just how far behind Sara Lee is in having the leadership and business structure to cope with the increasing power of giant retailers such as Wal-Mart Stores (WMT ). Sara Lee hired Barnes, 50, last July as president and chief operating officer to bring it focus (see BW Online, 7/1/04, "One Tough Job: Get Sara Lee Cooking"). Her résumé is filled with successes at well-known consumer-products companies, though she caused a stir over work-and-family issues seven years ago, when she resigned from the top post at PepsiCo's (PEP ) PepsiCola North American division to spend more time with her children.


  The charismatic McMillan, 58, was elevated to CEO in 2000 and presided over five years of poor sales and operating earnings growth -- and frequent calls from investors that Sara Lee would be better off broken up into three separate companies: apparel, food, and consumer products. He became embroiled last year in a sexual-harassment suit brought by a woman who said she applied to work at Sara Lee. The case was settled in December, 2004. McMillan will remain chairman through October.

As part of the reorganization, Sara Lee disclosed it would structure its operations around distinct consumer, retail, and geographic markets. North American retail will target the company's brands at major retailers like Wal-Mart. Another unit, North American Foodservice, will target food-service businesses such as restaurants and institutions. The third, Sara Lee International, will target brands outside of North America.

The new setup replaces the far more diffuse and decentralized organization of nearly 200 Sara Lee-owned brands, including everything from Ball Park Franks and Jimmy Dean sausages to Kiwi Shoe Polish.


  Sara Lee also will pursue a spin-off of its branded apparel business as a separately traded public company. The unit accounts for nearly $4.5 billion, or nearly a quarter of total sales. That move comes after Sara Lee announced in January that it was exploring the sale of its European apparel business.

The other businesses Sara Lee disclosed on Feb. 10 that it would sell include its European meats business, with $1.1 billion in sales; its $450 million business that sells direct to consumers, largely in Mexico, Australia, the Philippines, and Japan; and its U.S. retail coffee business, with $300 million in sales. It includes well-known brands such as Chock full o'Nuts, Hills Bros, MJB, and Chase & Sanborn. Sara Lee will keep its Senseo coffee-machine brand.

The steps build on a plan McMillan put in place last summer to break Sara Lee's brands into four segments, based on their growth potential. He aimed to invest more in the two faster-growing segments, while not increasing spending in the slower two. Instead, those units would have been milked for cash to support the two faster-growth categories. If any figure illustrated Sara Lee's troubles it this: The two faster-growth categories account for only 50% of its sales.


  McMillan was late in trying to identify businesses with the most growth potential. In 1999, Unilever (UL ) disclosed it would narrow its brands from 1,600 to 400. Since 2000, Procter & Gamble (PG ) has shed slow-growth lines like Jiff peanut butter and Crisco cooking oil and shortenings to concentrate on its stronger divisions. During this time, too, food manufacturers such as Heinz (HNZ ) and Campbell Soup (CPB ) have narrowed items they sell, being joined by General Mills (GIS ) last fall.

The moves reflect the new reality of global retail, where big players like Wal-Mart increasingly call the shots with suppliers. Those retailers increasingly look for items that sell well, jettisoning those that don't. Moreover, they increasingly want more marketing help and sales information on their wares and increasingly efficient deliveries.

Making her first appearance at a Sara Lee's analyst conference last September, Barnes gave some indication that the company would take a harder look at pruning its brands. It announced then that it would shed 60 of them.


  The more massive disposition announced today suggests Sara Lee needs to cut much deeper if it's to have the focused brand portfolio necessary to compete. However, the odds are long that Barnes will succeed because Sara Lee is so far behind rivals in taking these steps. The rapid pace in retail competition today makes it even harder to catch up.

Unilever is a good example. While it started trimming its brands in 1999, it's still struggling to grow. Last fall, Unilever sharply cut earnings forecasts for the second half of its fiscal year, citing the need to invest more behind innovation and marketing of its brands. Brenda Barnes, take note.

Berner is a correspondent in BusinessWeek's Chicago bureau

Edited by Beth Belton

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