Fashioning Grain Into Gold
February 1, 2005
Fashioning Grain Into Gold
Just under three years ago, Richard Noll designed a strategy to transform Sara Lee Bakery Group into a world-class operation. Today, his management team is relentlessly executing that plan and beginning to see the fruits of its labor.
When he joined Sara Lee Bakery Group in 2002, Richard A. Noll immediately realized he had a universally known brand with star power under the Sara Lee name. As president and chief operating officer who became CEO of the division in 2003, his goal was to leverage what he perceived to be an underutilized asset, the Sara Lee brand.
Relegated mainly to the freezer case, Sara Lee needed a broader repertoire to leverage her delightfully wholesome image and a larger stage to strut her stuff and become one of America’s beloved idols in the bread aisle.
In fact, that was a main reason behind the Sara Lee Corp. purchase of The Earthgrains Co. in August 2001. Although the Chicago-based company produced and distributed specialty breads and bagels under the Sara Lee name in California, expanding the operation to new geographic territories from scratch would be prohibitively expensive and take years to develop.
With $2.6 billion in sales, more than 60 plants and some 5,000 routes, Earthgrains provided a logical vehicle to enter the packaged bread aisle with the Sara Lee brand and reach consumers living in 60% of the U.S. population and do it in a brief period of time. The company quickly took its Sara Lee bagels to the rest of the Earthgrains geography in a system-wide rollout.
Then, in October 2002, Sara Lee Bakery Group (SLBG) rolled out five varieties of breads in what Noll calls the “first wave” of new product innovation under the Sara Lee banner.
Forget the uniform consistency common with most commercial breads. From the get-go, Sara Lee products had their own personality that reflected the brand’s premium image. The clear packaging allowed consumers to see the “home-baked” appearance with wheat bran, dusted flour and other toppings, which are now common in the bread aisle. The Sara Lee varieties came in both conventional and wide-pan sizes and were baked with distinctive ingredients, such as honey, butter and brown sugar.
However, that was only the beginning. Following its initial bread wave, SLBG also expanded the brand into the bun and roll categories in May 2003.
It then introduced other platforms of products that made the Sara Lee name synonymous with “healthy,” “wholesome” and “good for you.” In December 2003, it came out with its Delightful line of breads with fewer carbs and calories. Besides becoming the top-selling low-carb bread, the wheat and white varieties quickly were among the top 20 best-selling items in the bread category.
Additionally, the company began marketing products as “Heart Healthy,” labeling two of its initial Sara Lee whole-wheat breads as “Heart Healthy” in December 2003. In August 2004, it again expanded the concept by rolling out “Heart Healthy” whole-wheat bagels. By relying on extensive consumer research, SLBG was able to develop innovative products that were slowly making over the bread aisle.
“To me innovation is quite simple. It’s simply listening to consumers about what they want and delivering it,” Noll says. “It doesn’t mean a radically new product idea, but it could. It doesn’t mean a close in SKU [stock-keeping unit] extension, but it might be. It’s all about listening to consumers and giving them a high-quality product.”
Building on the success of the “Heart Healthy” program, the company recently took it one step further. In December, the “Heart Healthy Plus” platform debuted with six new Sara Lee products. The new whole-grain breads come in 20-oz. traditional and 24-oz. wide-pan sizes, are fortified with folic acid which many whole grain breads aren’t, and have twice the fiber of typical wheat breads. The products also are fortified with calcium and Vitamin D. That’s where the “plus” comes in.
“I think we’ve had some great innovative new products, and it’s one of the things that’s driving our success so far from the Delightful line to the most recent launch of the new fortified whole-grain breads,” Noll says.
Out of Nowhere
As a result of these efforts, the Sara Lee brand has gone from having little or no presence to being a fixture in the bread aisle in most parts of the nation in two years.
According to Information Resource Inc. data shared by Noll, Sara Lee has emerged virtually tied as the No. 1 brand with a 4.5% share in the bread, rolls, buns and bagel segments where it competes in the highly fragmented bread aisle. That’s more than double the 2.1% share in had in May 2003.
“It’s very conceivable to have a goal with the Sara Lee brand having an 8 or 12 share of the market, being substantially larger than the next player,” Noll says. “We are well along the path of building the Sara Lee brand, but we still have a long way to go. Being No. 1 in the category is not our goal with Sara Lee; it’s being No. 1 by a factor of two or three.”
Another goal, he adds, is to develop the much larger Sara Lee brand business, which includes baked goods, meats and deli, to $1 billion by 2007. By 2008, Noll expects a run rate of $1 billion for Sara Lee frozen and packaged shelf-stable baked goods.
Noll believes such ambitious goals are attainable based on the brand’s success in the short term and its potential in the long run.
Out of the hundreds of new food and beverage launches in 2003, Sara Lee fresh baked goods were one of only four brands to break the $100 million, according to Chicago-based Information Resources Inc.’s Times and Trends magazine. In fact, the brand had $125 million in sales in the second calendar quarter of 2004. Noll calls that, “world-class performance by a world-class brand.”
“I knew it was going to be strong, but this is unbelievably strong,” he recalls. “How many times have you seen a launch go from obscurity to the No. 1 or No. 2 brand in an 18-month period of time? It is a rare occurrence.”
Because of its long-term growth potential, Sara Lee has been identified as one of a handful of prestigious “strategic investment” brands in Sara Lee Corp.’s diversified portfolio. To qualify as one of Sara Lee Corp.’s strategic investment brands, there has to be a high probability of attaining $500 million in annual sales.
Under this brand segmentation strategy, Sara Lee receives the greatest amount of monetary support and management attention in an effort to most efficiently target resources on those lines that can provide the biggest bang for the buck.
A separate but related strategy for Sara Lee’s U.S. fresh business has been Noll’s comprehensive strategy for simplifying the business and improving the quality of revenue. In June 2002, when he moved to the bakery group from the apparel division of Sara Lee Corp., some strategies, such as the rollout of the Sara Lee brand into the bread aisle, were already in place and ready to unfold. However, shortly thereafter, the bakery business came under tremendous profit pressure.
“Profits started to decline, and we needed to take an accelerated approach, and quite frankly, a new approach,” he recalls.
A large part of the problem was the complexity of the business. Over the years, the fast-growing Earthgrains Co. had acquired a number of regional bakeries and compiled a whopping portfolio of 108 brands with some 8,000 SKUs. Not only were there too many brands, but there also were too many unprofitable ones, Noll says.
In a March 2003 Wall Street conference, the now-47-year-old executive outlined the turnaround strategy to “fix” the U.S. Fresh Bakery business. This long-term strategy would be used as the “scorecard” against which the management team and investors can judge their progress against their goals, Noll says.
To simply its portfolio, SLBG needed to slash the number of brands and SKUs in half. Noll describes the “planned exit” strategy as “a balancing act” that is ongoing today and needs to be constantly monitored on a weekly, monthly and quarterly basis as a part of everyday business.
Under this tricky strategy, SLBG would eliminate weaker, unprofitable brands as it grew its strong ones, specifically Sara Lee on a system-wide basis. In time, top-line sales would remain steady or they could even fall slightly, but operating margins or the quality of overall revenue would improve because a greater percentage of sales were made up of more profitable, higher-margin products. In many cases, Sara Lee, IronKids or Earth Grains products replaced the weaker brands.
Pruning brands, however, proved to be no easy task.
“On any given day that you eliminate something that somebody has been buying for a long period of time, those sales do go away. The trick is making sure that you’re capturing as many of them as possible, and building and growing your new lines at a faster rate,” Noll says.
“If you cut brands too quickly, your volumes start to decline and your profitability will go with it,” he adds. “If you do it too slowly, you will strain the growth of your new things.”
The strategy seems to be working. The bakery group has reduced the number of brands to 45 and the number of SKUs to 4,500.
Moreover, for the second quarter ending Jan. 1, operating profits reached $65 million, up 19% from the same period year ago. Net sales slipped 2.6% to $848 million. For the six-month period ending Jan. 1, the group’s profits are up 36% to $129 million while net sales are off 0.9% to $1.691 billion. In the first quarter ending Oct. 2, operating revenue jumped 59% to $40 million while revenue inched up 0.8% to $843 million, the company reported.
“If [Wall Street] analysts see our revenue not going up tremendously or declining slightly, but our profitability is going up, it reinforces that this is the right strategy for us for now,” Noll says. “It will not be our strategy forever, because as we exit those places that we can’t get an acceptable level of profitability, we then get to that base where we are going.”
Noll attributes a good portion of the quick turnaround to the success of Sara Lee.
“The strength of the Sara Lee brand, especially with the second kick-start of Delightful, exceeded our expectations, which allowed us to go a little bit faster [on the planned exit strategy] over the past 12 months than I would have anticipated back in March of 2003,” he says.
Moving More to Branded
Noll also says improved profitability should come from shifting a greater percentage of the company’s revenue from non-branded to branded products. That’s because the return on sales for branded ranges from 6% to 10% while the return on non-branded ranges from 3% to minus-12% Currently, that ratio is about 80% branded to 20% non-branded. Sara Lee, IronKids and Earth Grains account for 41% of U.S. Fresh branded sales. This contrasts to two years ago when the three national brands accounted for 27% of sales and 71 local brands made up of only 6% of sales.
“There are certain customers that we have had that we actually lose money on a variable basis,” Noll says. “Our strategy is to ensure we earn a return on all segments of our business. To that end, we developed a quantified understanding of the profitability of all of our customers in all of our markets, and we’re going in and trying to work with those customers to increase prices or change our cost to serve them. If, after trying those two things, we can’t get acceptable returns, we will exit those customers or those markets.”
SLBG’s sale of its private-label and restaurant-and-institution business in parts of Texas last year was perhaps the most public example of this exit strategy. In addition to selling its customer list to Thomasville, Ga.-based Flowers Foods, the company unloaded its Houston and San Antonio bakeries.
Noll describes the Texas market as a “very unique situation,” and “don’t expect to see something like that happen again.” There, 40% of Sara Lee’s business was non-branded, and profitability was “clearly out of whack.” Prior to the sale, the Texas business had generated only a 2% return. Now the company can focus on its branded business in that market, Noll says.
Shifting a greater business toward whole-wheat products from white bread is another long-term strategy for improving revenue quality. At the end of fiscal 2004, which ended July 3, wheat and grain breads rose from 30% to 40% of total bread sales while the amount of white bread fell to 45% from 50% the year before. The remainder is made up of French loaves, artisan breads and sweet breads.
Although white bread comprises a large amount of its sales, SLBG is committed to building up its whole-grain portfolio, which typically commands a higher margin. The company isn’t abandoning the white bread category, Noll stresses. Indeed, the company continues to put plenty of resources behind its strong regional brands, such as Colonial and Rainbo, to name a few.
Rather, it’s just a matter of facing the facts. Sales in the white bread category, Noll explains, have been declining for years, and that trend is likely to continue. Whole-grain and other higher-fiber breads have been growing at double-digit rates. Again, it’s a matter of getting the most bang for the buck.
Noll says he expects the percent of sales from wheat and other grain products to increase over the next 24 months. Certainly, the new product activity has been focused on that segment. Since last June, the company has more than tripled the number of whole grain products to 13 under the Sara Lee banner. It has also introduced new Earth Grains-brand breads with extra fiber to leverage the popularity of whole grains. The trend is so strong that Noll calls 2005 “the year of whole grains.”
“Our strategy is simple: Understand what the customers want, give them great-tasting products under the Sara Lee name that are healthy and nutritious, that are wheat- and grain-oriented, and it drives our growth and revenue,” he says.
Streamlining production, controlling costs and improving operational efficiencies make up another tenet of Noll’s turnaround strategy. In the past three years, SLBG closed 15 aging or underutilized plants and shifted production to more efficient ones. It currently operates 44 fresh bakeries. Likewise, it cut the number of routes from 4,700 to 4,100.
Although SLBG will continue to consolidate unprofitable routes, geographic expansion will become a more prominent priority for the company in the coming months.
“In terms of expanding into new territories in the U.S. Fresh [baked goods] category, we’re just starting that journey,” Noll says. “On a scale of one to 10, we’re at 0.5.”
Even during the depths of the turnaround, the bakery group never cut its investment in the long term. During the last 24 months, SLBG expanded into Raleigh, N.C.; Roanoke, Va.; New Orleans, Boise, Idaho, and Jacksonville, Fla.
As it entered these markets, the bakery group tested various approaches to find out what sales and marketing strategies work best and what doesn’t. As a result of those tests, SLBG now has honed its game plan, written a “playbook for expansion” and is starting to build an organization focused on expanding the Sara Lee brand geographically.
“It’s a strategic imperative for us to have the Sara Lee brand on a national basis,” he says. “And now we expect to be selling Sara Lee fresh breads, buns and bagels in all 48 continental U.S. states by the end of 2005.”
Most recently, the company began adding routes in several other Florida markets, supplied by the Orangeburg, S.C., plant. Last year, SLBG moved into Gainesville and Daytona. In February, it was scheduled to enter the Orlando area. By mid-summer, the company plans to be in Tampa, or in 55% of Florida markets. At that point, production will be strained in Orangeburg, so the company has no present plans to head further south.
However, SLBG is prioritizing plans to go north to parts of the Ohio Valley, southwestern Pennsylvania, in the remainder of North Carolina and Virginia.
These efforts will continue, along with other plans to get Sara Lee fresh products into all other states, at least on a limited basis, by the end of the year.
Along with new product innovation, it’s all part of the overall strategy of transforming the company and turning Sara Lee into a $1 billion brand.
“We’re well along the way, but there’s much more to come over the next 24 months,” Noll says.
Executive: Richard A. Noll
Title: Chief executive officer of Sara Lee Bakery Group and vice president of Sara Lee Corp. Appointed president and chief operating officer of Sara Lee Branded Apparel, effective July 3, 2005.
Previous Experience: CEO, Sara Lee Legware, direct and Mexico. Joined Sara Lee in 1992 as CEO of its U.S. sock business. Prior to Sara Lee, Noll was VP of Mercer Management Consulting.
Education: MBA with distinction from Carnegie-Mellon University in 1985. Bachelor’s degree in business administration from Pennsylvania State University in 1979.
Community Work: Member of Children’s Hospital board in St. Louis. Member of Civic Progress in St. Louis, a group of CEOs of public companies who foster civic issues within the community.
Family: Married with two boys, ages seven and five.
Hobbies: Spending time with family and friends. Involved in son’s sports events. Attending St. Louis Cardinals’ and Rams’ games with his boys. Woodworking, landscaping, gardening and other hobbies that involve working with his hands. “It’s so different than what I do as an executive or volunteer in the community,” he says.
Personal Insight: “Family is my most important priority. I enjoy time being with my family. I make time to be with my family. There’s no question for me, family comes first and work comes second. It’s a very important second, but it does come second.”
Company at a Glance
Company: Sara Lee Bakery Group, a division of Sara Lee Corp.
Location: St. Louis
2004 Sales: $3.415 billion
Products: Breads, rolls, buns, bagels, baked sweet goods, donuts, artisan breads, granola bars, croutons, stuffing and other packaged baked goods. Refrigerated dough. Frozen desserts and other baked goods.
Major Brands: Sara Lee, Bimbo (Europe), Earth Grains, IronKids, Rainbo, Colonial.
Plants: 52 domestic plants, 15 European and four Australian
Employees: 18,000 in U.S., 4,000 in Europe and Australia.
Routes: 4,100 in U.S.
Exec. Team Members:
CEO: Richard A. Noll
President, U.S. Fresh DSD: William J. Nictakis
President, U.S. Warehouse and Frozen International: G. Michael Knowles
President, Bimbo, S.A., European Bakery Products: Miguel Llado
President, EuroDough, SAS, European Refrigerated Dough Products: Mercedes Domingo
CFO/Senior VP of Adm.: Ann E. Ziegler
VP, H.R.: Kevin W. Oliver
Senior VP & Chief Customer Officer: Jan Saumweber
Noll to Return to Apparel As Sara Lee Restructures
Richard Noll is known as a turnaround specialist. In the 1990s, he turned around Sara Lee’s sock division. Since 2002, Noll has successfully turned around the Sara Lee Bakery Group (SLBG).
Now, in a major restructuring move at Sara Lee Corp., Noll is leaving as the bakery group’s CEO to become president and COO of Sara Lee’s beleaguered apparel division. Noll will immediately begin transitioning but will stay involved in the bakery group until the corporation’s new fiscal year starts on July 3.
“Rich Noll, who has very successfully turned around our bakery business, and turned the Sara Lee brand into the force in the fresh baking industry over the last three years, is returning to his roots,” said C. Steven McMillan, who is the outgoing CEO and will remain as chairman of Sara Lee Corp. until its annual meeting in October.
“Rich has a phenomenal track record running apparel businesses, including every category in which we compete,” McMillan added.
As a part of the restructuring plan, Sara Lee Corp. is shedding about 40% of its businesses, including its apparel operations, its European meat division and other groups.
Sara Lee Bakery Group is also changing. No longer will it operate as a separate division under the Sara Lee Corp. umbrella. Rather, the baking businesses will be slotted under either Sara Lee’s new North American Retail, North American Foodservice or Sara Lee International divisions.
Sara Lee is expected to move several of its operations to a single location in Chicago. As of deadline, details were sketchy as to which St. Louis bakery operations would be moved to Chicago or other locations.
Beyond the Bread Aisle
Although the U.S. Fresh Bakery business has received the bulk of attention and publicity over the last two years, Sara Lee Bakery Group’s (SLBG) other operations have been contributing nicely to the bottom line as well.
Internationally, its Bimbo, or European Fresh Bakery Products division, operates 12 direct-store-delivery plants primarily in Spain, but also in Portugal and the Canary Islands. In Spain, the Bimbo brand dominates the packaged sliced bread market, and the bakery group has plans to leverage its popularity with consumers there during the next couple of years.
“Bimbo is a key critical brand from a corporate perspective,” says Richard Noll, SLBG’s CEO. “It has a 60% share of the packaged bread market in Spain. Bimbo is an icon brand. We have the same opportunities with the Bimbo brand as we do with Sara Lee [domestically], which is to broaden it into a bakery mega-brand, rather than its traditional heritage, which is just a packaged white sliced bread brand.”
Also in Europe, SLBG’s EuroDough division has three plants in France producing refrigerated dough products. In Australia, four plants produce baked goods, garlic bread, lasagna and ice cream.
In the United States, most consumers are familiar with Sara Lee’s signature cheesecake and frozen desserts. The company operates three frozen baked goods operations that serve the market nationally. Noll describes the business as “doing well over the last couple of years.” It broadened its line with new, super-premium Signature Selection varieties such as Key Lime, Strawberries and Creme, Lemon Meringue and Chocolate Dream, “which if you love chocolate, it’s to die for,” Noll says.
He adds that the frozen division is adding convenience to the freezer case by packaging desserts in plastic domes so consumers can take a slice out and reseal the rest for another day. Despite the fad-diet craze, the frozen category continues to grow. At first, that may seem counterintuitive, but consumers perceive such desserts as an indulgence they used to reward themselves a couple of times a year. That’s why the company hasn’t come out with low-calorie or low-carb options. It’s all about great taste.
Moreover, SLBG’s refrigerated-dough business has two plants that produce private-label products.
One Man is Not a Team
Richard Noll’s management style is pretty straightforward. The key is to develop a long-term strategy and stick with it.
“You don’t need to develop a new strategy very often,” says the CEO of Sara Lee Bakery Group (SLBG). “Maybe at a time of crisis. Maybe once a decade. The trick is then to stay the course and relentlessly pursue the execution behind those strategies over time. That’s what we have been doing.”
One tenet of Noll’s overall strategy has involved turning the bakery group into a “world class” consumer packaged goods (CPG) company.
“Basically, all of the strategies that I’ve talked about for our company are very appropriate for any consumer packaged goods company,” he says.
Those strategies involve simplifying the business model, brand building, improving the quality of revenue and controlling costs. To execute those strategies, Noll has recruited senior managers from other established CPG businesses, such as Kraft, Coke, Colgate and Frito-Lay, to name a few. Under Noll, about 20% of SLBG’s senior managers were new to the organization.
“They’re attracted by the excitement … of not only changing the bakery group, but also changing the industry forever,” Noll says. “They’re attracted by the tremendous amount of potential they see, long term, and they’re excited about being a part of driving that change. That’s making a huge difference, and it’s a major reason that we’re successful.”
Adding outsiders to the baking industry has allowed SLBG to seed the organization with a CPG mentality and discipline.
“But 20% isn’t doing it entirely alone,” he says. “The entire organization now understands how to run this place like a consumer packaged goods company. We’re blending that historical bread-baking experience with great consumer packaged goods’ concepts, process and insights, and that blend together is extremely powerful, and that’s what’s making it all work.”