Ms. Fixit
Sara Lee Corporation was once a star of the local business scene but has struggled in recent years. Can CEO Brenda Barnes restore the luster?
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Bryan, now 70, declined a request for an interview, saying that it would be inappropriate to comment because he left the company six years ago.
It may not have been evident to Wall Street or the Chicago business community, but former executives say today that Bryan grew bored and disengaged as the nineties wore on-seeming to show more interest in the symphony than in profit margins on socks and shoe polish.
Few executives discussed-at least openly-the leadership void at the Loop headquarters, and the circumspect Bryan showed no sign he was dismayed or restless. The decentralized structure and diversified product portfolio increasingly worked against Sara Lee, as investors looked for companies with a narrower focus. Was it a food operation or an apparel company? Wall Street couldn't figure out how to value it.
Bryan's final 18 months included some of the worst moments of his tenure. At the end of 1998, Sara Lee recalled 35 million pounds of Ball Park hot dogs and lunch meat amid an outbreak of listeria poisoning that led to 15 deaths, as well as six miscarriages. It was considered the most lethal U.S. case of foodborne illness in 15 years. Yet the story never generated much publicity, whether because it competed for headlines with the Clinton impeachment and his ordering of military strikes in Iraq or the government's caution in handling the case.
No Sara Lee business emerged as dominant-like cheese at Kraft foods. "It's a collection of unrelated brands," says an industry consultant.
The Centers for Disease Control and Prevention (CDC) ultimately found the deaths had been caused by the meat processed at Sara Lee's Bil Mar Foods unit in Zeeland, Michigan. The company pleaded guilty to a misdemeanor charge of selling tainted meat-the settlement stressed that the company didn't knowingly distribute bad meat. It also settled a class action suit and five wrongful death suits for a combined total of about $6.6 million.
Succession planning was another problem for Bryan. The number two, or president's, position had been a revolving door under his tenure. When Bryan's protégé, Steven McMillan, became president in 1997, he was the fourth person to hold that title in nine years. A former McKinsey consultant, McMillan had been in charge of strategic planning and was considered a master of the mergers and acquisitions game. But he may have been better known for his expensive taste in clothes and cars-he collected Harleys, drove Ferraris, and at one time raced Formula 2000 cars.
In 2004, a 35-year-old Dallas woman and a friend of McMillan's daughter filed an employment discrimination suit against him and Sara Lee, charging that McMillan rescinded an offer of a $140,000-a-year marketing job after she broke off their affair. The case was settled in December 2004, but McMillan's tenure wasn't. Months earlier, he had hired Barnes as president and chief operating officer. In February 2005 she was elevated to CEO, the same day Sara Lee announced a "bold transformation plan to drive long-term growth and performance." The company would focus on packaged-meat, bakery, and food-service operations in the United States, as well as beverages and household products in Europe, and divest noncore businesses. That would eliminate Wall Street's confusion as to whether Sara Lee was a food or apparel company.
The final changing of the guard came at the company's annual meeting of shareholders the following October, when Barnes assumed the chairman's post and McMillan retired. In Barnes's first year, revenues rose marginally to $19.3 billion, but diluted earnings fell more than 43 percent, to 90 cents per share, partly as a result of restructuring charges. Operating income fell by a third, to $1.1 billion. Shares slid from $22.32 when Barnes took over, to about $19 six months later, and continued downward to about $16 in late June of this year.
Barnes wasted no time abandoning Bryan's decentralized structure and put in place a model more typical of the packaged goods business. She relocated corporate headquarters from Chicago to Downers Grove, incorporating bakery operations from St. Louis, packaged meats from Cincinnati, and beverages from Rolling Meadows. "Imagine John Bryan in Downers Grove," quips Gordon Newman, a former senior vice president and general counsel who retired in 1995, underscoring how much the old company was tied to Chicago's cultural life.
The new structure should pave the way for a coordinated strategy to market and promote brands-consumer deals as simple as a coupon for Sara Lee hot dog buns with the purchase of Ball Park hot dogs. And Barnes has touted to employees and analysts several innovations, including kid-friendly Soft & Smooth bread, which combines the nutrients of whole grains with the taste of white bread.
But Barnes's decision to jettison businesses is somewhat more controversial, if only because investors aren't sure of the value of what will be left. In rapid succession, she sold Sara Lee's U.S. retail coffee business, which included the Chock Full o'Nuts brand, to an Italian buyer; the European nuts and snacks business to PepsiCo; European underwear brands to a Florida private investment firm; and the European meats business to Smithfield Foods. Barnes took a different approach with Hanes (annual sales: $4.5 billion), spinning off in early September the maker of the Champion, Bali, Playtex, and Wonderbra brands to shareholders, who received a share in the new company, Hanesbrands Inc., based in Winston-Salem, North Carolina, for every eight shares of Sara Lee stock they owned. (In all, Sara Lee expected to raise $3.7 billion from the divestitures, including a one-time payment of $2.4 billion from the spinoff of Hanes.)
There's hope that Hanes, as a stand-alone company, will do better, in much the same way that leather goods maker Coach took off after its 2000 spinoff to shareholders. The stock of Coach, which makes high-end purses, shoes, and accessories, has soared nearly tenfold and its market capitalization recently surpassed that of its former parent.
Former executives say Bryan grew disengaged as the nineties wore on, more interested in the symphony than in profit margins on socks.
Barnes has told investors that she isn't wavering in her commitment to grow Sara Lee at rates ahead of the industry. And with the restructuring complete, greater efficiency and new products are the order of the day, she told analysts in mid-September. ( Forbes estimated her 2005 compensation at $1.43 million-well below the $4.09-million median for CEOs of food, beverage, and tobacco companies but not bad considering Sara Lee's slumping stock price during her tenure.) But some observers wonder if robust growth is possible with a portfolio of such run-of-the-mill products. "Splitting it up makes it easier to run, but not necessarily more valuable," says Kelly, the former general counsel.
Some fear the company will limp along for a while but ultimately could attract private equity or so-called vulture investors who streamline and then sell off the remaining assets. "It's possible they won't be around in five years," says Goldin, of Technomic.
The outlook brightened slightly for the fourth quarter ended July 1st: Sara Lee reported earnings from continuing operations of 31 cents a share, exceeding analysts' expectation of 29 cents. For the 2006 fiscal year, diluted earnings per share fell 20 percent to 72 cents, reflecting restructuring charges as well as gains from the divestitures. Sales fell 1 percent to $15.9 billion and are expected to decline to around $11.4 billion this year, reflecting the Hanes spinoff.
But the company forecasts gains in operating profits beginning in its second quarter that will end December 31st. Alexia Howard, an analyst at Sanford C. Bernstein & Company, rates Sara Lee as outperforming the market because the company will soon reap the benefits of its cost reductions and higher media spending to support its new products. If Barnes can start producing consistent improvements in operating results, the stock should start tracking upward, Howard says, but the shares won't pick up "until people see the proof in the pudding."
Until that happens the top job at Sara Lee can't be much fun. As Sheli Rosenberg, Barnes's colleague from the Chicago Network, puts it, "It's fairly lonely for her."
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