Sara Lee Corporation

1870–2002

Sara Lee Corporation is a leading global manufacturer and marketer of brand-name consumer packaged goods within three major business areas: food and beverage (52 percent of fiscal 2002 revenues), intimates and underwear (37 percent), and household products (11 percent). Within food and beverage, Sara Lee focuses on three principal areas: packaged meats, bakery products, and coffee and tea beverages. The company claims to be the world's leading producer of packaged meats through such brands as Hillshire Farm, Ball Park, and Jimmy Dean. In bakery products, the firm produces fresh and frozen desserts, breads, and doughs, including the famous Sara Lee cheesecake and Earthgrains bread. Through such brands as Douwe Egberts, Maison du Café, Hills Bros., Chock Full o' Nuts, and Pickwick, Sara Lee's beverage business holds one of the top two positions in coffee and/or tea in several European nations, is the leading coffee marketer in Brazil, and maintains the number three position in the U.S. retail coffee market. Sara Lee's apparel operations focus on intimates, underwear, and legwear; the company holds leading share positions in these market sectors in North America, Europe, and several Latin American countries. The firm's well-known apparel brands include Bali, Champion, Dim, Hanes, Hanes Her Way, Just My Size, L'Eggs, Playtex, and Wonderbra. The household products operation is Sara Lee's most global business and has leading positions in four categories: shoe care, body care, air care, and insecticides. Brands include Kiwi shoe care products, Ambi Pur air care products, and Sanex body care products. Although seemingly disparate, most Sara Lee products would be considered staples, helping insulate the company from the effects of economic cycles. Sara Lee sells its products in more than 180 countries.

Early History: From C.D. Kenny to Consolidated Foods

Formally organized in 1939, what is now the Sara Lee Corporation spent the next three decades under the direction of founder Nathan Cummings. Although he retired from active management of the company in 1968, Cummings remained the largest stockholder until his death in 1985, when Sara Lee bought back 1.8 million common shares from his estate.

Born in Canada in 1896, Cummings began his career in his father's shoe store. By 1917 he had built his own shoe manufacturing firm. Cummings's enterprise eventually expanded into a successful importer of general merchandise. This venture allowed him to purchase a small biscuit and candy company, which he later sold at a profit.

In 1939, at the age of 43, Cummings borrowed $5.2 million to buy the C.D. Kenny Company, a small wholesale distributor of sugar, coffee, and tea established in 1870. The Baltimore-based company represented Cummings's first entry into U.S. markets, and he sought to increase the number of Kenny-label products.

Cummings broadened his geographic scope in 1942 with the purchase of Sprague, Warner & Company, a distributor of canned and packaged food nationwide. C.D. Kenny was relocated to Chicago and renamed Sprague Warner-Kenny Corporation. Under the established Richelieu label, sales came to $19 million that year, allowing Cummings to begin a significant expansion through acquisition, a strategy the company has pursued consistently.

After several smaller acquisitions, in 1945 Cummings acquired Reid, Murdoch and Company, the producer of the nationally recognized Monarch label. After this acquisition, the C.D. Kenny Company changed its name to the Consolidated Grocers Corporation, and in 1946 Consolidated made its first public stock offering, with a listing on the New York Stock Exchange. The Monarch purchase boosted sales to $123 million in 1946.

Smaller food companies struggled through a difficult period in the late 1950s and early 1960s as operational expenses and competition increased--continual development of new products and large promotional budgets were typically the only way to keep shelf space in supermarkets. But small companies offered their already established brands to a large company such as Consolidated, saving the cost of internal development. By 1970, Cummings had supervised the purchase of more than 90 companies by pursuing family-owned businesses who consented to mergers.

In 1951 Consolidated consisted of more than a dozen companies, and in 1953 sales passed $200 million. They did not remain that high for very long, however. Sales in 1954, the year Consolidated Grocers changed its name to Consolidated Foods Corporation, dropped to $133 million. Sales fell another $15 million the following year, when after-tax profits were only slightly greater than $1 million and earnings per common share fell almost 40 percent.

Mid-1950s: Addition of Kitchens of Sara Lee

Cummings met these losses with further diversification. The Kitchens of Sara Lee, a five-year-old maker of frozen baked goods with annual sales of $9 million, was acquired in 1956 for 164,890 shares--not Consolidated's biggest purchase to date, but eventually a significant one. The company had been founded by Charles Lubin, who had named it after his daughter, and the firm's best-selling product was Sara Lee cheesecake. A slightly larger purchase of 34 Piggly Wiggly supermarkets marked Consolidated's first venture into food retailing. An even larger purchase, of the Omaha Cold Store Company, demonstrated Consolidated's preference for distribution and marketing operations rather than direct-to-consumer sales.

Consolidated continued a rapid acquisition pace into the 1960s with Shasta beverages and the Eagle Supermarket chain in 1961. L.H. Parke Company, Michigan Fruit Canners, and Monarch Food Ltd. of Toronto together added $35 million in sales for 1962. The corporation first went international in 1960 by buying a controlling interest in a Venezuelan vinegar company; a second foreign investment came in 1962, with the purchase of Jonker Fris, a Dutch canner. Although growth was rapid, analysts considered Consolidated stock a risk because dividend increases depended on purchases.

In 1939, at the age of 43, Cummings borrowed $5.2 million to buy the C.D.

1960–1989

During the 1960s recently acquired Booth Fisheries reported a 16 percent rise in sales volume for 1962, up to $56.6 million. By following the industry trend toward packaging seafood for the convenience market, Booth Fisheries fought off fish shortages and normally unstable prices, raising division earnings from $2.35 per share to $3.22.

In 1966 Consolidated agreed to a Federal Trade Commission (FTC) order to spin off its supermarket division within three years, principally its Piggly Wiggly and Eagle supermarket chains. This agreement came as a surprise to analysts, because the industry expected leniency from the FTC because of the high cost of small-scale food production and distribution. But Consolidated Foods President William Howlett publicly welcomed the agreement, stating that Consolidated no longer wished to compete at the retail level with its other customers. Consolidated still kept its convenience retail outlets such as Lawson Milk, purchased in 1960.

As Cummings prepared for retirement, Consolidated searched for a larger share of European and American markets. New production facilities were planned for Shasta and Sara Lee in 1964, tripling the latter's output, and sales that year topped $600 million. In 1966 Consolidated made two more important food purchases: E. Kahn's Sons Company (the firm's first meat company) and Idaho Frozen Foods.

Mid-1960s: Beginning of Nonfood Acquisitions

Between 1966 and 1967, Consolidated made eight of its first nonfood acquisitions, including Oxford Chemical Corporation, a maker of cleaning products; Abbey Rents, a home furnishings company; Electrolux vacuum cleaners; and the Fuller Brush Company. Consolidated also entered the apparel industry in 1968 when it purchased Gant shirts and acquired several other clothing makers during this period. Within five years, nonfood businesses comprised 50 percent of the company's profits. William Howlett became Cummings's successor in 1968, but Cummings remained a director, and the largest shareholder, until his death. Howlett left two years later because of disagreements with the founding director. Despite the turbulence of the decade, sales tripled and after-tax earnings increased fivefold.

William A. Buzick, Jr., became president in 1970, beginning a difficult decade for the corporation; by 1980, the selling price for a common share was almost 40 percent lower than 1970's purchase price. Although sales continued to rise, as a result of the diversification trend, Consolidated soon discovered the drawbacks of the strategy as well. Consolidated's profits rose only 4 percent from 1972 to 1973--the year sales hit $2 billion--compared with an industry average of 17 percent. Sales continued to rise in 1974, but earnings dropped for the first time in 19 years as nonfood business did poorly. Meantime, Hillshire Farm, maker of packaged meats, was acquired in 1971.

During Buzick's five-year reign, Consolidated sold many of its food distribution businesses and production facilities. Buzick also increased the company's commitment to nonfood products with the purchase of Max Klein, Inc., a Philadelphia-based clothing company and Erdal (later Intradal), a Dutch personal care products company.

Nonfood activity peaked in 1975 as durable goods provided almost two-thirds of corporate profits. The diversification was prompted in part by the company's belief that federal restraints on the food industry would continue. In addition, economic constraints made Consolidated's growth goals difficult to achieve as only a food company. Under President Richard Nixon's economic stabilization program of 1973, for instance, Sara Lee was allowed to increase prices on frozen baked goods only 6.35 percent; Consolidated had requested a 7.52 percent hike. Moving into nonfood businesses would make the corporation less dependent on federal decisions and less vulnerable to the antitrust suits that had impeded competitors.

Mid-1970s: Start of the John H. Bryan Era

Buzick left in 1975 and John H. Bryan became CEO; he was named chairman the following year. Bryan's family-owned business, Bryan Brothers Packing, was a 1968 Consolidated purchase. Bryan quickly sold more than 50 companies, most of which were smaller acquisitions made in the early 1970s. Fuller Brush and four furniture companies were singled out as problem units and divested. Earnings recovered the following year to $77.5 million, and Consolidated's operating margin returned to 7.6 percent.

Bryan continued to value nonfood sales, however. For the next ten years, nonfood products continued to make up more than 50 percent of corporate income but only 30 percent of total sales. Purchases during the 1980s continued the trend toward solidifying durable goods production.

Bryan's acquisition portfolio represented a more aggressive stance in all of its markets. Before the 1978 purchase of Douwe Egberts, a Dutch coffee, tea, and tobacco producer, only 11 percent of Consolidated's income came from abroad; by 1989 it made up nearly 30 percent. In 1979 Consolidated completed a hostile takeover of the Hanes Corporation, a family-owned undergarment manufacturer.

1950–1994

Despite difficulties--poor performance of some nonfood companies led to earnings losses in 1974 and 1975--Consolidated's performance excelled by the end of the 1970s. Between 1967 and 1973, sales doubled to $2 billion and total assets topped $1 billion. These figures allowed the company to set a goal of doubling sales volume by 1980; the actual amount achieved exceeded $5 billion.

Bryan's initial management goals were to keep the company diversified and decentralized, while keeping the corporate office responsible for financial control and strategic planning. Acquisition targets would be brands with leading market shares in new areas and "integrating acquisitions"--large companies with established brands in Consolidated's markets. Chef Pierre pies, Superior Tea and Coffee Company, and Italian dry sausage product maker Gallo Salame, Inc. fell into the latter category, and were purchased in the late 1970s, building on Consolidated's pastry, coffee and tea, and meat market shares. Similarly, Jimmy Dean Meats was acquired in 1984.

Emerging As Sara Lee in the Mid-1980s

In 1985 Consolidated announced that it would change its name to Sara Lee Corporation. The name was chosen because it was the corporation's most prominent brand name, and as a corporate name would give the company higher visibility and make advertising efforts more cost effective.

The first of two major foreign acquisitions came in 1985 when Nicholas Kiwi Limited's foreign subsidiaries were purchased for $330 million, in addition to 14 percent of its Australian domestic operations. Kiwi--seller of a variety of shoe care products, medicines, cleaners, and cosmetics--complemented Intradal, Sara Lee's Dutch subsidiary. Akzo, a Dutch conglomerate with annual sales of $720 million, was acquired in 1987 for approximately $600 million, the company's largest purchase ever. Another producer of household goods, Akzo was absorbed into Douwe Egberts and Kiwi. By mid-1987, just nine years since its first international venture, Sara Lee was among the largest U.S. multinationals, with foreign revenue reaching almost $2 billion, making up 24.1 percent of total sales, 26.8 percent of profits, and 40.5 percent of total corporate assets. Meantime, back home, Sara Lee acquired Coach Leatherware in 1985 and Hygrade Food Products, maker of Ball Park, Grillmaster, and Hygrade hot dogs, in 1989.

Although still very active in acquisitions, Bryan also drew praise for stressing internal product development. Return on total investment typically decreases in the wake of large purchases, but Bryan kept return on equity at more than 20 percent in nearly every year since 1985. This was especially unusual for a company whose growth was almost entirely through acquisition--96 percent of Sara Lee's 141 entries into new businesses were through acquisition between 1950 and 1986.

Bryan was responsible for easing the uncertainty of the 1970s, shifting the company's focus to the marketing of consumer products only. He also improved manufacturing efficiency and product development. In 1986 sales dropped from $8.1 billion to $7.9 billion, yet income increased $17 million. Domestic consumer and institutional food divisions reported the largest sales drop, as Shasta, Idaho Frozen Foods, and Union Sugar were divested and Popsicle was restructured and eventually divested. Bryan also introduced lower-priced items to complement the corporation's premium Sara Lee and Hanes labels. Bryan hoped, with this tactic, to improve total sales volume as successfully as the meat division had done in the past. In 1989 the company began the divestiture of its foodservice operations, then its poorest performing division.

Further Acquisitions in the Early 1990s

During the early 1990s Sara Lee continued to grow through acquisition and increased its market presence abroad. During the first three years of the decade, it spent more than $1.7 billion in adding a variety of properties to the Sara Lee stable, including Playtex undergarments; Brylcreem; Mark Cross leather goods; hosiery companies in France (Dim S.A.), Spain (Sans, S.A.), Italy (Filodoro), and the United Kingdom (Pretty Polly Limited); the consumer food group of BP Nutrition; and SmithKline Beecham's European bath and body care business.

Perhaps most significant among these purchases was Playtex. Coupled with such existing holdings as Bali, the 1991 acquisition of Playtex gave Sara Lee a commanding presence in the intimate apparel market in the United States, with overall market share of more than 31 percent and market share in some niche areas surpassing 65 percent. Although some competitors expressed concerns about the monopolistic nature of the combination, they made little headway with the free marketers of the Bush administration.

Ironically, Sara Lee's spending spree within another area--hosiery--quickly came back to haunt the company. A combination of several factors converged to lead to declining hosiery sales starting in late 1992. In the midst of a recession in Europe, the newly acquired hosiery units in France, Spain, and the United Kingdom experienced increasing competitive pressure. Sara Lee also erred in replacing the managers of the firms with U.S. personnel not as familiar with the local markets. Most important, both in Europe and the United States, the company failed to recognize quickly enough the trend toward more casual attire both at the office and for social events and, therefore, the resultant decreased demand for formal hosiery. Because hosiery comprised 25 percent of overall apparel sales, the decrease in hosiery sales presented a significant challenge. In response, Sara Lee quickly moved to decrease hosiery capacity by closing two U.S. plants as well as a plant in France. Sara Lee's apparel division also was realigned into a more flattened organizational structure.

Leading the way in these efforts was newly appointed president Cornelius Boonstra. A 20-year Sara Lee veteran with a strong background in operations, Boonstra provoked some disenchantment with his aggressive cost-cutting measures, which included reducing staff in the Chicago headquarters by 10 percent. Although praised by Wall Street for the cuts, several senior managers left Sara Lee soon after his appointment and continuing friction with other executives led to his resignation in early 1994 after only six months in the job. No one was immediately appointed to succeed him.

1976–2002

In another irony, in June 1994 Sara Lee announced a major restructuring of its European personal products operations, which included cuts much more severe than those imposed by Boonstra. The company took a $732 million charge mainly to reduce capacity in its hosiery operations. Several more plants were closed and more than 8,000 jobs were cut.

Rebounding from the difficult restructuring year of 1994, Sara Lee enjoyed record sales of $17.71 billion (a 14 percent increase over 1994) and record operating income of $1.6 billion in fiscal 1995, with 12 Sara Lee brands racking up sales in excess of $250 million. For the year, 40 percent of Sara Lee's sales and 45 percent of its operating income were generated from its operations abroad.

Major Restructuring in the Late 1990s

After a relatively quiet couple of years on the acquisition front in fiscal 1995 and 1996, Sara Lee grew hungrier during the fiscal year ending in June 1997, spending nearly $700 million to gobble up several companies. The most prominent of these were Aoste, a French maker of processed meats; Lovable Italiana S.p.A., an Italian manufacturer of intimate apparel; and Brossard France S.A., a French producer of bakery products. Also during fiscal 1997, C. Steven McMillan was named president and chief operating officer of Sara Lee, with Bryan remaining chairman and CEO. McMillan, who had been executive vice-president, had joined the company in 1976.

In September 1997 Sara Lee embarked on a major restructuring designed to boost both profits, which had been growing by just 6 percent a year since 1992, and the company's lagging stock price. As part of a program called "deverticalization," Sara Lee aimed to reduce its degree of vertical integration, shifting from a manufacturing and sales orientation to one focused foremost on marketing the firm's top brands. As many of its competitors had done--particularly those specializing in apparel and household products--Sara Lee began outsourcing more of its manufacturing; the company also sold off more than 110 manufacturing and distribution facilities over the next two years. Nearly 10,000 employees, representing 7 percent of the workforce, were laid off. Sara Lee also exited from several noncore businesses. The Mark Cross leather goods operation was shut down, and Sara Lee sold its cut-tobacco unit, Douwe Egberts Van Nelle Tobacco, to Imperial Tobacco Group PLC for $1.08 billion in mid-1998. Proceeds from the divestments and the cost savings derived from the restructuring were earmarked for investment in the company's core brands and to buy back $3 billion in company stock.

In December 1998, while this restructuring was still being implemented, Sara Lee announced the recall of 35 million pounds of hot dogs and deli meats that were thought to have been contaminated with listeria, a life-threatening bacteria. The products were traced back to a plant in Zeeland, Michigan, run by the firm's Bil Mar Foods Inc. unit. The contaminated meat was eventually blamed for 15 deaths, six miscarriages, and more than 100 illnesses. By 2001 Sara Lee had settled several civil lawsuits for less than $5 million, and the company also pleaded guilty to a misdemeanor charge of selling tainted meat and agreed to pay the maximum fine of $200,000 and to spend $3 million on food-safety research. Sara Lee also spent $25 million to renovate the Bil Mar plant. The tainted meat case hurt the company's profits, depressed its stock, and tarnished its credibility.

Meanwhile, Sara Lee completed several acquisitions in fiscal 1999 and 2000, with a particular emphasis on bolstering the firm's coffee operations. During the former year, Continental Coffee Products Company, a U.S. producer of roasted and ground coffee, was acquired from the Quaker Oats Company. Sara Lee spent $1 billion during fiscal 2000 to acquire: Chock Full o' Nuts Corporation, a U.S. coffee roaster and marketer; the North American coffee business of Nestlé S.A., including the Hills Bros., MJB, and Chase & Sanborn brands; Outer Banks Inc., maker of knit sports shirts; and Courtaulds Textiles plc, the number one producer of intimate apparel and underwear in the United Kingdom, under such brands as Gossard, Berlei, and Aristoc as well as private-label brands. At the end of fiscal 2000, McMillan moved up to president and CEO, while Bryan continued as chairman.

Early 2000s: Another Restructuring and Major Divestments

Despite the restructuring efforts of the late 1990s, Sara Lee continued to struggle. Profits had failed to grow at a faster pace, and annual sales growth for the five-year period from fiscal 1996 to fiscal 2000 was just 2.2 percent. The stock price, after jumping following the launch of the restructuring, was once again tumbling. In an attempt to reverse the company's fortunes, McMillan announced an even more ambitious restructuring in May 2000: Sara Lee would reign in its wide-ranging portfolio of businesses by focusing on three main areas--food and beverages, intimates and underwear, and household products; by reorganizing management to eliminate such duplicative efforts as running ten separate meat companies; and through a new round of divestments, including the leather goods company Coach, athletic apparel producer Champion, foodservice distributor PYA/Monarch, and the international fabrics manufacturing unit of Courtaulds. The restructuring efforts also would include the layoff of more than 13,000 employees, amounting to almost 10 percent of the workforce.

The divestment program proceeded in large part as outlined. In December 2000 PYA/Monarch was sold to Royal Ahold for $1.56 billion. In October 2000 Sara Lee sold off 19.5 percent of the newly named Coach, Inc. to the public, raising $118 million. The following April Sara Lee fully divested itself of its Coach holdings by spinning off the remaining interest to Sara Lee shareholders, netting $1.1 billion in the process. The Courtaulds fabrics manufacturing unit was sold to Spanish fabric maker Dogi in April 2001. Although Sara Lee eventually decided to retain its Champion business in the United States, it did sell off Champion Europe. A number of other smaller divestments were completed in 2001 and 2002 as well. Overall, the divestments equaled about 20 percent of company revenues.

Acquisitions were not a major feature of fiscal 2001, although Sara Lee did purchase Café Pilao Caboclo Ltda., the leading coffee company in Brazil, and Sol y Oro, the leading seller of women's underwear in Argentina. But then in August 2001 Sara Lee shifted back into a more serious growth mode by completing the largest acquisition in company history, that of The Earthgrains Company, purchased for $1.9 billion plus the assumption of $957 million in long-term debt. St. Louis-based Earthgrains was the nation's second largest bakery, with annual revenues of $2.6 billion, and it specialized in fresh packaged bread and refrigerated dough. The bakery operations of Earthgrains and Sara Lee were combined within the newly named Sara Lee Bakery Group. In October 2001 Bryan retired, ending his long stint as company chairman. McMillan added the chairman's post to his duties. It remained to be seen whether the restructuring spearheaded by McMillan would prove more successful than that launched by his predecessor.