After I looked up the Sara Lee (NYSE:SLE) presentation at the Consumer Analyst Group of New York 2007 Conference, but before I took figurative pen in hand to inform Fools of my observations, my wife entered the educational process. You see, before the conference, when I thought of Sara Lee, I thought of little more than cakes and cupcakes (along with the familiar slogan, "Nobody doesn't like Sara Lee").
It seems that my better half was far more knowledgeable about the company than I was, so she took it upon herself to drag me to the nearest grocery store for a firsthand look at the myriad brands that now fall under Sara Lee's corporate umbrella. In the bakery aisle, for instance, there was a host of the company's bread types, along with hamburger and hot dog buns, most marketed under the Sara Lee or Earth Grains labels. And there was the Hillshire Farms brand of thin-sliced deli meats, and the Jimmy Dean and Ball Park brands, and -- especially internationally -- coffees, and teas, and air fresheners, and on and on. Suffice it to say, the real Sara Lee of today is a very different company from the Sara Lee I thought I knew.
The company's presentation was given by Brenda Barnes, Sara Lee's chairman and CEO of two years. I must say I found the second half of her discussion to be far more interesting and informative than the first half.
Dough from bread
Once she'd completed her first-half retrospective on why she joined the company, Barnes clearly warmed to her subject, providing an informative look at Sara Lee and its direction. For instance, she described how, in a macro sense, the company's attention is focused on the consumer ("who is going to drive everything we do"), on the customer -- through whom the products get to the consumer "in a visible and impactful way" -- and on operating excellence. The latter "has to fuel our growth," she said.
But before providing a specific assessment of some of the company's brands, Barnes essentially recanted an earlier financial objective at the company: "We still have our goal of 2% to 4% top-line growth, and while we at one time committed to a margin of 12% by fiscal 2010, you were right: It was too ambitious, and we had probably too much disruption to actually stay on that course to get there by fiscal 2010."
The first specific area of Sara Lee's products she discussed was the bakery unit, about which -- thanks to my wife -- I eventually became better informed. Barnes actually began by lauding George Deese, Flowers Foods' (NYSE:FLO) CEO, who had presented earlier. "I dream about the margins they have. I dream about the growth they have," she said. But, she noted, "... if Flowers can generate that kind of performance, there is no reason in the world why Sara Lee can't."
Her comments about her company's sizable bakery unit included a nod to its high elasticity of demand. As she said, people don't turn away from breads, rolls, or buns. Indeed, they eat them every day, and "if you innovate against this category, you do, in fact, have the capability to drive growth." In that context, while Sara Lee has a 7.8% share in the bread and rolls category, "our brands have driven almost 40% of the growth in the market," she said.
One of the changes that's occurred in Sara Lee's bread line was the introduction four years ago of Soft & Smooth white bread, which now leads the company's bakery category. Indeed, the Soft & Smooth approach has been expanded to a whole-wheat offering and on to hamburger and hot dog buns.
Also, Sara Lee was at one time limited by a customer to four-foot spaces for the marketing of all its bakery products. The result was an inability to stock those products effectively, resulting in spot shortages of products on the shelves. Once the display space was expanded, not only did Sara Lee's sales increase, but the customer's "growth rate for the entire category doubled."
Cents from scents
In Europe, the company has seen the successful introduction of an electric air purifier marketed under the "Ambi Pur" brand. The product was introduced in the United Kingdom a year ago, and is now offered in eight countries. The product apparently operates along the same principles as the concept of the razor and the more profitable blade: "We make our money on selling the fragrances that go in," Barnes said.
In the food category, most of us -- Fools or not -- probably think of Jimmy Dean simply as a breakfast sausage marketed by that pleasantly smiling Texas troubadour of the same name. But as Barnes noted, "The marketing team turned it from that concept, repositioned Jimmy Dean as a breakfast food, and we've been coming out with new product ideas that are meeting consumers' needs. These are great meals that are made very quickly, fully prepared. Pop it in the microwave and have a full, hot breakfast in less than five minutes." Similarly, a new cheesecake offering has received an American Culinary Federation seal of approval award, along with "terrific consumer feedback."
In a related area, the Hillshire brand "used to be rope sausage. That was it." But after a successful repackaging of the Hillshire Farm Deli Select brand of sliced meats into tubs, the brand is being extended to prepackaged, ready-to-mix salads that, according to Barnes, have had the highest consumer response scores among the approximately 160 products the company has tested in the past three years.
Barnes has also attempted to bring order to the flow of ideas through the company's product innovation pipeline. As she said, all ideas are clustered by the year in which their launch is expected, and they are weighted by the odds of a successful introduction. Further, she noted that "at each stage, there are exit criteria to move from one state to the other, so we don't spend a lot of time on ideas that aren't going to work."
As a $16 billion company primarily focused on food, and one which must depend on constant innovation in order to satisfy changing consumer tastes and fuel its growth, Sara Lee is comparable to such companies as Kraft (NYSE:KFT), General Mills (NYSE:GIS), HJ Heinz (NYSE:HNZ), and Campbell Soup (NYSE:CPB).
Nevertheless, I came away from Barnes' presentation with the strong feeling that, in light of the rapid pace of changes still occurring at the company, Sara Lee is clearly more of a work in process than are most of its bluer-than-blue-chip peers. Thus, I'd urge Fools to monitor Sara Lee carefully, but to allow some of its restructuring dust to settle before including it in their portfolios.
For related Foolishness:
Heinz and Kraft are Motley Fool Income Investor picks. To see what other great dividend-paying companies have been recommended to subscribers of the market-beating newsletter service, take a free 30-day trial today. Sara Lee is a former Income Investor pick.
Fool contributor David Lee Smith is a hearty eater who doesn't own shares in any of the companies mentioned. He welcomes your comments or questions. The Fool's disclosure policy is topped with raspberries drizzled with chocolate sauce.
