Sara Lee Corporation (Circa 2008)

 Problem

Sara Lee is a worldwide manufacturer and wholesaler of over 200 brands ranging from their signature cheesecake to Ball Park hotdogs to Kiwi shoe polish. The company has significant foreign operations focusing on food, coffee and household products. For its fiscal year ended June 28, 2008 "approximately 50% of sales and the majority of operating segment income were generated outside the U.S. (Sara Lee 2008 Annual Report, issued 9/1/08.)

The heart and soul of Sara Lee were born in a Chicago bakery founded by Charles Lubin in 1951. Lubin launched a line of cheesecakes named after his daughter which became popular because of their quality and appeal. A big company, whose name is no longer important, acquired Sara Lee in 1956. Over the following decades the company engaged in a series of acquisitions of far-flung and diverse operations and grew into "...a sagging hodgepodge of disparate businesses...." (Wall Street Journal, High Costs Put Sara Lee CEO in a Bind by Julie Jargon, 7/23/08.)

In 2001, under CEO C. Steven McMillan, the company began a shedding process in which it attempted, with some success, to rediscover itself and its core business of quality branded food products. The useless, the unnecessary and the irrelevant were stripped away or sold off such as retail coffee (2005); apparel, including Hanes Brands (2006); European meat (2007); and Mexican meat and foodservices sauces and dressings (2008). (Hoovers' October 2008 Sara Lee Profile.) In 2005, new CEO Brenda Barnes continued and intensified this shedding process.

Over the past three fiscal years the company has experienced strong sales growth. Net sales in billions of dollars for fiscal years ended in 2006, 2007 and 2008 were $11.175, $11.983 and $13.212, respectively. Sara Lee is organized into six business segments.

Three of the company's business segments operate primarily in the U.S. North American Retail Meats (18% of 2008 sales) sells packaged meats including Ball Park hot dogs, Jimmy Dean breakfast sausage, and Hillshire Farm deli items. North American Retail Bakery (17%) sells the company's famous line of cheesecakes and other baked goods including bread. The Sara Lee brand surpassed $1 billion in sales for fiscal 2008. The Foodservice segment (17%) sells a variety of beverages, commodity meats, and private label baked goods to institutional and business customers and is disposing of its sauces and dressings product line to Richelieu Foods (BNET Industries, All Would Be Well for Sara Lee, but for Those Pesky Costs by Dan Mitchell, 9/2/08.)

The remaining three segments operate abroad. International Beverage (24% of 2008 sales) sells coffee and tea worldwide. Its Cafe Pilao coffee is the leading brand in Brazil. International Bakery (7%) sells baked and dough products primarily to Europe. The Household and Body Care Segment (17%) sells packaged consumer goods worldwide, including Kiwi shoe polish. (Percentage sales by segment are from the 2008 Annual Report.) Table A (see appendix) summarizes recent segment sales and changes in unit volumes and aggregate prices.

Company strategy, as stated in its most recent annual report, “...is focused on building sustainable, profitable growth over the long term by achieving share leadership in its core categories; [and] innovating around its core products....” Sara Lee clearly recognizes that its capacity for success hinges on maintaining and building up the strength of its brands: “The consumers’ willingness to purchase our products depends on our ability to offer brand value
propositions....”

The primary industry in which Sara Lee operates is packaged food and consumer products. Its primary markets are the United States and Western Europe. (Hoovers' Sara Lee Profile). Sara Lee's "significant customers include mass retailers and supermarket chains in both the United States and Europe." (New York Times Company Information, 10/16/08).

The most important economic trend besetting the company is "soaring grain costs." (Wall Street Journal, Food Giants Race to Pass Rising Costs to Shoppers by Scott Kilman, 8/8/08). The surging cost of raw materials for food manufacturers like Sara Lee is significant: "...in the summer of 2006, the price of corn had stayed below $3 a bushel for a decade. In the space of two years it surged as high as $7 a bushel. Soybean and wheat made similar moves." Brenda Barnes,
CEO of Sara Lee, summarized current negative economic trends by saying "everyone's adjusting."

The target audiences for this company include the full spectrum of packaged goods consumers as well as the business customers of the foodservice segment. Company products are focused on high convenience ready-to-eat items, including the recent innovation of pre-sliced cheesecakes, and the highly successful new product launch of Sara Lee Hearty and Delicious Breads. This bread was named one of the ten most successful new branded products of 2008 by Information Resources Inc. (IRI, IRI Announces the Most Successful New Brands of 2008, 3/5/08 Press Release.) Sara Lee is partnering with Dunkin Donuts to distribute their coffee.

Marketing efforts over the past three years displayed steady increases in advertising and promotional expenses, which totaled (in millions) $298, $313, and $325 for the fiscal years 2006, 2007 and 2008, respectively. (Note 2, Advertising Expense, 2008 Annual Report.) However, in June 2008 the company announced a decrease in advertising efforts. The company's "ad spending now lags that of its competitors." (BNET Article by Dan Mitchell, 9/2/08).

The reductions in recent marketing efforts appear to be more than offset by a strengthened commitment to R&D: "In 2007 Sara Lee began building new R&D facilities and upping its research staff by 50% (to 150 researchers) in order to develop new retail-food and foodservice products." (Hoovers' Sara Lee Profile.)

The company's principal competitors are Kraft Foods ($37.2 billion in most recent annual sales), Tyson Foods ($26.9 billion) and Interstate Bakeries ($2.9 billion). Sara Lee's fiscal 2008 sales were $13.2 billion. (Hoovers' Sara Lee Profile.) The New York Times company information for Sara Lee further lists ConAgra Foods, Dean Foods, and Smithfield Foods as competitors.

A recent article in the Wall Street Journal (Food Marketers Cook Up 'Value' Campaigns, 9/29/08) by Julie Jargon discussed coping tactics being used by many food service companies, including some of the chief competitors of Sara Lee, to respond to rising raw materials costs. The tactic consists of "steering consumers to cheaper, high-margin products." This is a "big shift" for the branded companies in the packaged food industry.

According to this 9/29/08 article in the Wall Street Journal recent advertising for milk, ConAgra frozen dinners, and Campbell's soup all focused on "wallet-friendly" products. The article considers these "value" oriented marketing efforts to be "...in part, a defensive move against private-label food makers that could steal market share with their cheaper goods."

The article goes on to say that "...not all plan to push cheaper goods harder. Spokesmen for...Sara Lee Corp., maker of Jimmy Dean sausage and Ball Park hot dogs, say their brands have always stood for good value." Thus, Sara Lee is one of the few companies resisting the prevailing impulse to cheapen their brands. CEO Barnes stated in an interview that "...she hasn't yet seen consumers migrate to cheaper, private-label brands. "We believe it's because our brands are strong," she said." (Wall Street Journal, Sara Lee Sees Benefits of Revamp as Sales Rise 12% by Julie Jargon, 8/8/08.) Sara Lee continues to see significant increases in unit volumes of many of its core products - see Table A.

A second tactic being used in response to rising commodity costs is threefold in nature: (1) overt price increases - "Food companies themselves have contributed to the pressure on consumers by raising prices"; (2) covert price increases - "shrinking package sizes"; and (3) "substituting cheaper ingredients." (Wall Street Journal, 9/29/08 article by Julie Jargon.) Unlike its response to recent "value" oriented ads, Sara Lee is clearly using at least two of these approaches.

Sara Lee is "reducing the amount of meat in its Hillshire Farm deli packages" (Wall Street Journal Article by Scott Kilman, 8/8/08), a stealth price increase. And the company's 2008 annual report discloses "positive pricing actions to offset the higher commodity and other raw material costs." There is no indication as of yet that the company is using cheaper or lower quality ingredients.

One marketing issue concerning Sara Lee's use of overt and covert price increases is the simple fact that "companies won't be able to raise prices indefinitely." (Wall Street Journal Article by Julie Jargon, 9/29/08.) On the one hand there is an upper limit to price increases. On the other hand there is a danger, which Sara Lee is presently avoiding, of cheapening high-investment brands in a race to the bottom against private label competition.

But the greatest danger and the main marketing issue now facing Sara Lee, and its competitors, is that they will over-react to short term economic trends by abusing short-term coping tactics with long-term consequences.

Solutions

The greatest strength of Sara Lee is the quality and visibility of many of its core food brands. Its lines of cheesecakes, hot dogs and coffee have significant market share and high brand awareness built up over many years of investment. The strength of these core brands has allowed Sara Lee to "...gain market share despite recent price increases." (Wall Street Journal, 8/8/08 article by Julie Jargon.)

The source of Sara Lee's critical weakness is the fact that it continues to operate as an unwieldy conglomerate, despite the shedding process it has undergone, with a large assortment of unrelated products. In terms of number of products and their interrelationship this company is too large to be managed effectively in its present form. The breadth and scope of its operations exceed the breadth and scope of any management's capacity for insight and control.

Sara Lee and its rivals face a common threat of overreacting to current negative economic conditions by resorting to coping tactics that may leave an enduring hangover. Prices cannot be increased to infinity and package sizes cannot be shrunk to zero. If the trend of rising raw materials prices persists, and there are some reasons for believing it will not, food companies must react in more creative and innovative ways that do not impair the enormous investments they have made in their brands.

Sara Lee has the opportunity available to any player who resists the herd impulse for a moment. Many of the company's competitors, but not Sara Lee, are using 'value' type ads that may confuse consumers and make their brands indistinguishable from private label products in the longer-run. Most food companies, including Sara Lee, are using higher prices and smaller packages to deal with surging input costs and lower gross margins. A vacuum exists at present at the opposite extreme of the options spectrum - to keep prices and portions the same (or larger) and intentionally advertise this fact to consumers as a means of differentiation.

In his award-winning 2006 book, The Omnivore’s Dilemma, the New York Times journalist Michael Pollan discussed the consequences for all of us of the industrialization of agriculture and of food. In the context of Sara Lee and its competitors his most relevant observation concerns corn: "...every bushel of industrial corn requires the equivalent of between a quarter and a third of a gallon of oil to grow it - or around fifty gallons of oil per acre of corn." (p. 45, softcover edition.) Wheat and soybeans require similar significant inputs of fossil fuels. Thus, the price of raw materials for Sara Lee and its industry are sensitive to the price of oil. Oil prices impact not only the cost of their raw materials but also their 'transformational' or manufacturing costs of production and of distribution.

Because of the emerging worldwide recession, global demand for oil is falling and oil prices are falling with it. It is not surprising then that the price of corn per bushel on Monday, October 20, 2008 was $4.19 (www.quotecorn.com), a significant decline from its $7/bushel peak. Oil prices have declined 52 % since their peak of $147/barrel last July: "The sharp drop in demand in the U.S....shows how deep the economic malaise is across much of the industrialized world now." (Wall Street Journal, Oil Fundamentals Respond to Global Realities by Joseph Schuman, 10/17/08). The legitimate concerns of Sara Lee and its industry over rising raw materials prices, while well-founded for a while, appear to be passing.

Oil prices, and therefore raw materials prices for Sara Lee, appear headed for a fall. This is the emerging counter-trend that is just beginning to manifest itself. Even if this counter-trend evaporates, perhaps through aggressive oil price defense by the OPEC cartel, Sara Lee and its industry must still act as if it did exist, because of fundamental limitations to raising food prices and shrinking package sizes.

The tactics used by the industry to respond to a current condition are ill-suited in the longer-term to the health and survival of their high-investment brands and overall brand strategy. The best investment strategy is to buy low and sell high; only panic will make people and companies abandon this time-tested strategy in favor of the tactic of buying high and selling low. By selling their brands short, large food companies like ConAgra and Kraft Foods risk confusing consumers and diluting their brand identities.

If current economic conditions are bad and the future is uncertain, then the past is all that's left to appeal to consumers. In these circumstances people may unconsciously look to traditional brands as comfort foods and comfort products. By cheapening their brands and using a 'value' approach, branded companies risk everything in a race to the bottom with private label competitors.

Consumers may reach out for branded comfort foods only to find them indistinguishable from their cheap, private label rivals. By deliberately associating high-investment brands with 'cheapness' companies that follow this approach may be digging their own graves. Brands are built upon the concept of being premium in nature, of possessing intangible benefits above and beyond price that at the same time justifies a higher price.

An appropriate alternative strategy is an appeal to the traditional. The harsher current conditions become the more consumers will demand comfort, trust, and satisfaction from those products they can still afford to purchase. One adaptive strategy could include retro style ads based on happier past times that would be likely to resonate with consumers.

Another alternate strategy, one that Sara Lee is poised to exploit given its higher investment in R&D, is to innovate. Good nutrition can be combined with affordable products. Larger package sizes (like those sold in warehouse clubs) can be combined with prominent guarantees of freshness and good taste. Such approaches build upon, rather than undermine, the trust, appeal, loyalty and quality that are the foundation of branded products.

Food companies adapting to new circumstances must recognize the critical importance of consumer perception: creating a quality product identity is the reason why companies invest billions to build brands in the first place. The more uncertain the present climate becomes for consumers the more likely they are to find reassurance in what does not change. This suggests another alternate strategy.

If most companies in the food industry are cutting package sizes and raising prices then, from the viewpoint of competitive game theory, this opens up an unused slot at the other end of the spectrum of options: Sara Lee could keep package sizes and prices the same and emphasize this fact to consumers, clearly differentiating itself from its branded competitors. Such ads could take the form of "same size, same price, same quality" or something like "count us, count on us" - with highly visible and prominent emphasis placed on unchanged portion size, quantity, etc., and clearly distinguishing Sara Lee products from the miniaturized and disappearing versions offered by its rivals.

Wendy's used a similar successful ad campaign years ago: "Where's the beef?" Their ad campaign clearly distinguished their product from competitors without cheapening or diluting brand identity. Sara Lee could do the same and possibly gain market share while its competitors willfully invite consumer comparison of their brands with generics and private labels.

Recommendations

I recommend that Sara Lee continue its policy of avoiding ‘value’ oriented ads, which risk consumer confusion and potential dilution of brand strength.

I also recommend that the company halt further price increases and reductions in package sizes. In addition, it should explore increases in package sizes in several key test markets in the United States that would be subjected to thorough market research. The new policy would be supported by a new marketing campaign using retro style ads focusing on happier times. Another element of the campaign would include ads that emphasize the stability and reliability of Sara Lee brands, where price, quantity and quality can be counted on by the consumer. The recent advertising budget cuts should be reversed, and the new ad campaigns will require an increase in funding.

Finally, Sara Lee should push innovation to its limit and capitalize on the recent significant investments it has made in R&D. The above recommendations may lead to further gains in market share that, in turn, would facilitate new product launches.

These recommendations implement the overall company strategy of “building sustainable, profitable growth over the long term.” Long term thinking is usually the first casualty of difficult economic times. Sara Lee must continue to believe in the future, and work to achieve it, even when many of its customers are finding it harder to do so.

APPENDIX

Sara Lee
Table A: Summary and Analysis of Key Segment Information by Year
All amounts in millions of dollars

Source: Sales and unit volume changes compiled from 2008 and 2007 Annual Reports. Price changes were derived as explained in Note 1.

Note 1: Aggregate change in price was derived by using the ratio of % change in sales divided by % change in quantity sold (unit volume). For foreign segments the change in aggregate price reflects the effect of foreign currency fluctuations. Some unit volume changes reflect discontinued operations.

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