Bloomberg News

Sara Lee Meat Spinoff Chases Foodies With Gourmet Salami

June 27, 2012

Sara Lee Meat Spinoff for Growth Seen Inviting Takeover

Jimmy Dean, which also generates about $1 billion a year in sales, is tops in breakfast sausage. Photographer: Daniel Acker/Bloomberg

Will Americans eat chicken curry meatloaf?

Sean Connolly is betting they will. The chief executive officer of Hillshire Brands Co. is trying to take the purveyor of sausage and lunchmeat upmarket -- he even wants to appeal to foodies -- at a time when shoppers are trading down to store brands or buying ready-to-eat entrees.

The new company, which sells Hillshire Farms meats, Jimmy Dean sausages and Ball Park Franks, starts trading June 28 -- making official its split from Sara Lee Corp. (SLE:US), which is dividing into a U.S. meat business and a global coffee and tea company.

Because Hillshire and the other meat brands were once part of an enterprise selling everything from apparel to cheesecake, “we haven’t had a focused food company, so we haven’t had the innovation we need,” Connolly said in a phone interview. “We see enormous potential for growth. Meat-centric meals is a $68 billion business and we have $3 billion of it.”

The company, which will be based in Chicago, is No. 1 in its core U.S. markets: Hillshire Farms, an almost $1 billion brand, leads in dinner sausage; Jimmy Dean, which also generates about $1 billion a year in sales, is tops in breakfast sausage; Ball Park Franks sells the most hot dogs. To hit his goal of 5 percent annual revenue growth, Connolly will have to gain market share in those slow-growing niches and create new categories, as Jimmy Dean did with refrigerated breakfast sandwiches.

Doing all of that -- and maintaining profit -- won’t be easy, according to Tim Ramey, an analyst with D.A. Davidson Co. in Lake Oswego, Oregon.

Narrowing Margins

In 2009, Sara Lee’s retail meat business did $2.8 billion in sales, growing to only $2.9 billion last year. Plus, operating margins, which were 10.8 percent this time last year, narrowed to 10.2 percent in the first three quarters of fiscal 2012. That’s partly because food ingredient prices have been rising, and companies such as Hillshire are having trouble passing the costs on to shoppers.

While Connolly is plotting a growth strategy, Hillshire may become a takeover target, according to Alexia Howard, a Sanford C. Bernstein & Co. analyst in New York. In a June 25 report, Howard said Hillshire brands is attractive because it has a family of established brands and is the only company focused almost exclusively on meat. Potential suitors include Hormel Foods Corp. (HRL:US) and Tyson Foods Inc. (TSN:US), she said.

“This will be a transformational deal for whoever makes it,” Howard said in the report.

Connolly made a name for himself at Campbell Soup Co. (CPB:US), where he helped bring to market such innovations as the V8 V- Fusion line of vegetable-fruit drinks. Since taking over Sara Lee’s meat business in January, he has set up a new research and development team to come up with new creations, including the chicken curry meatloaf.

First Act

One of Connolly’s first acts was to start cutting staff, which will save $100 million over three years, according to a company statement. The streamlining is also supposed to reduce how long Hillshire takes to get new products to market, he said.

“We had analysis paralysis,” Connolly said. “So we consciously downsized the organization so it’s leaner. We have fewer meetings and fewer check-offs on decision-making.”

Connolly is using Aidells, a gourmet sausage company Sara Lee bought a year ago, to help spread innovation to the rest of Hillshire Brands. While Aidells revenue is only about $100 million a year, it’s growing faster than the core Hillshire sausage business. Its R&D group also can get new products to market in 12 weeks -- or almost four times as fast as Sara Lee typically took to put new innovations on grocery shelves.

At the Aidells Gourmet Food Group in San Francisco, Connolly has chefs and creative staff working on items for all of the company’s brands.

Guy Food

Ball Park Franks sells $400 million a year worth of products, and Connolly wants a bigger slice of the $8 billion “better guy-food” market -- also known as tailgaters and patio grillers. In April, the company began selling Ball Park frozen burgers; sliders are being tested.

The chicken curry meatloaf is now moving from the Aidells skunkworks to the testing phase. If it winds up in grocery stores, it could complement the brand’s gourmet salami, which is being market tested, and chicken teriyaki meatballs.

Hillshire Farms needs the most rehab. Connolly said he wants to improve lunch meat quality. In an attempt to attract foodies, he’s introducing super-premium smoked Hillshire sausage, which typically commands higher prices and generates faster sales growth than mainstream brands.

Core Following

“Hillshire has a core following that has atrophied,” said Ken Harris, an independent consultant who recently left consulting firm Kantar Retail’s Chicago office. “They can do some new things with formulation and flavoring. It doesn’t have the reach of Oscar Meyer and some others.”

Harris cites Connolly’s success with the line of V8 drinks at Campbell as evidence that he has the right experience to make a go of Hillshire Brands.

Though Campbell had mixed results while Connolly ran the U.S. and North American businesses, he was adept at running a team that vacuumed up consumer trends and brought new products to market, said Mindy Mackenzie, a former colleague who is now chief human resources officer at the Deerfield, Illinois-based spirits company Beam Inc. (BEAM:US)

“He thinks about what consumer trends are hot and how to marry that with what the company’s brands deliver,” Mackenzie said in a phone interview. “He can galvanize a group of people and get after it. That’s why he is perfect for this role.”

To contact the reporter on this story: David Welch in Detroit at dwelch12@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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