BLL

October 30, 2008

Sara Lee Corporation

Sara Lee retrenched seven of its business units in 2006 in order to focus its

resources on its more profitable industries. The company’s goal is to boost its sales

lines by at least 2 percent and increase its profit margin to 12% by 2010. By

developing three competitive capabilities in each of its remaining business units,

Sara Lee looks to improve its net profits within the next few years.

Divested Businesses Analysis

Sara Lee divested seven of its units, including: direct sales, U.S. retail coffee,

European apparel, European snacks, and U.S. and European meats. The company

followed a strategy which allowed it to increase its corporate profits, since most of

its business units it retrenched were unprofitable. By 2006, five business units had

negative net profit margins and negative operating margins. Four of those units

had negative margins of more than 10%, with different units seeing steady or sharp

declines in revenues in profits since 2004.

The only two profitable units were the direct selling unit and the European

snack lines. These two lines were seeing declining revenues and operating margins,

except in 2006, when both lines increased their margins. Divesting the snack

business was a correct decision, since it was only producing net profits of $3 million,

which would not help the business to increase its shareholders’ wealth. Plus, the

company received a $70 million after-tax gain, more than 22 times the current net

profit. Selling its direct sales business was not a good decision, since it was still

drawing a 27% profit margin and income of $54 million. The business compliments
its current household and body care line within Sara Lee International. The unit

exposed the company to other markets, while it could have allowed the company to

find potentials for its other products in those markets. Though the direct selling line

was still profitable for the company, Sara Lee received a net gain which was 4 times

the unit’s current profits. After divesting these seven units, Sara Lee gained $440

million, a $700 million increase from its total losses in 2006.

Sara Lee’s decision to spin-off Hanesbrands is questionable. This sector of

Sara Lee did not correlate with its other North American business, which were

concentrated in the food industry. The sector, however, did correlate with the

businesses included in Sara Lee International, which would have allowed the

additional distribution of apparel to foreign markets. The primary products offered

are not innovative products, but provide a solid base of revenues for the company.

Though revenues, gross margins and operating margins have been flat,

Hanesbrands saw an increase of more than $100 million in net income after 2005.

Returns on assets have fallen 5% since 2004 and return on equity was cut in half

during the same period. Debt-to-equity ratios have been around .5 since 2004,

showing that Hanesbrands had been capable of keeping its debts low compared to

the amount of equity it had on hand. After the spin-off of Hanesbrands, the

business acquired significant debt in order to remain a standalone business.

Though the company was able to pay off $100 million in long-term debt, the

significant amounts of debt left over may hinder its ability to turn solid profits in the

future. Sara Lee should have retained this business, allowing it to expand in foreign

markets it already had a presence in while bringing in revenues which could be

used to accelerate other businesses.

Retrenchment Strategy Evaluation

After Sara Lee’s retrenchment, the company was able to focus on its food &

beverage, foodservice and international businesses. Sara Lee’s key objectives for

its remaining businesses were to focus on customer needs and operating

excellence, while creating a strong brand through wide innovations and competitive

pricing.

The company successfully utilizes its retail meats, selling similar meats to its

foodservice customers. Its meats have seen increases in sales and operating

income, while efficiently taking advantage of innovations within grocery items.

These innovations boosted sales more than $100 million, even when its core

products’ sales were flat. The company holds a 20% market share in a growing

industry of almost $10 billion. Sara Lee is the market leader in retail breads in

North America, while closely trailing Kraft within the meat sector. Fresh bread sales

jumped more than $600 million within 3 years, due to the leverage Sara Lee had

with grocery stores to increase shelf space for its products. Sara Lee provided

innovative breads for its customers, while dominating the breakfast bread market.

While holding a 14% market share in a $100 billion industry, Sara Lee is positioned

to increase its profits significantly in this segment. The company was unable to

produce significant sales in its frozen desserts or its coffeemakers, leaving the

segment to rely on baked breads. Sara Lee misread the market for dessert items,

and was known to provide poorly made coffee pods.

The foodservice sector provides Sara Lee the ability to use its meats in

restaurants and fast-food dining centers. Sara Lee has generated strong market

shares within this sector, though its strong share in baked goods is in a segment
which is growing very slowly. Its beverage profits are strong, where the segment is

growing at 5%. Sara Lee is currently holding a modest position within the meats

segment, which is growing at 5% as well. The company can grab more market

share within this segment with its innovative packaged meats, which have helped to

reduce customer’s labor costs. While providing low-calorie desserts to its

customers, Sara Lee has met the needs of its customers and captured a larger

market share.

Sara Lee International’s products consist of beverage, bakery and household

and body care brands. Most of the division’s sales are made in Western Europe,

where another portion is amassed in Asia and Australia. The division is working to

successfully integrate its businesses by adding continuous improvement programs.

This investment should help to increase its sales within these markets.

SLI has a 9 percent market share of retail coffee, making it the second largest

in the world. Its sales are surpass $1.7 billion, while introducing the best selling

coffee product in Europe. Since the continent has strong demands for specialty

coffees, Sara Lee remodeled its best selling coffee pots to serve cappuccino and

espresso drinks. The bakery line for the company has not been as successful

throughout Europe. Consumers prefer fresh-baked bread; however, Sara Lee can

only provide packaged bread. Though packaged bread only makes up 12% of the

bread market, it is expected to increase to 25% by 2015. Sara Lee’s bread has

been successful in Spain, though, where it dominates the country with a 54 percent

market share. SLI is currently not in an attractive market, but if packaged breads

sales improve, SLI may be able to capture a large market share.

 Sara Lee International has positioned itself in growing segments and stalling

unrelated segments within its household and body care product lines. This segment

diverts away from Sara Lee’s core food items businesses. SLI holds the number one

brand of shoe polish, Kiwi, which amasses a global market share of 63%. Its shoe

polish accounts for almost 16% of the unit’s sales. Though SLI has the leading

shower brand, the market is slowly growing at 1%. This prevents the company from

taking advantage of potential revenues within the market. SLI holds a 28% market

share of insecticide brands, focusing its future growth in Asia. The company looks

to continue innovating products to capture significant market share within that

market. Though SLI has the third largest brand of air fresheners in Europe, the

market has decline by more than 1%. The division has managed to amass market

share of 25% in several Western European country, where it is positioned to grab

market share with its innovative Ambi Pur 3volution.

Sara Lee has successfully revamped its business strategy, focusing on

innovative products and meeting customer demand. Its lineup of businesses allows

it to grow in several markets, though some segments of its businesses may not

prove to be as successful. The company has segments in unrelated industries, such

as its household line in SLI. The rest of the company has focused on food items,

diverting its attention from its strong points. After the company restructured itself,

net income, revenue and assets declined significantly. The positive aspects

financially of the restructuring was that sales per employee increased by $60,000,

while inventory turned over 3 additional times. In order to grow its revenues and

profits, Sara Lee will need to focus on its key performing businesses.

Business Units Strengths and Ability to Increase Value

 Sara Lee has positioned itself with strong food products which make the

company successful in both the retail and foodservice industry. The company can

utilize its strong growing meats in its food service business, saving costs within the

company while building strong relationships with other businesses. Sara Lee’s

thick-sliced bread is very popular in supermarkets, which has captured a strong

market share while producing strong sales for the North American Retail Bread

segment. Its desserts are not fairing as well, with sales approximated to decrease

over the next several years. The desserts, however, hold a fair market share in the

foodservice business, allowing Sara Lee to cater healthier options to fast-food

customers.

Sara Lee International has captured strong market share within Western

Europe, utilizing the sales from its coffee pods. The Senseo coffee pods are the

second best selling coffee product in Europe, generating $25 billion in sales for SLI.

SLI has taken advantage of the growing hot and cold coffee drink industry,

innovating products that will allow it to grow market share within this segment.

Bimbo, SLI’s number one brand of bread in Spain, should be able to take advantage

of the some of the growing packaged bread sales, though private label brands are

preferred. Bimbo may not be able to continue its sales within the International

Bakery segment due to the switch to private brands in the future.

The company’s household brands are overshadowed by Kiwi, which

generates almost $300 million in sales. Sanex is a cash cow for this segment, with

significant market share held in a slow-growing industry. The company should be

able to continue generating its constant sales of $280 million. Though SLI has other

insecticide and household brands, it diverts quickly from the company’s core line of

businesses. Its other products generate large sales for the company, but stray
away from the company’s main focus. The insecticide brands do have the largest

market share, and are positioned to overtake the rapidly-growing Asian market. Its

air fresheners are in a declining market, which may prevent its 3volution from

generating large sales to improve value for the company.

Profitability and Divestiture

Sara Lee has developed many of its brands within North America and

internationally, developing healthy operating profits in several of its brands. Sara

Lee International has seen high operating profit margins, currently at almost 13%.

This is a decrease from 15.7% in 2005, due to the 3% margin declines in its

beverage and household & body care units. Its bakery business saw declines of

only 1%, mainly due to the decline of the packaged bread market in Europe. SLI’s

coffee sold to restaurants and cafés make up 10% of the market, providing an

opportunity for the company to further expand and increase its $2.4 billion sales.

Sara Lee’s foodservice business has seen declining operating margins since

2005. Though sales have increased $100 million, margins are down 2% since 2005.

The sales of bakery items have declined to restaurants, while beverages make up

almost 30% of overall sales. The company should be taking advantage of its

situation, as more Americans are eating away from home.

Meat products sold in North American grocery outlets have increased by $100

million. This increase has propelled margins up 2%, with new innovations in

prepared meals and promotions helping to spur growth. Bakery revenues remain

stagnant, as revenues have not changed, but reduced costs have created a small

margin of 0.5%. Stale growth in Sara Lee’s bakery items has prevented growth

within the business, while single-service coffeemakers have hurt growth. Overall
operating profits for Sara Lee Food & Beverage are increasing before significant

items, with profits increasing by $70 million.

Sara Lee’s divestment of its seven brands, excluding Hanesbrands, has

allowed the company to prosper in the future. Most of its brands had significantly

negative profit and operating margins, while being unrelated to most of the

company’s other products. Sara Lee should have kept its direct sales business and

European snacks line, which have produced favorable operating margins over 14%

in 2006. The company’s direct sales line provided the company the opportunity to

expand its international household products to other regions and increase sales. Its

European snacks complemented its international beverage and bakery lines, though

it did not account for a significant amount of sales. Sara Lee did not divest its North

American and foodservice bakery lines, which have been unprofitable for the

company for several years. Though some innovations have been made, bakery

sales will continue to slide as Americans eat healthier foods. The company could

have sold its dessert lines, while keeping its bread lines, which have significant

market share.

Recommendations

Sara Lee has several positions that it can take that can strategically grow its

profitability. The company currently has limited margins on its bakery line,

especially from its dessert items. Since Sara Lee has significant market share with

its packaged bread in North America, the company should eliminate its dessert

sales and the sale of single-serving coffeemakers. Growth in this segment is very

slow, and is not growing within the foodservice industry either. By selling off its
dessert brands, Sara Lee can invest the profits of the sale into other innovations in

its other business units.

Sara Lee International should expand its household and body care brands

into the United States. Its air freshener brands hold significant market share in

Europe, which could be utilized in North America. The market for cleaning products

and air fresheners is strong in the United States. Sara Lee’s innovations would be

very successful in the growing market across the Atlantic. The company can also

sell more of its insecticides in developing nations, where few treatments are

available to prevent bacteria. Nations in Africa are still growing, and could utilize

the insecticides to improve farming practices within the continent.

Beverage products sold by Sara Lee International produce almost 50% of all

profits. These beverages could be sold to local retail business, similar to what is

done with Sara Lee Foodservice. The company has already begun selling beverages

in retail operations, and with the current contacts and knowledge of the foodservice

industry, profits could easily be managed. This strategy allows Sara Lee to develop

larger profits by selling its teas and coffees within local businesses throughout

Europe. If Sara Lee follows these strategies, the company will be able to amass

profits similar to what it had before its divestures.