Sara Lee

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Sara Lee Corporation in 2011: Has Its Retrenchment Strategy Been Successful?

Executive Summary
Sara Lee Corporation was founded in 1939 and, as of 2001, had acquired more than forty companies. Sales reached $10 billion in 1988, $15 billion in 1994, and $20 billion in 1998. However, revenues peaked in 1998, as Sara Lee struggled to manage the company’s broadly diversified and geographically scattered operations. In February 2005, Brenda Barnes, Sara Lee’s newly appointed president and CEO, announced a strategic plan to transform Sara Lee into a more tightly focused food, beverage, and household products company. The centerpiece of Barnes’s transformation plan was the divestiture of weak-performing business units and product categories accounting for $8.2 billion in sales - 40% of Sara Lee’s annual revenue. Barnes believed that Sara Lee could benefit from concentrating its financial and managerial resources on a smaller number of business segments where market prospects were promising and Sara Lee’s brands were well positioned. As the first phase of Barnes’s transformation plan, Sara Lee was to exit eight businesses: Direct selling, U.S. retail coffee, European apparel, European nuts and snacks, European rice, U.S. meat snacks, European meats, and Sara Lee branded apparel. The latter was spun off as an independent company, Hanesbrands Inc. Following the disposition of these nonstrategic businesses in 2006, Sara Lee focused on increasing the sales, market shares, and profitability of its remaining businesses including North American Retail, North American Fresh Bakery, North American Foodservice, International Beverage, International Bakery, and International Household & Body Care. Sara Lee’s management estimated that by focusing more on the stronger brands with good growth potential, its revenues would grow to $14 billion in fiscal 2010 and that the company’s operating income margin would increase to at least 12%. Additionally, executives believed that the retrenchment strategy would generate sufficient cash flows to pay the company’s total debt down to between $1.5 and $2 billion by fiscal 2010, pay substantial dividends to shareholders, and repurchase shares of common stock. Sara Lee missed both revenue and operating profit margin projections for 2010 and it was unclear whether the retrenchment strategy had increased shareholder value. During 2010, Sara Lee had engaged in further retrenchment with the divestiture of its International Household and Body Care business that produced and marketed Kiwi shoe care products, Sanex personal care products, AmbiPur air fresheners, and various insecticides and cleaning products sold outside North America. The same year, management launched a share buyback plan and Project Accelerate, a company-wide cost savings and productivity initiative focused on outsourcing, supply chain efficiencies, and overhead reduction, had saved the company $180 million. Barnes suffered a stroke and was succeeded by CFO Marcel Smits as interim CEO.

Sara Lee’s retrenchment is based on a strategy of related diversification. As noted in our text, “Related diversitication is based on value chain matchups with respect to key value chain activities.” With the exception of International Household & Body Care, which was slated for divesture in 2009, the businesses retained were all in the food and beverage industry and, given this relationship, relied on the same value chain activities such as production, purchasing, advertising, marketing, R&D, distribution, and customer service. This strategy provided Sara Lee the opportunity to focus on food and beverages as a core competency while taking advantages of synergies between the different businesses. By facilitating the sharing or transferring of competitively important resources and capabilities, related diversification promised to boost each business’s prospects for competitive...
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