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A Healthy Choice For Transition

Turnaround and acquisitions wizard Mike Harper took food leviathan ConAgra from poorhouse to penthouse. But new CEO Phil Fletcher, hamstrung by sagging brand loyalty and cutthroat price wars in frozen entrees, may find it hard to keep up the pace.

What’s it like to follow a corporate legend? Ask Citibank CEO John Reed about the inevitable comparisons with Walter Wriston, nominally chairman emeritus of the entire banking industry. Check the pulse of Chrysler’s heir apparent, Bob Eaton, each time Kirk Kerkorian tries to postpone Lee Iacocca’s scheduled retirement at year end.

Similarly, you might expect the new CEO at food giant ConAgra, Phil Fletcher, to be wincing in the spotlight after stepping into Mike Harper’s shoes in September. But he downplays the transition, quipping: “There’s no way I’m going to be another Mike Harper. He’s a size 14. I’m a 12.”

Kidding aside, Fletcher knows comparisons are inevitable. Charles Michael Harper pulled Omaha, NB-based ConAgra from the brink of bankruptcy in 1974 and built it into a $20 billion powerhouse. He gobbled competitors and turned out blockbuster products as had few before him in the food business. When the dust cleared, ConAgra stood as the nation’s second largest food company: Only the Kraft General Foods unit of Philip Morris is bigger, with annual sales of $30 billion.

In pillaging the food sector, Harper stockpiled an impressive arsenal of brand firepower-Butterball turkey, Orville Redenbacher’s popcorn, Peter Pan peanut butter, and Armour luncheon meats-and developed a reputation for picking up acquisitions at a discount to their real value. Plunking down billions of dollars, he landed more than 100 companies, including Golden Valley Microwave Foods (1991), Beatrice Inc. (1990), and Armour Food (1983), and, in an age of specialization, Harper confounded conventional wisdom by offering products that span the entire food chain, from crop protection chemicals to grains to flour to spaghetti; from poultry and meats to branded frozen entrees and desserts. But it’s hard to argue with the results: Ten-year compound sales growth weighs in at 29 percent. If you bought 10,000 shares of ConAgra stock for $30,000 in 1974, today you would hold 135,000 shares valued at $5.5 million. Six years running, Harper has been among the ten finalists in CE’s Chief Executive of the Year competition.

“Needless to say, it is a challenge to succeed Mike Harper, ” says Nomi Ghez, food analyst with New York investment bank Goldman Sachs.

Undoubtedly, Fletcher, 59, also faces more personal comparisons. His silver-gray hair combed neatly in place, he cuts a decidedly more polished-well, more CEO-like-image than Harper. Though both men share a passion for sports cars-Fletcher’s latest is a jet-black 1991 Dodge Stealth-the new boss describes himself as “dull, old Phil.” An operations commando “with black boots and a whip,” he gained repute while forging efficiencies at H.J. Heinz, Campbell Soup, and Heublein. “No one has a keener eye for process on the factoryfloor,” says James R. Tindall, president and chief operating officer of ConAgra Prepared Food Companies, roughly the position Fletcher held before being appointed corporate president and chief operating officer in 1989.

By contrast, Harper-a grizzly of a man at 6 feet 6 inches-prefers rumpled short-sleeved shirts and well-worn shoes. Raiment aside, however, there are few CEOs more flamboyant. Harper earned a pilot’s license several years ago, and to celebrate his 60th birthday, he flew a Cessna 182 from San Francisco to New York. Upon winning tax concessions from the state of Nebraska after a nasty fight in 1987, he dressed up like Gen. Patton and serenaded members of the Omaha press club in an effort to mend political fences. Ever the corporate predator, he proudly displays a plaque in his office of two vultures perched on a branch. “Patience my ass,” says one bird to the other. “I’m gonna go kill somebody.”

Fletcher may be forced to discard such bravado as he navigates a transition period both for ConAgra and the broader food industry. Domestic sales growth seems likely to taper somewhat, compared with the 1980s when declining tax rates and cheap raw materials propelled top food companies to double-digit earnings gains. A new thriftiness among consumers has chipped away at brand loyalty, effectively capping pricing premiums. To boot, the frozen entree business is entrenched in an ugly war in which prices have plunged 30 percent in the past year.

But the new CEO also faces difficulties more specific to ConAgra. Amid slimmer profit margins at home, Fletcher has set as a goal the expansion of ConAgra’s beachhead in tough-to-crack international markets. Currently, overseas operations comprise less than 10 percent of total sales, compared with Sara Lee (44 percent) and Heinz (42 percent). In addition, while other companies are cutting costs to the bone, Fletcher will hold fast to a more expensive, decentralized strategy that hands near-total autonomy to independent operating companies. The approach boosts motivation and productivity, and enables ConAgra to attract highly skilled managers, he contends. But the downside: Each of ConAgra’s business units maintains separate-in some cases, overlapping            operations and personnel. IOCs are free to purchase raw materials, including meats and grains, outside the company that they could buy from one another. Sometimes Mission Control in Omaha is left in the dark: Fletcher recalls finding out in a newspaper article that Minneapolis-based Cargill Inc. was a major supplier to a ConAgra unit. But he promises closer coordination among subsidiaries: “We need to buy as a $20 billion company. I can’t afford to let $ 1 million of shareholder value slip away simply because managers can’t figure out how to work with one another.”

Fletcher is also aiming to beef up ConAgra’s anemic profit margins: The rollout costs of new products helped slice ConAgra’s net margin cold-cut thin-to 1.6 percent last year, versus 10.5 percent for Kellogg and 10.3 percent for Heinz. The Healthy Choice brand alone was pasted on 100 additional items, most outside the freezer case, including meats, cheeses, soups, ice cream, and dry grocery items. Some analysts view the massive HC campaign as a cause for concern: While extension is generally more cost-effective than launching a new brand in mature industries such as food, they reckon ConAgra may be placing too many egg substitutes in the Healthy Choice basket.

`Healthy Choice fails the shopping list test,” says Jack Trout, co-president of Trout & Ries, a Greenwich, CT-based marketing strategy firm. “Originally, the brand meant frozen entrees. Now, it’s so diluted, nobody knows what it means.”

Following Harper’s heart attack in September 1985, his wife Josie whipped up a batch of low fat turkey chili. Delighted with the fare, Harper summoned his lieutenants for a tasting party. Several months and several million dollars in R&D later, ConAgra found itself with a megahit: Advertising Age called Healthy Choice entrees “the most successful new food brand introduction in two decades.” The line stole market share from archrivals such as Stouffer’s Lean Cuisine and Heinz’ Weight Watchers, and prompted Tony O’Reilly to observe: ‘Mike Harper has propelled ConAgra to be one of the most respected food companies in the world.”

Emboldened by success, ConAgra’s brain trust moved to expand the HC line. The move touched off a price war, knocking down sales of flagship entrees and forcing the company to dig deep into its pockets. Industrywide, the tonnage of frozen dinner and entree sales slipped 0.9 percent in the 13 weeks ended June 28, according to market research firm Information Resources Inc. But Healthy Choice plummeted an alarming 30 percent. Amid the carnage, ConAgra sacked frozen-foods chief Charlie Weil, handing his responsibilities to Jim Tindall. Stouffer, Campbell, and Kraft have also replaced senior managers in the sector.

Tindall defends the HC effort, arguing that ConAgra is planting its flag in product categories with significant expansion potential. He and Fletcher are betting the company’s decentralized structure will make it swifter, smarter, and more flexible than its rivals: The various Healthy Choice businesses are being handled by separate operating companies. Tindall projects HC sales of $1 billion in the fiscal year ended May 1993.

Longer-term, however, Jack Trout doubts the maneuver will succeed. “ConAgra has muddied the track for a very strong horse its frozen entrees. In the process, they are shooting themselves in the wallet. They’ll have their hands full taking on Oscar Mayer in meats, and in soups, well, that’s Campbell Country.” David Nelson, an analyst in the Washington office of brokerage County NatWest, also deems the extension program a watershed: “Whether Phil Fletcher can pull it off will be critical.”

Harper handed the corporate mantle to his “close friend” and hand-picked successor in September at ConAgra’s annual stockholders’ meeting. But he won’t ride quietly into the sunset: He’s set up shop in an office in downtown Omaha, some 10 blocks from headquarters, and hints he may stay on as chairman for five years until mandatory retirement at age 70. I will be keeping an eye on Phil,” Harper promises with a wink. Rejoins Fletcher. “I don’t worry about comparisons with Mike.”

CE editors J.P. Donlon and Joseph L. McCarthy caught up with Fletcher at ConAgra’s headquarters, just prior to the executive transition. (A conversation with Harper appears on pp. 34-5.)

BRAND NAMES FOR LESS?

You have high-profile brands in a variety of food categories, but lately there’s been an erosion in brand loyalties, making it difficult to command premium prices. How will this affect the business?

Value-conscious shoppers have decided that there are two or three brands that will meet their needs in the same product, and whichever of them is the better deal at the time of purchase is the one they will buy. Our job is to hit every price point with an offering that satisfies consumer need.

VALUE ADDED

Will you make any shifts in the marketing side of the business, especially in the areas of brand management or product positioning?

My wife will tell you I’m never satisfied with anything. Right now in marketing, we are just touching the edge of what we should be doing.

For instance, we are adding value to our thin profit-margin commodities businesses by pushing consumer-friendly packaging and leaner beef and pork products. I think ConAgra can also go much further with marketing in the red meats, poultry, and grain processing businesses.

We own a flour milling business and some small spice and flavor businesses. We combined the expertise of both companies to find ways to flavor flour and make batters. Now we don’t own a flour milling company, but a growth business in food ingredients. In this manner, we build value-added segments, higher-margin businesses that boost the overall margin.

But in commodities businesses that measure costs to the fourth decimal point, marketing is a dirty word. They think it’s like dropping money in a hole.

GROWTH AND INNOVATION

Do you expect ConAgra to be as active in the future in terms of acquisitions and rolling out new products as it was in the last few years?

I don’t think there will be as many opportunities for major acquisitions. Recent consolidations haven’t left many candidates.

Partly as a result, I don’t expect sales to grow as rapidly in the ’90s as they did in the ’80s, but our net margin will probably grow faster. That’s partly because we’ll consolidate our purchasing power and move into new arenas, such as international. We’re aiming to get the benefits of this ConAgra empire that’s been put together over time.

You’ve lagged behind in the international arena. Do you think you can catch the companies that are outselling you offshore right now by a 10.1 ratio?

I don’t think of it as a catch-up game. I think we can find ways to meet our return standards in that marketplace and grow the business.

Particularly in the EC, the distribution system is more controlled and harder to penetrate than that in North America. How will you overcome that barrier?

By no longer being an outsider. Toward that end, we think joint ventures are the way to go.

Here are a few examples of our international operations: ConAgra Asia-Pacific works with our other independent operating companies to market and distribute products to retail and foodservice customers in the Far East. The venture also runs food processing operations in Australia and Thailand with local partners. In Europe, we are involved in animal feed and broiler-chicken production, hog breeding, and meat processing. ConAgra Latin America includes Puerto Rico Basic Foods, a leader in food processing and distribution in the territory. The company produces and markets poultry and processed corn products.

American businesses have to find a different approach from “here’s the way it should be done, and you will like it.” Instead, we should find how business is conducted in the country, understand the dynamics, and collaborate with someone who lives and breathes the business.

Why would a company want to work with you instead of one of your more established competitors?

Because we’re a scale-driven, cost-effective operation that provides a range of products across the food chain. That offers our partners distinct advantages. Right now, agricultural subsidies-particularly in the Economic Community-allow other countries to supply their products cheaper. But eventually as subsidies are reduced under free trade, lower-cost producers will have an advantage. That’s where we come in.

ALL IN THE FAMILY

You’ve been quoted as attributing ConAgra’s success to a decentralized, entrepreneurial form of business structure based on strong independent operating companies. What are the advantages of that structure?

Each IOC has near complete freedom on purchasing and operating decisions. That includes the freedom to fail.

The structure also creates a culture: Managers don’t have to raise their hands to ask corporate permission or go through 17 layers of approval to move.

Given rapid changes in consumer demand, the speed to move and the ability to take risks are critical in the race to stay ahead. A company can’t put a product on the shelf today with its up-front costs and think, “We’ll get our payback in five years.” In five years the product-and possibly the company-will be long gone.

We acquired Beatrice in 1990 for $1.34 billion. We haven’t placed a single ConAgra person at any Beatrice facility. Beatrice managers told me it was just like the old days, when they had the autonomy to run their business. But before we bought it, the company was gradually centralized, and the managers lost that feeling of control.

IOCs allow ConAgra to develop expertise in individual areas. The structure also gives individual units the freedom to expand their product lines into new areas. We have a saying: “Screw the charter.” If the frozen foods company wants to sell soup, fine. The only caveat is that the units on an annual average-increase ROE 20 percent and earnings per share 14 percent.

But your independent operating culture involves some duplication of effort. Will you tinker with the IOC system to consolidate or cut costs and forge greater efficiencies?

Yes. In the past, we’ve failed to take advantage of some opportunities to make money by buying and selling within the organization. We need to leverage the strength of this combined family to exploit our purchasing power without destroying the autonomy of the independent operating units.

Here’s an example: ConAgra buys almost $1 billion worth of packaging. But we buy it through 30 or 40 companies. We do not have a purchasing person at the corporation, and we won’t. But by God, if companies can’t figure out how to cut costs by working together, we’ll do it for them.

How?

We have a magistrate, Tom Peters, who is a retired comptroller. He is not a judge, but a fact-finder. He calculates the real costs and real benefits to shareholders.

HOW LOW CAN YOU GO?

Walmart and other mass merchandisers have adopted so-called everyday low prices. Will this put added pressure on the products you sell, particularly on high-margin brands?

The short answer is yes. We have to eliminate excessive costs in the chain between the grower and the consumer, or the consumer will buy wherever he can obtain the best value.

Another problem is an ongoing price war in the frozen entree business that has slashed prices in the last year by nearly a third. Is there an end in sight?

At least in the short-term, we anticipate the war will continue. The battle will end when people are tired of losing money. We see some signs of that. Meanwhile, it’s frustrating when margin loss results in little or no growth in a category.

Price wars and distribution problems aside, how will you cope with comparisons to Mike Harper?

Comparisons will be made. I can’t change that. All I can do is work like hell to generate the same kind of results. I’m anxious to get to it.


THE WIZARD

Upon her arrival at the Emerald City in the 1939 movie, “The Wizard Of Oz,” Dorothy encounters an apparition of the Wizard-a hairless, alien, translucent image hovering amid fireballs and clouds of smoke. The real Wizard-an amiable, bookish man-is hidden behind a nearby curtain, frantically spinning wheels and pushing buttons on a control board.

Several years ago, ConAgra executives also encountered a technological thunderclap. Many offices were outfitted with terminals linked to a global, companywide executive information system. In this case, however, the jocular, baldheaded man pulling the levers was CEO Mike Harper.

Best-known as a hard-charging acquisitions champion who etched the ConAgra logo on every link of the food chain, Harper is also praised among the company’s senior executives for his early embrace of information technology, including EIS. Through ConAgra’s system, company officials access vital data on personnel, plants, performance, competitors, stock-price and interest-rate trends, and online databases. Every Monday morning, heads of the company’s operating units use the system to confer in real time about profits, sales targets, and accounts receivable. Until stepping down as CEO, Harper directed the weekly show from his control center in Omaha (see photo). Sitting atop a desk in his office, it comprises a keyboard and 16-inch VGA color monitor, a wall phone, and a series of clocks set to the local times of ConAgra’s far-flung units. Company officials declined to reveal the system’s costs.

Asked whether he will inherit Harper’s EIS upon the former CEO’s move from ConAgra’s executive offices, Phil Fletcher feigns indignation and triumphantly unveils his own EIS. “I don’t want a lot of junk on my desk,” he says, pointing to a video screen recessed under a glass cover “This is much better, although Mike’ll never come out and admit it.” Fletcher flicks a button, and across the room a 27-inch multi-screen monitor pops out from an eight-seat, oval conference table in his office.

Clearly at ConAgra, the benefits of technology trickle down from the top. CE editors peeked over Mike Harper’s shoulder and peppered him with questions as he tinkered with his creation.

Your executive information system is much-renowned. How does it enhance your ability to manage?

This EIS is a hell of a good communications device. Today, 5,360 of our people are hooked into the network, which transmits inbound mail, phone calls, internal news, and financial and market data.

Let me call up a mail screen. Inbound mail I haven’t read yet is flagged with double yellow dots. A green asterisk means I saved a piece of mail I have seen. Say I had a letter from someone who agreed to do something in two weeks. At that time, the reminder note comes back, and I can check to see if the action has been taken.

To facilitate communications between ConAgra’s operating units, we have a location file. If an executive is going to our plant in Dalton,GA, he can find out who’s in charge there, the facility’s size, its distance from a major city, labor contracts in effect, and the politicians responsible for that district.

We also keep personnel data on computer rather than on cards. At the touch of a button, information is available on employee compensation, position, incentives paid in the past, stock options, and stock ownership.

On zany company, a financial database spits out data on accounts receivable, inventory, pre-tax profits, sales, gross margins, and advertising.

In addition, we track market share, an important measure of how we stack up against our competition.

At Monday morning meetings with your operating chiefs, what performance benchmarks do you analyze?

At one time, I had a room lined with cork board, where I pinned up charts on each of the businesses we owned. I got a long phone cord and talked to the operating heads about their business’ profits while walking around the office and looking at the charts.

Now, computers have replaced cork board. They drive the screen in the boardroom. They also power the screens of eight members of the Office of the President, who are scattered around the country, so everyone sees the same information simultaneously. For each individual business, we check out a profit estimate for that month or that accounting period.

Those figures can be presented in graphic form. Here’s another wrinkle: In any profit projection, we discovered there are sandbaggers, and there are optimists. So we can weight their estimates based on our knowledge of their predictive tendencies.

Do your employees take advantage of this system?

Yes, indeed. For example, because we borrow a lot of money in the short term, interest rates are an integral part of many of our businesses, such as grain trading. So this system lists our pool rate and line costs. Right now, the computer shows total short-term costs are 4.17 percent.

What about video conferencing?

We’re experimenting with that. Under one option, I can look at four different people via a conference call, because the picture comes in a grid. Or, I can have financial information in EIS on the same screen as a caller.

What drives your information system?

All sorts of mini computers, but each feeds into the mainframe in our computer center, about a mile from here. The minis are linked by dedicated telecommunications lines throughout the U.S.

Do you have a disaster protection system in case of a blow-out?

Once a day someone pulls off a file and backs it up.

So many people invest in technology and don’t know what to do with it. It’s gratifying to see someone who has set up a system that gives core value.

EIS really facilitates communications. But if the situation is urgent or confidential, we still use the telephone or meet in person. The system is great, but it’ll never completely take the place of personal contact.

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