Sara Lee (NYSE: SLE) is a leading retailer of packaged meats and baked goods both domestically and internationally. Sara Lee's operations are organized around six business segments: North American Retail, North American Fresh Bakery, North American Foodservice, International Beverage, International Bakery, and International Household and Body Care. The Company’s customers include mass retailers and supermarket chains in both the United States and Europe.
While operating margins have improved for the packaged foods industry due to lower commodity prices, Sara Lee remains more vulnerable to any potential upswings in prices than its competitors. Moreover, as a significant but non-dominant player in many of its markets, Sara Lee lacks the pricing power of some its competitors.
Sara Lee's Food services are marketed to hospitals, restaurants and entities that serve food. Sara Lee's other businesses market their products to supermarkets and other retailers. Wal-Mart Stores (WMT), which is responsible for 15% of the company's sales, is Sara Lee's largest customer. No other customer is responsible for more than 10% of the company's sales.
In the packaged goods industry a company's ability to increase it sales are driven by population growth and product innovation. Given that Sara Lee's businesses are based primarily in North America and Europe regions, of the world with relatively modest population growth, the company is placing a strong emphasis on product innovation.
First Quarter 2010 Results
Sara Lee reported first-quarter earnings of $284 million, or 41 cents a share, compared to $230 million, or 32 cents a share, in the same period a year ago. Sales fell to $2.59 billion compared to $2.79 billion in the first quarter of 2010.
Sara Lee’s operations are organized around six business segments—North American Retail, North American Fresh Bakery, North American Foodservice, International Beverage, International Bakery, and International Household and Body Care.
North American Retail sells a variety of packaged meat and frozen bakery products to retail customers in North America. Products include hot dogs and corn dogs, breakfast sausages, breakfast convenience items, including breakfast sandwiches and bowls, smoked and dinner sausages, premium deli and luncheon meats, bacon, cooked hams and frozen pies, cakes, cheesecakes and other desserts. Brands include Hillshire Farm, Ball Park, Jimmy Dean, Sara Lee and State Fair. The North American Retail segment also includes the results of the corporation’s Senseo retail coffee business in the U.S.
Sales are made in the retail channel to supermarkets, warehouse clubs and national chains. The primary raw materials for the segment’s products include pork, turkey, beef and chicken, which are purchased almost entirely from independent farmers and vendors. The meats business is highly competitive, with an emphasis on product quality, innovation and value. New product innovations are a key component to success.
North American Fresh Bakery sells a wide variety of fresh bakery products and specialty items to retail and institutional customers in North America. Products include bread, buns, bagels, rolls, muffins, specialty bread and cakes. Significant brands include Sara Lee, Earth Grains, Colonial, Rainbo, Holsum, IronKids, Mother’s, Sunbeam, Sun-Maid, San Luis Sourdough and Heiner’s. Certain brands are used under licensing arrangements; however sales of products sold under licensing arrangements represent less than 10% of total North American Fresh Bakery sales.
Sales are generated in the U.S. are made in the retail channel to supermarkets, mass merchandisers and warehouse clubs, and to restaurants, schools and other institutional outlets. The North American Fresh Bakery segment offers delivery directly to retail customer stores and warehouses through its direct store delivery system, which maintains approximately 4,400 delivery routes.
North American Fresh Bakery’s primary raw materials include wheat flour, gluten, yeast, sugar, corn syrup, butter, fruit, eggs and cooking oils, which are purchased from independent suppliers.
North American Foodservice sells a variety of meat, bakery and beverage products to foodservice customers in North America. Products include hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon, ham, beef, turkey, bread, pastries, bagels, rolls, muffins, refrigerated dough, frozen pies, cakes, cheesecakes, roast, ground and liquid coffee, cappuccinos, lattes and hot and iced teas. In addition, private label refrigerated dough products are sold to retail customers in North America.
Sales are made in the foodservice channel to distributors, restaurants, hospitals and other large institutions and, in the retail channel, private label refrigerated dough products are sold to grocery stores and mass merchandisers. The primary raw materials for North American Foodservice’s products include pork, turkey, beef, chicken, wheat flour, sugar, corn syrup, butter, fruit, eggs, cooking oils and green coffee beans, which are purchased from independent vendors and farmers.
International Beverage sells coffee and tea products in major markets around the world, including Europe, Australia and Brazil. In Europe, some of the more prominent brands are Douwe Egberts, Senseo, Maison du Café, Marcilla, Merrild and Pickwick. In South America, significant brands include Café do Ponto, Café Caboclo, União and Café Pilão.
In fiscal 2009, 78% of the segment’s sales were generated in Western and Central Europe, 16% in Brazil and 6% in Asia/Pacific. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to distributors. The International Beverage segment also offers direct delivery to restaurants and warehouses through its direct delivery system.
The most significant cost item in the production of coffee products is the price of green coffee beans, which are purchased from farmers and coffee bean vendors in various countries around the world.
International Bakery sells a variety of bakery and dough products to retail and foodservice customers in Europe and Australia. Products include a variety of bread, buns, rolls, specialty bread, refrigerated dough and frozen desserts. The major brands under which International Bakery sells its products include Bimbo, CroustiPate, Ortiz, BonGateaux and Sara Lee.
During fiscal 2009, 87% of the segment’s sales were generated in Western Europe, while the remaining sales were generated in Australia. Sales are made in the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to distributors and institutions.
International Bakery’s primary raw materials include wheat flour, sugar, corn syrup, butter, fruit, eggs, milk and cooking oils, which are purchased from independent suppliers.
International Household and Body Care sells products in four primary categories: body care, air care, shoe care and insecticides. Body care consists of soaps, shampoos, bath and shower products, deodorants, shaving creams and toothpastes, which are sold primarily in Europe under brands such as Sanex, Duschdas, Radox, Monsavon and Zendium. Air care provides air fresheners under the Ambi Pur brand in Europe, Australia, Africa and certain Asian countries. Shoe care includes polishes, cleaners, wax and insoles sold primarily under the Kiwi brand in many countries around the world. Insecticides are sold primarily in Europe and Asia under brands such as Vapona, Catch, GoodKnight, Bloom and Ridsect.
In fiscal 2009, 68% of the segment’s sales were generated in Western and Central Europe, 22% in the Asia/Pacific region, 5% in Africa and 5% in the U.S.
In May 2010, Sara Lee sold of its 51% interest in Godrej Sara Lee joint venture to Godrej Consumer Products Ltd. In September 2008, Richelieu Foods, Inc. announced that it acquired the sauces and dressings business from Sara Lee’s Foodservice segment. In March 2009, Farmer Bros. Co. acquired from Sara Lee its United States direct-store delivery (DSD) Foodservice coffee business.
Sara Lee's businesses depend on a wide range of raw inputs ranging from corn to hogs. The prices for these inputs are subject to volatility and can be affected by a number of factors including demand, governmental agricultural programs and weather. A drought could for instance reduce the quantity of green coffee beans available, increasing green bean prices. Oil Prices are another major input which can affect both packaging and deliver costs; SLE delivers baked goods directly through customers.
Although Sara Lee hedges commodity prices, this hedging is relatively minor and does not fully shield the company from volatility. Commodity prices have mostly fallen over the last 25 years but from 2002-2005 the packaged food industry saw dramatic increases in commodity prices resulting in a nearly 80 basis point drop in profit margins. Government programs can also affect commodity prices as certain commodities benefit from government subsidies which are subject to change. Any increase in cost resulting from lower subsidies may be passed on to companies like Sara Lee.
Because Sara Lee operates in highly competitive markets, the company has very limited pricing flexibility. While it may be able to pass on higher commodity costs to its customers, in many cases its ability to do so is limited, as any increase in price may result in lower sales volume and or defection of customers to competitors.
Sara Lee and its competitors are subject to health concerns related to their products. This is particularly true of its meat businesses. Over the last several years there has been increasing media attention on mad cow disease. Any future outbreaks have the potential to negatively impact the sales volume and profitability of its beef sales. Health concerns also have the potential to spark increased government regulations. Any substantial change in regulations can increase the cost of compliance and reduce operating profitability.
In recent years consumers have begun placing an increased emphasis on eating healthier. This trend has been reinforced by both media and government attention on the rising obesity epidemic and the increased prevalence of largely preventable illness such as diabetes and heart attack. It is not surprising therefore that consumer demand for healthier packaged foods alternatives has shown robust growth.
This trend is being driven in part by baby boomers. About 30% of Americans in the 50+ age range consume healthier foods as opposed to 19% for those 19-34. As the former population ages and it experiences more health problems, eating healthier becomes a top priority.
Sara Lee is a significant but non-dominant player in many of its markets. As such it is at a distinct disadvantage when compared to some of its competitors, many of whom are concentrated in a single market. McCormick for instance holds over 50% of the US market for spices giving it significantly greater purchasing power than Sara Lee. In this case McCormick would be able to negotiate better prices with its suppliers given that it orders greater quantities. Sara Lee also operates in markets that are relatively fragmented - no dominant player exists. Within these markets Sara Lee is often neck and neck with its competitors with no appreciable advantages in terms of scale.
As seen from the chart below, Sara Lee is trailing its competitors in terms of pre-tax margin. While the company has divested several non-core and non-performing business it will still be some time before it is clear whether this will be enough to close the gap. Sara Lee's marketing efforts have also been lack luster. As a percentage of revenue Sara Lee spends the least on marketing. These factors combined with very low sales growth over the last two years put Sara Lee in a decidedly unfavorable competitive position.
|Metrics||General Mills||Campbell Soup||Kraft||Kellogg||Hershey||Sara Lee|
|Marketing as % of Revenue||4.4||N/A||3.9||8.4||2.6||2.1|
|2yr Sales Growth (%)||2.9||5||4.9||7.5||7.7||1.1|
|Pre-Tax Margin (%)||18||15||13||16||20||6|
Both within the US market and internationally Sara Lee's operating margins have also lagged behind its major competitors.