Nota Bena

April 1 1990 by Chief Executive

CYRIL STEIN

You can’t run a company by looking at a piece of paper while sitting in an ivory tower,” says Ladbroke Group‘s chairman and managing director, Cyril Stein. Stein favors a more hands-on approach when running the $4.75 billion U.K.-based conglomerate, most known for its recent acquisition of Hilton International (not to be confused with the U.S.-based Hilton Corp., which recently put itself up for sale). Since Ladbroke acquired Hilton International in 1987, profits have doubled.

One hotel was losing $300,000 a year on a disco. Now it’s a profitable conference room. The hotel business makes up 60 percent of total profits, but analysts predict Ladbroke’s greatest opportunity will come from the opening up of U.S. state-licensed betting.

Ladbroke strategically acquired racetracks in San Francisco, Pittsburgh, Detroit, and a greyhound stadium in Texas to meet new legislation that allows only racetrack owners to set up OTB parlors. Some argue this will supplant illegal betting, which is worth about $42 billion a year.

“Five years from now, we should have half the states in the union. We have virtually no competitors in the U.S.,” says Stein, who also hopes 1992 means more legalized betting throughout Europe. Ladbroke suffered a major disappointment in 1989 when plans for 1,500 betting shops across Germany were terminated by German political opposition. In the U.K., where it remains the largest operator of betting shops, Ladbroke has 1,885 units.

Ladbroke Property contributes 13 percent to group profits and DIY Retail, 12 percent. With interest spread between the U.S. and Europe, Stein expects the property division to experience steady growth. But with the recent surge in interest rates and decline in consumer spending, Stein says that if DIY isn’t able to expand, it will probably be sold.

Stein’s first job after training for his accountancy degree was with Ladbroke in 1956. In 1966, he became chairman. One year later, the company went public. Early on he had

10 percent of the company, which cost him about £10,000. “If I had 10 percent of the company today, I’d be a very rich man.”

At 61, Stein has no plans for retirement. In fact, on a recent trip to the U.S., he visited 18 sites in just four days. Talk about keeping your sleeves rolled up.

Lindis Courtney

WARREN E. MAIN

As the supermarket industry experienced LBO fever during the 1980s, Albertson‘s avoided the debt burden and dislocations affecting other chains. Chairman and CEO Warren E. McCain, 64, continued a steady growth policy that focused on strengthening the company.

Albertson’s avoided a takeover because of its stock price. “As long as we keep our earnings continually rising,” says McCain, “and command a multiple of 20 to 22 percent, it will be hard for an outside organization to make an offer that will be acceptable to our shareholders.”

McCain’s goal has been to expand in 17 western and southeastern states where 1989 sales topped $7 billion. McCain is not content to increase his territory in piecemeal fashion-from 1979 to 1989 Albertson’s bought 24 stores from competitors. “With our low debt position, we can grow faster [than the other chains],” he says.

Albertson’s current five-year plan calls for $1.2 billion in new store construction with an additional $236 million for extensive remodeling of existing stores. McCain’s philosophy? “You either grow or shrink. In order to keep the best people and give them opportunities, you must have a road map for growth.”

Analysts give Albertson’s high marks as a well-managed company. But they note that it has to face a labor challenge in the 1990s. “I feel that Albertson’s is an extremely well-run supermarket chain with excellent cost controls and superior executives,” says Ruth Ketler, formerly an analyst with Drexel Burnham Lambert in New York.

Albertson’s corporate culture is not only about making money. It’s also about being a “people-oriented business,” according to McCain. But riding herd on 50,000 employees isn’t easy. As the teen population dwindles, where will the company find employees?

Some of the answers to employee labor questions will have to be answered by McCain’s successor. His retirement plans haven’t been made public. When he does step down, he assures that “the company will be in good hands.”

-Christopher Dingman

JOHN H. McCONNELL

John McConnell got his first taste of the steel business as a teen working in a steel mill in a small town in West Virginia. After graduation from Michigan State with a degree in business, he returned to the steel industry. “I saw a need and an opportunity for an intermediary between the steel producer and the steel user,” he explains. So in 1955, with $1,200 in cash and $600 borrowed on his ’52 Oldsmobile, he founded the Columbus, Ohio-based Worthington Industries and purchased his first load of steel.

In his first year, his five employees produced $342,000 in sales and the firm realized a net profit of $11,000. Today, as an intermediate steel processor, Worthington prepares flat rolled steel to the exact tolerances required by its customers. Last year’s sales topped $819 million.

As chairman and CEO, McConnell, 66, is positioning Worthington to take advantage of major shifts in the industry. In 1989, he bought a minority interest in the Rouge Steel Company, providing Worthington with a secure source of steel without the costs and risks of running the mill. His diversifications and joint ventures have reduced reliance on processed steel. “Acquisitions have played a part in our growth,” admits McConnell, “and we are always continuing to pursue new opportunities.”

McConnell is also interested in large companies that are market leaders. He recently joined forces with USX and with Japan‘s Nissan Chemical Industries and Sumitomo Corp. of America, which supplies plastic parts for Honda’s U.S. manufacturing arm. “In the Japanese business style,” notes McConnell, “suppliers are kind of like family.”

“In today’s pricing environment,” he adds, “it is difficult to purchase companies that will contribute to earnings. Until circumstances change, we will devote capital to building new plants and growing internally.”

McConnell considers himself fortunate: with the help of the GI Bill, he was able to get a good education. That paid off. Today he can afford to relax at his Colorado ranch, where he and his wife raise horses and cattle.

-Christopher Dingman

ROBERT K. MELTZER

These are times when a fur company CEO feels like hibernating. In fact, the head of the second largest company in the industry (Fur Vault) recently announced he intends to get out of fur entirely.

“It’s probably the only major apparel item that’s had such a tremendous decrease in price, ever.” That’s the view of Robert K. Meltzer, president and CEO of Chicago-based Evans, the world’s largest retail furrier.

Founded by Meltzer’s grandfather, the 61-year-old fur company was the first one to go public, in 1963. With 30 stores and leased fur departments in Garfinckel’s, May Company and Nordstrom, Evans is a nationwide barometer of the 30,000-member industry.

“The best thing you can have in any industry is stability of pricing,” says Meltzer. “Since the peak in 1987-88, prices have dropped as much as 40 percent.” The reason? According to Meltzer, the peak was mainly responsible. This is purely a commodity business,” he says. Mink provides 70 percent of the industry’s sales and when pelt prices surged, so did farm production-hugely.

Adding to the mink glut were two warm winters and accelerating anti-fur campaigns. Although European activists have apparently cut fur sales dramatically in the Netherlands and Germany, Evans claims the U.S. hasn’t been affected. He supports the industry’s $2 million campaign to convince the public that if fur is outlawed, tomorrow it will be leather, wool and meat.

“The anti-fur issue,” he explains, “is being played out in the media. The vast majority of the American people don’t truly believe that animals have the same rights as humans.”

Nevertheless, “People for the Ethical Treatment of Animals” claimed a big victory when another furrier, Antonovich, filed Chapter 11 in December.

Industry executives like Meltzer insist that such claims are grossly exaggerated, and point to increased sales (up 47 percent for Evans) during December’s cold snap. However, because of pricing, though unit sales went up, profits remained flat. In addition, Evans and the other big furriers are suffering the effects of optimistic expansion during the boom years. “I think the industry’s going to go through a trough for the next two or three years,” he predicts.

With sales of about $133 million in 1989, Meltzer’s firm will probably show less in 1990.

Residing in chilly Chicago with his wife and two children, Meltzer is concentrating on streamlining the company and cutting costs. Then, if the mink population goes

down, too, and the winters get even chillier, things may get better. But the activists will probably still be active.

 -Peter Lacey

FERENC DARVAS

As CEO of the Buda- pest-based Compudrug, Ferenc Darvas, 48, runs a company with an annual growth recently averaging more than 75 percent. Revenues in 1989 were about $3 million, with 30 percent from foreign trade.

Darvas is a specialist in expert systems-advanced computer software that incorporates artificial intelligence techniques-that rapidly predict the effects of substances and reactions in drug design, metabolism and toxicology.

Working with John W. Kiser III, a Washington, D.C.-based investor and East Bloc technology authority, Darvas’ Compudrug last year opened its first U.S. sales office in Dallas. Though a number of large U.S. pharmaceuticals are well-advanced in expert systems, Compudrug, according to Kiser, is preeminent in met abolic prediction.

Still, Darvas finds the U.S. a tough place to sell. “Our software reduces development

time,” he says, “but American high executive levels seem resistant to innovation. It’s been a painful experience.” Marketing was not a subject that was taught in Hungary when Ferenc Darvas was studying organic chemistry at Budapest‘s Technical University, despite Russian-approved attempts by the puppet government of Janos Kadar to improve Hungary‘s economic lot. In 1966, he joined EGYT Pharmaceutical Works. A new production technique for chloramphenicol developed by Darvas and four other chemists brought very large orders from the Japanese; it also indirectly brought about Darvas’ independence.

Paradoxically, in communist Hungary, staff scientists were legally entitled to royalties from their inventions. When Darvas and his collaborators’ royalties from EGYT’s sales to the Japanese began to exceed the salary of EGYT’s CEO, they were asked to forgo them. Darvas and one of the others refused. Harassed by management, he quit. In 1981, after a spell at the Ministry for Heavy Industry, Darvas started Compudrug.

Darvas, like most Hungarian entrepreneurs, is trying to raise hard currency investments to develop his business. “Development costs in Hungary are 1/100 of those in the U.S.,” he says, “but there’s no capital available for production.” Free market economies are beginning to invest in Hungary. With the help of an American supporter, Compudrug opened its first U.S. sales office last year, and Darvas has held a visiting professorship at the University of Florida. Prosperity will not be easy. Communism, as the Hungarian joke used to go, is “the long, hard road between capitalism and capitalism.” -Peter Lacey

ELIZABETH BIRMAN

The transformation of Elizabeth Birman, head of Budapest‘s venture capital bank, Innofinance, is almost a paradigm of what has happened to communism itself. At 51, she is the granddaughter of Eugene Landler, one of the leaders of the brief regime that first brought communism to Hungary in 1919. Her father worked at a Russian factory as a political secretary. He died in one of Stalin’s prisons during a 1973 purge. After graduation from Budapest‘s Institute for Economy and Organization, Birman worked in the foreign trade department of the National Bank of Hungary, providing credit to small businesses that were export oriented. The export success of a Hungarian-developed agricultural product suggested to Birman and her colleagues the idea of actual investment in new high-tech firms. Abetted by a friend who was secretary of the government’s committee on science policy, Birman devised the state-supported Innovation Fund in 1979. Capitalized with $12 million, Birman had become an investment banker.

Birman made some mistakes. “It was wrong to finance only risky ventures,” she admits. But she made profitable decisions, too. An investment in a natural cosmetic called Helia-D has been highly successful in Hungary and the product is exported to Europe and the U.S.

In 1985, the fund was cut loose from the state and renamed Innofinance. Today, as an independent CEO, Birman examines risk very carefully and expects a 25 percent annual return until repaid. She spends most of her time seeking out new ventures. “My first question,” she explains, “is who will be the executive manager? I don’t trust financial projections; you can put anything on paper.”

With about $8 million of capital, Innofinance is a bright light in the financial gloom of Eastern Europe. Birman, who is famous in Hungary as “Miss Innovation,” though still inclined to a modified form of socialism, has abandoned communism. “I really don’t know what would be the best system,” she comments. “I only know that ours doesn’t work.”

- Peter Lacey