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Sara Lee: Playing With The Recipe


The Corporation: STRATEGIES

SARA LEE: PLAYING WITH THE RECIPE

It's bent on making better use of its disparate brands

Pepsi is a $23 billion brand. Reebok clothes are sold in 170 different countries. Kraft products bring in some 30% of revenue at their parent company. And all of these brands, sensibly enough, have companies named for them. Then there is the strange case of Sara Lee. The label made famous by its frozen cheesecake accounts for $375 million in sales each year, a paltry 2% of the $19.7 billion revenues its parent brings in. The company also owns the world's largest underwear brand, a $4 billion packaged-meat business, and a huge food-service unit--and yet it's the cheesecake whose name is on the front door.

Now, Sara Lee Corp. is embarking on a major effort to live up to its name. Within three years, executives predict, the Sara Lee brand will bring in $600 million annually and will reach $1 billion soon after that. To get there, the company has doubled the label's advertising budget, reorganized its management, and moved the brand beyond the freezer into the meat case and the bakery. Sara Lee execs admit they're playing catch-up. "The brand we've actually spent the least time focusing on is the one the company's named after," says President C. Steven McMillan. "This is a brand we have never used even remotely to its fullest potential."LAGGING STOCK. That effort to pump up Sara Lee's namesake brand is but one example of the Chicago-based company's attempts to boost its top labels. The strategy is a critical next step in Sara Lee's plan to transform itself from a manufacturing and sales conglomerate into a lean marketing powerhouse. In September, Chief Executive John H. Bryan announced Sara Lee would sell off factories and less important brands and use the proceeds to buy back $3 billion of its lagging stock and invest in its core food and clothing brands.

To succeed, Bryan and his deputies must give consumers new reasons to buy Sara Lee's familiar products. Can they do it? The record is mixed. They've created successful brands in highly fragmented categories. But they'll need to demonstrate a newfound ability to compete with the giants of food and clothing.

Bryan's shift away from manufacturing to focus on brand marketing recognizes that the future belongs to companies--like Coca-Cola Co.--that own little but sell much. "It's passe for us to be as vertically integrated as we were," says Bryan, in his 23rd year as CEO. Wall Street has responded enthusiastically. In the last seven months, Sara Lee's shares have gained 50%, to around 62--as much as in the previous three years.

Outsourcing alone won't keep the stock climbing, however. Since 1992, Sara Lee profits have grown by just 6% a year. To achieve the 13% to 15% annual growth in earnings-per-share that Bryan is now predicting, he'll have to polish and expand the brands in the company's largely unexciting business mix. "They are in basically mature businesses," says Arthur Cecil, who follows the company for T. Rowe Price Associates Inc., which owns $3 billion of Sara Lee shares.

Until now, Bryan's preferred strategy has been to find product categories that lack a powerful brand and then build one. It worked with the Coach leather accessories line, which Sara Lee has built from sales of $25 million in 1986 to $500 million last year. Hanes's success is even more dramatic. The underwear brand has used new distribution channels, such as Wal-Mart Stores Inc., and new products, particularly for women, to soundly thump Fruit of the Loom, the leader just a few years ago.

But in battles against larger, more creative companies, Bryan's team has a weaker record. Rivals like Kraft and Conagra have won market share by being more innovative, devising the prepackaged Lunchables meals and the megabrand Healthy Choice. And Sara Lee's Champion sportswear has failed to keep up with Nike or Reebok. "The company hasn't always done well with categories that require a lot of style," says former Sara Lee President Paul Fulton, now CEO of Bassett Furniture.

The Sara Lee food brands illustrate why--and the tough task the company has ahead. Confined to the freezer, Sara Lee for years was left to languish as its supermarket brethren branched out. Today, it sells less, advertises less, and has far fewer products than those big competitors. Pillsbury Co., for example, spent $88 million on its flagship brand last year, more than 25 times what Sara Lee spent, according to Competitive Media Reporting. And the Kraft label appears on hundreds of products across 10 major categories.

In the '90s, Sara Lee started to change that, expanding into deli meats, opening sandwich shops in airports and on college campuses, and starting up a line of bagels. The move into deli meats was a gamble, and it met some resistance within the company. Bakery executives worried that the shift to meats would confuse consumers. But assurances that only higher-end products would get the label helped allay fears. "You can't just slap `Sara Lee' on a hot dog," says James R. Carlson, who oversees the company's U.S. food divisions.PREMIUM MEATS. At the time, a recession was driving down cold-cut prices. Sara Lee went in the other direction, calling its brand "premium" and charging $2 more per pound. It worked; in five years, Sara Lee has captured 6% of the market. But the deli meat business is highly fragmented. Expanding some of its other brands means moving into categories where it will have to take on established leaders. Thomas', the English muffin line owned by Best Foods, and Sara Lee both entered the fresh bagel category in the past few years. In early 1997, they were essentially tied for No.2 with $40 million in sales, according to Information Resources Inc. Since then, Thomas' has used its familiarity as a bread company to win shelf space and leapfrog past No.1 Lender's, while Sara Lee's has barely grown.

How did Sara Lee bungle bagels? Weak distribution, for one. Because most Sara Lee products do not go stale quickly, the company didn't develop an extensive fleet of trucks to deliver straight to supermarkets. "They don't have a broad-based direct-store delivery program," says Donald C. Berman, a Best Foods vice-president. It also doesn't help that Sara Lee's investments have been sporadic. Ad spending for the brand fell sharply from $10.3 million in 1996 to $3.4 million last year as the company emphasized its coupon program.

Now, Bryan and McMillan say such errors are behind them. By freeing up manufacturing resources, they're making a clearer commitment to Sara Lee and other brands. "We're just now cranking this up," says McMillan.

To that end, the company has placed one executive--Vice-President George A. Shivari--in charge of both the bakery and deli-meats businesses and told him to concentrate on expanding the Sara Lee brand. In the year that starts on July 1, ad spending for the brand will rise to $22 million. One big push: targeting consumers who have less time to prepare food than they used to and who no longer sit down to eat as part of a large family. New products include smaller cheesecake portions that don't have to be defrosted. The company also hopes to roll out prepackaged, refrigerated meals--although early tests in Chicago haven't been very successful. Distribution of already-cooked meals is always tricky, McMillan acknowledges.

Sara Lee execs will have to solve those problems and others if they hope to be considered a nimble marketing giant rather than a mishmash of shoe polish and bras, sausages and T-shirts. With their namesake brand, they've got one big advantage. Just about everyone recognizes the Sara Lee label--thanks, in part, to the old "Nobody doesn't like Sara Lee" ad campaign. "Of all the baked-goods products," says Richard Gerstman, president of Interbrand Gerstman+Myers, a New York consulting firm, "Sara Lee probably has the best name." Of course, if their efforts fail, there's another option: Bryan can rename the company Hanes Corp.By David Leonhardt in ChicagoReturn to top


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