by Adam Hartung | Jan 25, 2011 | Current Affairs, Food and Drink, In the Whirlpool, Leadership
Summary:
- It sounds good to refocus a business on its core
- It sounds good to centralize for cost reductions and belt tightening as part of refocusing
- It sounds good to sell “non-essential” businesses to raise cash
- It sounds good to have a company buy back shares
- But these efforts serve to destroy the company, killing it softly as it sounds good, but guts the business of revenues and innovation
- Sara Lee’s CEO destroyed the company softly by following such a strategy
The vultures are swirling around Sara Lee. “Sara Lee Said to Get Bid from Bain, Apollo Group Exceeding $18.70 a Share” was the Bloomberg headline. JBS and Blackstone Group are reportedly considering making an offer, according to the Wall Street Journal. This has, of course, driven up the share price from its steady decline of 67% between 2006 and 2009.. But unless you’re a short-term trader, even this acquisition offer is barely going to get you back to break even for your 5 year old investment.
Source: Marketwatch.com
Five years ago Brenda Barnes took leadership at Sara Lee to much fanfare, as she broke the long-problematic glass ceiling for women executives. But her plan for Sara Lee hasn’t worked out so well. Although her compensation has been in the millions, for investors, employees and suppliers this has been a very rough 5 years.
Ms. Barnes took over Sara Lee saying it was a “hodgepodge” of inefficient brands and businesses. Her goal was to streamline Sara Lee, refocus the company and regenerate its core. That certainly sounded good.
Her first steps were to consolidate operations into a central headquarters, including all R&D for the far-flung businesses. She started cutting costs, and heads, as she reduced the number of marketers and centralized purchasing. Going after “synergies,” consolidations were forced on all functions, and the re-launched R&D was staffed at a fraction of earlier product development efforts. The intent, accomplished, was to launch fewer products, and focus on cost reductions. To many listeners, this sounded so soothing. After all, who wouldn’t think there was “fat” to be cut? Who ever believes cost-cutting reaches an end? Why not try to “milk” more out of the old products rather than undertake costly new product launches?
Simultaneously, Ms. Barnes began selling businesses. Gone was the European meats and apparel units, soon followed by the direct sales business sale to Tupperware, and the Body Care business sale to Unilever. Branded apparel was spun out as a seperate company, and the bakery business was sold to Group Bimbo [transaction not yet closed.] Revenues declined from $13.2B in June, 2008 to $10.8B in June 2010 – and after the bakery sale would fall to $8.7B – a revenue drop of 1/3 in just a few years. But this was to refocus, and generate billions of cash for share buybacks. To many that sounded good as well.
All of this streamlining, cost cutting, consolidating and refocusing did raise cash. But, for investors, quarterly dividends were cut from 19.75 cents/share in April, 2006 to 10 cents/share in August, 2006. Only recently have dividends been raised to 11.5 cents/share, but this is still a reduction of over 40% from where dividends were prior to implementing the new refocusing strategy.
After years of implementation, Sara Lee investors in 2010 were holding stock worth less, and had lower dividends, than before this new plan was put into effect.
It all sounded so good, like the lyrics of a lullaby. Refocus. Go back to the business core. Get out of non-essential businesses. Consolidate operations with belt-tightening. Centralize functions to get more done with fewer resources. Sell businesses to raise cash. And invest that cash in share buybacks that would raise the company value. (The alchemy of this last statement still mystifies me. At the end, you’ve sold all the businesses to raise money to buy the last shares – and nobody is left with anything. It’s like selling parts of the house to pay the maintenance – eventually there’s nowhere left to live. How anybody thinks this is good for any constituency of the company is hard to fathom.)
What has been accomplished under the Barnes leadership?
- The equity value cratered, only to be uplifted by a private equity takeover effort that may allow investors to regain their original investment
- Cash dividends have been gutted
- Sara Lee is now a much smaller company, with no new products and no growth plan
- Operating cash flow has declined
- Cash has been dispersed in meaningless stock buybacks that have accomplished nothing
- Tens of thousands of jobs have been lost
- Suppliers have been squeezed out, or if still selling to Sara Lee had their margins squeezed
- Downers Grove, IL ,where the headquarters is located, can link declines in commercial and residential real estate to the downfall of Sara Lee
While it may sound like a comforting song, business leadership that turns to cutting the business throws it into a growth stall from which there is almost no hope of recovery. Even though short-term there may be bragging about the effort to refocus, cut costs and raise cash, these actions simply kill the business – softly and slowly perhaps, but kill it nonetheless.
Sales and profit problems are the result of remaining stuck in old market approaches long after the market has shifted to superior solutions. The only way to “fix” the business is to get closer to the market and launch new products, technologies, processes or solutions that are aligned with emerging market trends. You can’t cost-cut, refocus or re-align a business to success. You have to grow it.
by Adam Hartung | Feb 16, 2010 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
About 30 years ago Roberta Flack hit the top of the record charts (remember records anybody?) with "Killing Me Softly" – a love song. Today we have 2 examples of CEO's softly killing their shareholders, employees and investors. Definitely NOT a love song.
Sears has continued its slide, which began the day Chairman Lampert acquired the company and merged it with KMart. I blogged this was a bad idea day of announcement. Although there was much fanfare at the beginning, since day 1 Mr. Lampert has pursued an effort to Defend & Extend the outdated Sears Success Formula. And simultaneously Defend & Extend his outdated personal Success Formula based on leveraged financing and cost cutting. The result has been a dramatic reduction in Sears stores, a huge headcount reduction, lower sales per store, less merchandise available, fewer customers, empty parking lots, acres of unused real estate and horrible profits. Nothing good has happened. Nobody, not customers, suppliers or investors, have benefited from this strategy. Sears is almost irrelevant in the retail scene, a zombie most analysts are waiting to expire.
Today Crain's Chicago Business reported "Sears to Offer Diehard Power Accessories for Sale at Other Retailers." Sears results are so bad that Mr. Lampert has decided to try pushing these batteries, charges, etc. through another channel. At this late stage, all this will do is offer a few incremental initial sales – but reduce the appeal of Sears as a retailer – and eventually diminish the brand as its wide availability makes it compete head-to-head with much stronger auto battery brands like Energizer, Duralast, Optima and the heavily advertised Interstate. Sears has attempted to "milk" the Diehard brand for cash for many years, and placed in retail stores head-to-head with these other products it won't be long before Sears learns that its competitive position is weak as sales decline.
Mr. Lampert needed to "fix" Sears – not try to cut costs and drain it of cash. He needed to rebuild Sears as a viable competitor by rethinking its market position, obsessing about competitors and using Disruptions to figure out how Sears could compete with the likes of WalMart, Target, Kohl's, Home Depot, JC Penneys and other strong retailers. Now, his effort to further "milk" Diehard will quickly kill it – and make Sears an even less viable competitor.
Simultaneously, Chairperson Barnes at Sara Lee has likewise been destroying shareholder value, employee careers and supplier growth goals since taking over. During her tenure Sara Lee has sold buisinesses, cut headcount, killed almost all R&D and new product development, sold real estate and otherwise squandered away the company assets. Sara Lee is now smaller, but nobody – other than perhaps herself – has benefited from her extremely poor leadership.
As this business failure continues advancing, Crain's Chicago Business reports "Sara Lee to Spend $3B on Stock Buyback." In 2009 Sara Lee announced it was continuing the dismantling of the company by selling its body-care business to
Unilever and its air-freshener products and assets to Procter & Gamble Co. for approximately $2.2 billion. As an investor you'd like to hear all that money was being reinvested in a high growth business that would earn a significant rate of return while adding to the top line for another decade. As a supplier you'd like to hear this money would strengthen the financials, and help Sara Lee to invest in new products for growth that you could support. As an employee you'd like this money to go into new projects for revenue growth that could help your personal growth and career advancement.
But, instead, Ms. Barnes will use this money to buy company stock. This does nothing but put a short-term prop under a falling valuation. Like bamboo poles holding up a badly damaged brick wall. As investors flee, because there is no growth, low rates of return and no indication of a viable future, the money will be spent to prop up the price by buying shares from these very intelligent owner escapees. After a couple of years the money will be gone, Sara Lee will be smaller, and the shares will fall to their fair market value – no longer propped up by this corporate subsidy. The only possible winner from this will be Sara Lee executives, like Ms. Barnes, who probably have incentive compensation tied to stock price — rather than something worthwhile like organic revenue growth.
Both of these very highly paid CEOs are simply killing their business. Softly and quietly, as if they are doing something intelligent. Just because they are in powerful positions does not make them right. To the contrary, this is an abuse of their positions as they squander assets, and harm the suburban Chicago communities where they are headquartered. That their Boards of Directors are approving these decisions just goes to show how ineffective Boards are at looking out for the interests of shareholders, employees and suppliers – as they ratify the decisions of their friendly Chairperson/CEOs who put them in their Board positions. The Boards of Sears and Sara Lee are demonstrating all the governance skill of the Boards at Circuit City and GM.
It's too bad. Both companies could be viable competitors. But not as long as the leadership tries to Defend & Extend outdated Success Formulas unable to produce satisfactory rates of return. Lacking serious Disruption and White Space, these two publicly traded companies remain on the road to failure.
