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Conagra Turns Up The Heat In The Kitchen


The Corporation

CONAGRA TURNS UP THE HEAT IN THE KITCHEN

When Mike Harper was confined to bed for a week in July to heal a painful slipped disk, he didn't spend his time sleeping late or tuning in to Oprah. Instead, the hard-charging chairman of ConAgra Inc. tapped away at his personal computer and worked his phone, tracking everything from executives' travel schedules to weekly profit updates from ConAgra's 70 far-flung operations.

Unwilling to slow down even while flat on his back, Charles M. Harper has set a breakneck pace at ConAgra. When Harper took over the Omaha-based grain processor in 1974, it was on the edge of bankruptcy and had sales of $634 million. By gobbling up companies and churning out new products, he built little-known ConAgra into a $19 billion behemoth that is now the nation's largest independent food company. Only the Kraft General Foods Inc. unit of tobacco giant Philip Morris is bigger, with $30 billion in sales. Gushes Clayton Yeutter, chairman of the Republican National Committee and a former ConAgra director: "Mike has simply outmanaged just about everybody in the United States."

Nor is he slowing down now. In 1989, ConAgra began launching low-fat, low-sodium frozen dinners, dubbed Healthy Choice. The line became the food industry's most successful new product in at least a decade, jolting such giant rivals as Campbell Soup Co. and Nestle's Stouffer Foods Corp. Harper followed that up last year with the $1.34 billion purchase of Beatrice Co. And in July, he snapped up Golden Valley Microwave Foods Inc. for $455 million (table).

ConAgra's assault comes as the $241 billion packaged-food industry is facing slower growth. In the 1980s, declining tax rates, divestitures of nonfood businesses, and cheap raw materials helped 10 top food companies post average annual earnings gains of 11.5%, according to Gleacher & Co., an investment bank. With fewer such maneuvers left, foodmakers may find it tough to sustain that growth. As brand loyalty declines, consumers see many foods as commodities, making it tough for manufacturers to command premium prices. The waning power of brands also means that retailers can opt to push only those products that offer them the best deals. As a result, foodmakers are being forced to pay for shelf space, subsidize retailers' ad campaigns, and issue coupons for shoppers.

SHARP PEN. But Con-Agra knows how to thrive in this hostile environment. From its roots in commodities, where margins are notoriously thin, it learned to boost profits by hiking production efficiency and increasing sales rather than raising prices. Indeed, ConAgra's net profit margin is 1.5%, vs. 6.1% for 10 leading food companies, says analyst William Leach of Donaldson Lufkin & Jenrette Securities Corp. Ordinarily, that might not be something to boast about. But ConAgra's net income has grown more than twice as fast as that of other large independent U. S. foodmakers since 1980 (chart).

The leaner margins are partly a product of ConAgra's lower-profit agricultural commodities lines. But they also reflect the company's willingness to wield a sharp pricing pen in the ever-more-vicious battle of the supermarket. Its aggressive discounting has helped Healthy Choice grab the leading share in premium frozen dinners and left rivals wondering how it can make money. Says James F. Van Stone, vice-president for convenience meals at Campbell Soup, makers of Le Menu: "They can really screw up a category."

NO PRISONERS. ConAgra's competitors had better get used to it. Newly armed with Beatrice brands such as Wesson, Hunt's, Butterball, and Orville Redenbacher's popcorn, Harper plans to use his pricing and production edge in every aisle of the store. "The guy that can produce at the lowest cost definitely has the high ground," says James Jermann, senior vice-president of Hannaford Brothers Co., a New England grocery chain.

ConAgra's bold strategy comes with plenty of risks, however. As it pushes out of its stronghold in the freezer, it aims to plaster the Healthy Choice logo on hundreds of dry grocery and refrigerated items. In the U. S., only H. J. Heinz Co. has tried to build such an umbrella brand for Weight Watchers--with limited success. The rush to capitalize on Healthy Choice's premium image could backfire if the new products don't deliver the same quality. "Can you take on a variety of different competitors across the store and bring meaningful advantage in each category?" asks Stouffer Foods marketing chief Edward A. Marra. "I think the answer is no."

ConAgra can't afford to underestimate its competitors either. King Kraft could prove the most formidable. In the last three years, the food superpower has launched an armada of high-margin additions to its existing lines, backed by heavy spending on marketing. As ConAgra marches across the supermarket, it will increasingly run up against a tenacious, entrenched Kraft in dozens of categories. And Kraft has a jump overseas, too, where it now gets one-third of its sales. ConAgra's foreign packaged-foods business, by contrast, is minuscule. Says Marc C. Particelli, who heads the consumer-goods consulting practice at Booz, Allen & Hamilton Inc.: "Those two giants are going to be slogging it out for a long time."

There are other worries as well. Harper, who has been ConAgra's visionary, dealmaker, and financial wizard for 17 years, may retire when he turns 65 in September, 1992. Although he says the board hasn't decided, Harper probably will stay on for a year or two as chairman while Chief Operating Officer Philip B. Fletcher moves up to CEO. Industry watchers say Fletcher, 58, is a seasoned manager, but it will be tough to fill Harper's shoes. "His successor is going to face quite a daunting task to match his record," says John B. Carl, acting equity investment officer for the Teacher Retirement System of Texas, which recently reduced its ConAgra holding by 10%, to 428,000 shares, because Carl doesn't see much growth potential in the stock.

Still, by building its branded-foods base and paring debt, ConAgra could double its net margin to 3% and more than double profits, to at least $700 million, by fiscal 1995, says Stephen M. Carnes, managing director of Minneapolis brokerage Piper, Jaffray & Hopwood Inc. And few companies can rival the appreciation of ConAgra's stock, recently trading at 44 1/2: A $1,000 stake in ConAgra in 1974 is worth $221,704 today. That's a compound annual growth rate of 37.4%, vs. 15.67% for the Standard & Poor's 500-stock index.

It's a far cry from the sorry mess Harper found on his arrival as COO 17 years ago. A disastrous futures-trading play had pushed the highly leveraged grain processor $12 million into the red. Harper shored up the balance sheet by selling flour mills, cutting costs, and slicing grain inventories.

Harper seemed an unlikely savior. While most of his food industry peers are marketing types, the 6-foot, 6-inch Harper started at General Motors Corp. as a mechanical engineer before joining Pillsbury Co. There, he worked his way up the operations ladder to head the poultry and food service units. Unlike most polished CEOs, he favors short-sleeved shirts year-round. But he's not without flash. Harper earned a pilot's license at age 56 and flew a Cessna 182 from San Francisco to New York to celebrate his 60th birthday, setting a world speed record for a piston-engine plane in its weight class.

No less daring was Harper's 1980 plunge into packaged foods with Banquet Foods. Even after languishing under conglomerate RCA for five years, Banquet was the largest player in the frozen-food industry, where sales tripled during the 1970s. Despite the promise of growth, Harper drove a hard bargain: He picked up the company for a mere $63 million--about one-fourth of RCA's original asking price. By 1984, the acquisition paid for itself as annual operating income more than doubled, to $25 million. Sales have grown more than 100% and now top $700 million a year.

The Banquet deal became a model for a string of packaged-food acquisitions, including Armour Food Co. and RJR Nabisco Inc.'s frozen-food lines. By refusing to overpay for assets, Harper helps ensure low operating costs. He then wrests higher profits by hacking out manufacturing inefficiencies and cranking up volume. After buying Nabisco's Morton, Patio, and Chun King lines, for example, he shut two old Banquet plants and shifted production into newer Nabisco plants--saving $10 million a year.

LOTS OF CHIEFS. Harper's tight grip on the acquisition purse strings forced him to sit out the richly priced food megamergers of the 1980s. But he altered his tactics somewhat to buy Beatrice, which was neither a bargain nor a turnaround candidate. He picked up the $4.3 billion company for its choice brands and Hunt-Wesson's top-flight distribution system. Not that Harper hasn't found ways to cut costs. The newly combined Armour Swift-Eckrich processed meats group has shut its most expensive plant and is closing a second one. Harper also refinanced Beatrice junk bonds, lowering interest payments by a total of $50 million over the seven years until maturity.

Despite the lure of economies of scale or the siren song of synergy, however, Harper resists centralization. Unlike Kraft, which has consolidated hundreds of product lines into seven major units, Harper has formed 70 operating companies at ConAgra, each with its own president and corporate staff to handle marketing, accounting, and production.As the Beatrice units are finding, Harper expects the operating companies to churn out new products and pump up demand for existing ones. So Armour Swift-Eckrich has stepped up its push into supermarket delis and restaurant chains. In the past year, Hunt-Wesson has added 74 new items, including Wesson canola, olive, and sunflower oils. New brands offer the greatest growth potential--and the greatest chance of failure. ConAgra has laid its share of eggs, such as Bow Wow dog food, which lived up to its name. But lately, ConAgra's golden touch has enabled it to muscle aside entrenched competitors and beat back big-spending challengers.

Take Banquet's Kid Cuisine, a line of frozen dinners for children. In early 1990, when Kid Cuisine was rolling out nationwide, Tyson Foods Inc. jumped in with a line called Looney Tunes. With a budget about one-third of Tyson's $50 million, ConAgra relied on cents-off coupons and in-store tastings. Kid Cuisine meals also sold for 20% less and included a game and a dessert, while Tyson stuck to main courses. With $75 million in fiscal 1991 sales, Kid Cuisine now outsells Looney Tunes three to one.

TURKEY CHILI. Another new-product phenomenon grew out of a personal crisis for Harper. After suffering a heart attack in 1985, he couldn't find tasty prepared foods that met his strict new diet. But his wife, Josie, whipped up some low-fat, low-sodium dishes. "Ground turkey sort of saved the day," Josie Harper chuckles. When Harper invited some ConAgra managers over to sample her spicy turkey chili, they became convinced that there was a huge market for such foods.

After several years in research labs and test kitchens, ConAgra launched Healthy Choice frozen dinners in late 1989. At first, ConAgra had to pay retailers to carry the fledgling brand, but soon they were clamoring for it. The brand has grabbed 18% of the $2.5 billion premium frozen dinner-and-entree segment, while Weight Watchers has lost 30% of its sales. Rivals have rushed out low-fat, low-salt offerings, led by Kraft's Eating Right.

None has dented Healthy Choice. Sales of the line, which now includes ice cream and breakfast items, reached $350 million in fiscal 1991. Although its soups and stews recently languished in test markets, the company still plans to launch more than 100 new Healthy Choice products within the year. If the push is successful, the brand could hit $1 billion in a few years, says L. Craig Carver, an analyst at Minneapolis brokerage John G. Kinnard & Co.

With so much potential in prepared foods, will ConAgra now unload its slow-er-growing agricultural products, which contribute 22% of sales? Not a chance, Harper insists. ConAgra is the nation's No. 2 meat packer and No. 3 grain processor, and Harper claims its breadth cushions the impact of natural disasters. During droughts, for instance, packaged-food margins get squeezed by material costs, but ConAgra's commodities make a killing.

Harper's decade-long string of acquisitions has turned ConAgra into the only big U. S. company "to operate across the food chain," as its chairman boasts. But Mike Harper is still one hungry marketer. Of all food sold in the U. S., he says, "we have just a 2% share, so we have 98% to go." It's a joke, of course. But ConAgra's competitors aren't laughing.CONAGRA'S FEAST

Year Acquisition Brands Price

Millions of dollars

1980 BANQUET FOODS Banquet $63

1983 BANQUET FOODS Armour 182

1986 ARMOUR FOOD Morton, Patio, Chun King 64

1986 RJR NABISCO

FROZEN FOODS

1990 BEATRICE Hunt's, Wesson, Swift, Eckrich,

Butterball, Orville Redenbacher's

1,340

1991 GOLDEN VALLEY Act II 455

MICROWAVE FOODS

DATA: COMPANY REPORTS, BW

Lois Therrien in Omaha


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