About a year or so ago the conventional wisdom was that we were headed for a recession (the government wasn't yet saying we were in a recession already). Building on that theme, advisors were recommending investors should buy stocks like Kraft (chart here) and Sara Lee (chart here). After all, these companies make basic foodstuffs, and even in a recession people have to eat! So investors should be thrilled to own stock in companies with brands like Velveeta, Mac-N-Cheese, Oscar Meyer, Maxwell House and Jimmy Dean.
Once again, conventional wisdom didn't quite work out. Today Kraft (the world's #2 food manufacturer) announced a 72% profit plunge (read article here). Sara Lee profits fell to a loss – so you could say they fell 100%+ (read article here).
Both companies were in trouble back when the conventional wisdom said "buy." Sara Lee has been in a freefall ever since it changed CEOs five years ago. Back then the new CEO decided to "refocus" Sara Lee by selling its apparel business (Hanes and Champion) along with other assets. That effort continues, as the company recently sold its foodservice coffee business and some international businesses. The CEO was successful selling assets, but the money is now gone and all investors have is a smaller and less profitable Sara Lee. Her effort at "focus" did a good job of "focusing" Sara Lee right down the Swamp toward the Whirlpool. What was once a great consumer products company is now a mere industry afterthought that nobody pays attention to, and has wiped out 2/3 of investor value along the way.
Kraft was formerly a division of Altria (which used to be called Phillip-Morris – you know – cigarettes). During the early- and middle-2000s management sold growth busineses (like Altoids) in order to "focus on core products" like Velveeta. The CEO said that he saw no reason to spend money on risky new products, when he could maximize value by spending more money on Velveeta ads. If there was ever an example of a process designed to yield a specific result, any analysis that gave preference to Velveeta ads over new products was one clearly designed to Defend & Extend the past.
After spinning out on its own, analysts were all aglow about how a new Kraft CEO would take this venerable company into dramatic profit growth. But that hasn't quite worked. Rather, lacking any new product launches Kraft profits have been stagnant. Last year, the blame was placed on escalating commodity prices eating into margins. Now, with profits bouncing off the floor, the claim is that because the company raised prices last year to reclaim cost increases it has driven down sales! Of course we don't know exactly how bad things are at Kraft, because the company decided to claim substantial "restructuring costs" this quarter hiding the true business margins. We just know things are pretty bad.
Conventional wisdom is based on, at worst, myth – and, at best, what worked in the past, although no one is sure why. Following conventional wisdom can be successful only so long as current conditions are like past conditions.
But, this economic downturn isn't like any previous downturn. There have been dramatic shifts in global competitiveness and the value of resources. And, the companies being discussed are dramatically different than they were in previous recessions. Both Kraft and Sara Lee are companies that systematically shed all their growth businesses to raise cash in an effort to Defend & Extend old businesses. Both company's leadership manipulated the financial statements to make the company look better in past quarters (and years) thus reducing opportunities to now hide those ongoing weaknesses. Simply, things aren't like they used to be in the marketplace, or in the competitiveness of these companies. No one should be expecting them to have improved results. As the old markets weaken and shift, these companies become even weaker.
Both could take a different course. They could revitalize their futures by stopping Defend & Extend practices designed to over-invest in outdated brands and products. They could obsess about competitors to identify new growth opportunites. They could Disrupt old practices and procedures to allow new innovations to flourish. And they could open White Space where managers are given permission to do things new and different and given the resources to develop a new Success Formula. Both companies could be successful. But first they have to stop believing in the past, in their conventional wisdom, and focus again on future growth.