Big consumer goods companies that thought they could clean up by attending to both the care and feeding of the American public have been finding out the hard way that they have to pick just one. In a retreat from a once-acclaimed but now malfunctioning business model, food producers have been getting out of cosmetics, toys, confections, and myriad other non-food lines while makers of household and personal care products are shedding their peripheral food businesses. The latest to refocus on its core food business is Sara Lee Corp., which has teed up for disposition of businesses that account for a whopping 40% of annual sales – which came in at just under $20 billion in the fiscal that ended last July 3. About two-thirds of the revenues being jettisoned are in the company’s $4.5 billion branded apparel operation, including the Hanes, Champion, and Bali brands, which is being spun off to shareholders. Sara Lee also is planning to sell its European meat business; its $300 million retail coffee division, including Chock full o’Nuts, Hills Bros., MJB, and Chase & Sanborn; and its direct-selling division, a network that sold about $450 million worth of cosmetics, household products, apparel, and other products in overseas markets. These moves, the company and industry experts say, will allow Sara Lee to concentrate on its premier brands – the eponymous baked goods products, Jimmy Dean sausages, Hillcrest Farms meats – at a most auspicious point. Sara Lee and a who’s who of competing players are responding to a raft of food and retailing trends that overpowered the diversification concept built on putting a variety of products through the same distribution channels. For openers, they include Wal-Mart Stores Inc.’s low-price entry into groceries coupled with the traditional supermarkets’ response of emphasizing store peripheries – produce, deli products, prepared foods, meat and fish, dairy products – where they can gain margins and competitive edge. Key Sara Lee products typically are sold at the periphery. In addition, says Kristen Daley of Kurt Salmon Associates, there has been a “hyper-segmentation” of the American consumer base that requires targeted products for a host of smallish groups, such as seniors, working families, ethnic minorities, etc. “The current set of products does not meet every small consumer group’s needs,” she says. “So innovation is becoming more and more important and more targeted to these smaller consumer groups.” However, innovating new products or revamping existing items is expensive, and, notes Barbara Hulit of Boston Consulting Group, few companies have enough resources to spread them over both food and non-food lines. It forces them, she says, to determine where they will “place their bets.” Without a laser-like focus on where to spend for product development and support, Hulit says, companies can go into a “perpetual doom loop.” “Lackluster performance in sales means a cutback in spending to support those sales, which propagates lackluster sales,” she says. “The broken business model is not all that uncommon in packaged goods because the industry has been under stress.” Diversification may mean that both the core business – typically food – and the side businesses suffer because they are starved for funds. Thus, the apparel business may be better off as a large stand-alone company with totally dedicated management and a respected stable of brands, although conditions are fierce in that area as well. The apparel business being spun off produces Bali and Playtex intimate apparel, Hanes underwear, L’eggs hosiery, and Champion exercise clothing, among others. Its biggest challenges include the growth of private-label products in its categories, demands of “big box” retailers, and maintaining No. 1 or No. 2 share positions in key lines. Hulit says the apparel business could face better times as an independent because Sara Lee’s problem was “placing too many bets” and “the executive team spent so much time on the food business that there wasn’t enough attention paid to apparel.” Daley thinks the apparel unit has become too commoditized “because they haven’t done much on the fashion side.” “If they can bring a little fashion and innovation to these commodity categories, their prospects are fabulous,” she says. However, Daley notes that the apparel business also has to wrestle with the network of plants it owns in the U.S. and the Caribbean which runs counter to the typical methods of sourcing product in the industry. “It is really an antiquated model,” she says. “All of their competitors have moved offshore.” Sara Lee’s last remaining non-food interests will be a group of household and personal care products that include Kiwi shoe polish and Brylcreem hair products. Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com

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