Back in the Saddle

After a phenomenal stint at ConAgra ending in 1992, Mike Harper was expected to ride quietly into the sunset. Then Henry Kravis called, summoning the seasoned veteran into a battle zone of price wars and sagging brand loyalty.

May 1 1994 by Chief Executive


When last spotted by Chief Executive in 1992, Charles Michael Harper, then the outgoing CEO of food giant ConAgra, was holding forth in his Omaha, NE, office, surrounded by-and unashamedly peddling to visitors-the company’s Healthy Choice products.

Just days before his semiretirement, Harper appeared jovial and relaxed, and before the visit was over, CE editors had their fill of low-fat cheese and a spate of other salubrious products (CE cover story: Nov/Dec 1992).

But at a recent breakfast interview in New York with Harper, the new chairman and CEO of RJR Nabisco, the contrast in setting and mood was striking. While chatting, he polished off a plate of bacon and eggs, shrugging off a mention of his heart attack nine years ago. Downright ornery at times, Harper rose to the attack when questioned about the decline of brand loyalty among consumers. On a nearby windowsill sat a large bowl filled with packs of Winston, Salem, and Camel cigarettes. And though Harper, 66, once more made certain visitors left with their pockets filled, this time the bounty consisted of junk food, such as jellybean-like Gummi Bears and Planters Peanut Butter Chocolates, RJR Nabisco’s answer to Reese’s Peanut Butter Cups. The recently launched Fat Free Strawberry Newton is another sweet treat, though tasty and likely good for the cholesterol count.

If Harper’s on edge, it’s understandable: One year after taking the reins, he has his work cut out for him. Corporate debt of $29 billion from the biggest buyout in history is more than half paid down, cash flow is solid, some new products are performing well, and Harper seems anxious to pump up earnings through investments and acquisitions. On the flip side, however, brutal price wars prevail in domestic tobacco, RJR Nabisco’s largest single operation. Partly as a result, in the fourth-quarter, the company cut 6,000 jobs-nearly 10 percent of its worldwide work force-and swallowed a $467 million restructuring charge. Lately, its plan to raise $2 billion through a preferred stock offering has run into some resistance. Investors are wary, because the shares would be at least partly tied to the troubled tobacco business should Harper pull the trigger on a breakup of RIR Nabisco’s food and tobacco operations. Excluding charges, 1993 net income slipped 43 percent to $464 million.

But it’s the brands issue that most engages Harper-he shakes it with the relish of a dog with an old shoe. Harper’s main points are well-taken: After an early charge, sales of private-label goods have slowed, partly because of defensive maneuvers by big marketers. And certainly, non-food has more to fear from private label than food. Even so, his spin seems particularly rosy amid savage competition from value-priced products in recent years. Overall, private label has wiped out some $14 billion in brand value, says David R. Beatty, president of Weston Foods, a $1.8 billion unit of Toronto-based George Weston Ltd. The Loblaw Cos., another George Weston affiliate, is creaming the competition in Canada with its highly successful President’s Choice brands. The line’s chocolate chip cookie is a hot seller, Beatty says, outpacing Nabisco’s Chips Ahoy in the Chicago market. Among the fastest-growing private-label categories, according to Information Resources’ InfoScan service, are non-food items such as cold and sinus remedies and cat litter, but frozen poultry, baked goods, seafood, and entrees also top the list. Even a backgrounder on Harper sent to Chief Executive by RJR Nabisco cites the erosion of brand loyalty. Consumers and investors alike, it says, are questioning the value of brands “across the board.”

Harper joins Stanley Gault-who bounced to Goodyear Tire & Rubber from Rubbermaid-as a seasoned sexagenarian for whom the challenge of rallying a slumbering giant was too tempting to pass up. Unlike Gault, and most of his peers, Harper frequently wears rumpled short-sleeved shirts to the office and barely conceals an aversion to big-city life. “If I were going to locate a headquarters,” he says, “I wouldn’t put it New York], because where I grew up, you look for 100 miles to see the next cow.”

Though a small-town boy, Harper has big-league stuff, and his track record at ConAgra clearly had marked him for the CEOs Hall of Fame. At the time Harper stepped down, 10,000 shares of ConAgra stock purchased for $30,000 in 1974, when Harper joined the company, would have parlayed into 135,000 shares worth $5.5 million. The only chief executive to be profiled three times by CE (first in 1987), Harper covered lots of ground in a session with managing editor Joseph L. McCarthy, including life under Kohlberg Kravis Roberts & Co.’s Henry Kravis, cultural changes afoot at RJR Nabisco, and what it’s like commuting to New York by plane from his Omaha home. Why risk a goodas-gold reputation? Partly because Harper is hardly the sort who cares about such things. “Building a corporation is great fun,” he says. “I might feel differently when I’m 102, but for now, there’s no great mystery about why I’m here.”

TIME FOR A CHANGE

When we last spoke, you seemed ready to rest on your laurels. Why the comeback?

I was comfortable sliding into a role as chairman of the board at ConAgra, advising Phil Fletcher. Then the phone rang: It was Henry Kravis. We’d done business before, and I knew Henry was a straight arrow. So, when he said, “Might you be interested in running RJR Nabisco?” I said, “Yeah, I would be glad to talk.”

What are your priorities at RJR?

Our first priority is earnings. Our second priority is earnings. And our third priority is earnings. We have T-shirts with that motto. Mine’s a bit different. It says, “E3.” Guess what that stands for?

To reach that goal, we’re open to anything. Spin out food. Spin out tobacco. Merge with General Motors. Every damn conceivable idea in the world. And when we find an option that will build value for shareholders, we’re going to do it.

We’ve done a tremendous job of debt reduction. They reduced debt from $29.1 billion in 1989 to S12.4 billion last year. That’s a lot of money out in the Midwest.

Sounds like there’s a “but.”

But now it’s time for a switch. We won’t sell any more assets for the purpose of debt reduction. We’ll sell them only if we don’t know how to manage them.

We have a good free cash flow. Until we meet some goals, we will continue to put some of that toward debt reduction. After that, we’ll put the full cash flow to work generating earnings.

Will you be doing that through acquisitions, and if so, will any be outside the food and tobacco areas?

All plans are firm until changed. [Laughs.] Right now, our plan is to grow in three areas: domestic food, international food, and international tobacco. We do not see our domestic tobacco business as a growth business.

You swallowed a fourth-quarter charge of $467 million and decided to lay off 6,000 people. Is that due to the price war in cigarettes?

In a sense it is. The charge put a dent in earnings. You don’t like to do that, but it’s a part of repositioning the company. Actually, it helps our P&L statement by $250 million a year.

BLASTING OFF

There’s been somewhat of an erosion of brand loyalty in recent years. How do you deal…

The biggest con game that’s been foisted on the American public is that private label is taking over the universe. Baloney. There are another two words in the Midwest that express that idea in a much more positive way. But it’s not true. Where the hell do people come up with that? Journalists started this, along with the analysts. “Oh, my God,” they say, “brands are passe.” What the American consumer wants is value, right? They say you could sell Cigarette No. 105 here-just like in Russia-if you sold it at a low price. The same thing on any other consumer product. That is baloney! Prove it to me. Give me some data.

In fact, the data really say that Nabisco cookies-let’s include biscuits and crackers in that category-account for about half of total U.S. sales, and unit volume was up a freckle. But private-label volume was up only half a freckle. This is all a matter of perception. I’ll grant you that paper towels would be a tough business. It’s hard to distinguish between one towel and another, and you have to have a great product to put a brand on. But there are differences in cigarettes and in food products. And there is brand loyalty. If you get the price spread too high, of course, you invite more competition.

Now I’ll pull my gray hair act: I’m about 100 years old. [Laughs.] I’ve seen other periods of business stagnation when private labels grow-at least in the food business. And then, strangely enough, as things get better, private-label volume goes down.

That’s a point well-taken. Nonetheless, it’s hard to deny that many brands are selling at deep discounts, whether you ascribe that to competition or to distribution trends, such as the rise of consumer superstores such as Wal-Mart.

Let me challenge you. You are trying to prove a point. You’re the one who’s saying, “Hey, there’s a real problem out there.” Prove it to me. Give me some data. I’m not going to debate this with you, because I know what’s going on out there. You think you do. Prove your point.

Are you saying that in the food business there hasn’t been an increase in the shelf space of private-label and other discounted goods?

In total? Yes. But this has been blown way out of proportion.

There is some truth in what you’re saying, at least in my humble opinion, OK? A Wal-Mart-like store wants two things: low-priced brands and premium brands. Its system doesn’t work if it has too many lower-priced brands, because it risks looking like a schlock house. What this situation does is put a hell of a lot of pressure on the No. 3 share guy. And some pressure on the No. 2. Usually, the No. 1 guy does OK.

SQUEEZING COSTS

How does this affect the distribution system?

The major chains are being forced to examine their belly buttons and to become more cost-conscious. There’s a major effort in the grocery-products industry by manufacturers and retailers to take cost out of the system. We have to work together. Some people say $30 billion can be squeezed out. Whatever the exact number, there’s way too much inefficiency.

Traditionally, grocery-store chains have tried to make money on the buy. Beat down the manufacturer, so to speak. Wal-Mart tries to make money by how it sells and markets-this lowers prices and still leaves room for good margins for the manufacturer and the retailer. Retailers make money this way, but we make good money, too.

Given the erosion of brand loyalty-to whatever degree it exists-how do you proceed on new products?

SnackWell’s came from nowhere. The product posted $200 million in franchise sales in its first year. Outstanding, and it’s a whole new brand. Some line extensions also have done well, such as Egg Beaters. We took a frozen product and made it into a refrigerated one. Often, when you extend a line, you get some cannibalization. But that’s not always the case. Take the Fat Free Newtons, which we recently introduced. They brought people back into the category. Fat Free sales in 1993 were $150 million, more than doubling performance for the Newtons franchise.

RJR Nabisco also recently introduced low-fat extensions of cookies and crackers, such as Oreos, Chips Ahoy, Ritz, and Triscuits. Sure, we have some bombs, but all told, our guys generated $435 million worth of worldwide, new-product sales last year.

Sounds like you’re attempting to capitalize on the same trend you did at ConAgra with the Healthy Choke line of products.

When I came here, I found a sophisticated, well-oiled new-products machinery. Even so, I thought that with my experience, I might be able to help.

WEAPON OF CHOICE

How do ConAgra and RJR Nabisco differ culturally?

The people of the two organizations have different characteristics. I have discovered that Easterners have a heart buried away someplace. There are some people who really love to live and work in New York. If I were going to locate a headquarters, I wouldn’t put it here, because where I grew up, you look for 100 miles to see the next cow or something. I’m a country bumpkin at heart.

The similarity is that both companies are a combination of different cultures. At ConAgra, you had independent operating companies, including frozen foods, grain processing, and agricultural products. While respecting individual cultures, we were able to get people to focus on one theme-return on common equity and some other earnings-related standards.

Here at RJR Nabisco, we have disparate cultures, too. Our tobacco company is different than Nabisco, and Nabisco itself has several cultures, one of which is Standard Brands. We integrate these cultures in line with principles such as trust, openness, and integrity. We use management seminars and stress communication. One thing I brought with me from ConAgra is the idea of a regular, Monday-morning meeting held through teleconferencing. We talk about operations and performance data, which are fed to us by computer.

For an example of how culture works, let’s take the production of an Oreo. Say a quality-control inspector is on one of the production lines checking for cracked cookies. The inspector’s supervisor says, “Look, George, yesterday I got a hell of a lot of customer complaints. If I get one more gosh dang complaint, you’re fired.” What happens? Scrutiny increases. Volume goes down. So the worried supervisor comes back and says: “We have to meet production schedules. Our customers are out of stock, and the sales people are mad at me.” Well, George is a smart guy. Naturally, the volume goes up. What’s the moral of the story? You want that inspector to be able to exercise judgment and to do his job right. How can you make that happen? The supervisor has to get inside his mind, to create a mind-set, so to speak. That takes time and effort. That’s culture. That’s the job of management-and my job, too.

Culture is a mind-set. It is the greatest weapon a CEO has. Change culture, and you change the world.

At ConAgra, you were the largest single shareholder, with a little more than 1 percent. Here, Henry Kravis owns slightly less than 50 percent. Does having an institutional shareholder as boss impact your strategy?

Shareholders are always your boss. But if you speak to Kravis, he’ll tell you, “We don’t know how to run companies.” KKR does not get involved in the management of this business.

AGING GRACEFULLY

Even so, when you have one shareholder with an overwhelming chunk of stock and a CEO who’s been summoned out of semi-retirement, there’s going to be speculation that you’re here to polish up assets ahead of KKR cashing out. Did you ask for, or receive, any assurances in terms of your mission here?

KKR is a long-term investor. I didn’t come here to polish anything; I came here to have some fun. I know a little bit about how to run a company, though I’m still learning. I hope to keep learning for the next 100 years.

Since by your own admission, you’re 100 years old, that would make you about 200 when you retire. What do you think RJR might say about that-or your wife, Josie? I’m commuting back and forth from Omaha now-I’m here four days a week and home three days. But right now, Josie and I are still having fun. When I took the job here, a friend of mine said, “Why don’t you just go fishing?” I told him: “This is my fishing. Building a corporation is great fun.” I might not feel that way forever, but for right now, I do. There’s still a lot I’d like to accomplish