Exclusive: Hillshire's new beginning
Sept. 24, 2012
by Joel Crews
August 9 marked the first-ever earnings call with analysts for Hillshire Brands Company, a “new” company with a long history as part of the very iconic Sara Lee Corp.
During the conference call, Sean Connolly, who was appointed CEO in January, spelled out the strategy to “unleash the potential” of what was formerly Sara Lee’s North American meat business. Connolly and CFO, Maria Henry, would ultimately detail Hillshire’s fourth-quarter performance for fiscal 2012, but not before recounting the significant changes in the prior two months and not until the mission for the “new” company was restated.
The well-documented spin-off saw Sara Lee’s international coffee and tea business form an independent public company, D.E. Master Blenders 1753, while its meat-based sector assumed a new name as part of a corporate, carnivorous makeover under a new leadership team with an all-meat, all-the-time mentality. June 29, 2012, marked the birth of Hillshire Brands Company as a new, independent and publicly traded firm that would make a symbolic debut on Wall Street (NYSE: HSH) just days later, when Connolly and his management team rang the opening bell at the New York Stock Exchange.
“When we rang the bell at the stock exchange, it was really representative of a new beginning,” Connolly tells Meat&Poultry from the company’s headquarters, currently based in Downers Grove, Ill. The spin-off spanned about 18 months, filled with long hours of planning and strategizing. Ringing the NYSE opening bell was, on one hand, a celebration for Connolly and his team to put the spin-off behind them, but also a wake-up call reminding them that the real work was ahead of them. Connolly remembers thinking, “Now we’re on the clock.”
Fix, drive, expand
As the clock ticks and the Hillshire strategy plays out, executives realize the evolution will not occur overnight. Indeed, fiscal 2013 is the transition part of a three-year plan. To finance some of the primary goals, which include fixing underperforming businesses, increasing marketing, advertising and promotions and “rebuilding the innovation pipeline,” Connolly has committed to delivering $100 million in cost savings in the next three years, which included layoffs earlier this year. He characterizes the mission for fiscal ’13, ’14 and ’15 with the words: “fix, drive and expand.” That mission also includes moving the company’s headquarters from Downers Grove back to Chicago in January, 2013.
The company’s longer-term goals include capitalizing on its established brands, which include Jimmy Dean, Ball Park, Hillshire Farm and State Fair, while growing and adapting some of the practices of its Aidells and Gallo Salame artisanal brands. With $4 billion in total revenues, processed meats makes up 85 percent of sales in addition to 15 percent from sales in bakery, a small category it retained after the spin-off. Three quarters of Hillshire’s revenues are generated through retail channels while the other 25 percent is foodservice. Connolly’s plan is to grow revenues by 5 percent while increasing margins.
All eyes are on the target. “Our goal is 200 basis points of even-margin expansion by the time we close out 2015,” he says. “The way we will get there is a balance of brand building, plus innovation and efficient cost management.”
Pursuing the growth goals is a leadership roster whose collective business acumen is as impressive as the individual successes of each person’s track record of excellence. But perhaps most important to Connolly is the team’s motivation and energy to finally push the company and its brands over the top.
Leading the innovation efforts is Sally Grimes, who was appointed chief innovation officer this past June. Most recently, she served in a senior-level marketing position with Newell Rubbermaid Inc. Grimes also spent 10 years at Kraft Foods Inc., in several marketing and brand-management positions. Connolly says Grimes brings a skill set to Hillshire that is focused on consumer marketing and innovation. Her appointment marks the first time the company has had a fully dedicated innovation group reporting directly to the CEO.
The goal for innovation was quantified early on as a percent of the company’s annual revenue (approximately $4 billion), which historically has been in the 9 percent to 10 percent range. Grimes and her team have been challenged to push the needle to 13 percent to 15 percent over the next three years. “She has a crystal-clear endgame,” he says, which includes plenty of backing and empowerment throughout the leadership team.
“Innovation is no longer someone’s side job. Innovation is the focal point of this team’s efforts, seven days a week,” says Connolly.
Also joining the management team in July was Dennis Belcastro, vice president of government and industry affairs. Belcastro’s background includes similar roles with Kraft Foods, Nabisco Inc. and most recently, the Grocery Manufacturers Association. Kent Magill, previously with Hostess Brands, recently joined the company as executive vice president, general counsel and corporate secretary.
Several other managers, including Andy Callahan, president of retail; Maria Henry, CFO; Thomas Hayes, chief supply chain officer; Donald Davis, president of Sara Lee Foodservice; and Jon Harris, chief communications officer, were a part of Sara Lee prior to the spin-off.
Members of the leadership team all have a technical, skilled-based pedigree, says Connolly.
“There is a high bias for action across our leadership team and there is a real owner-operator mentality,” Connolly says.
Back to Chicago
Connolly refers to an unmistakable energy that emanates from Downtown Chicago when talking about the company’s relocation plans, which were announced in early 2012. The move out of the Downers Grove office to an updated, 221,000-plus sq.-ft. building in Chicago’s West Loop, is a deliberate symbol of the significant changes within the company. It’s also a homecoming of sorts, as Sara Lee was based in the Windy City since the mid-1940s before moving to Downers Grove in 2005 as part of a consolidation effort. The new location, at 400 South Jefferson, includes four main floors, plus the additional space in the tower. Hillshire will occupy all of the floors in the main building, but not the basement which is a parking garage and storage area.
“Our building will be very open, very collaborative, and very down to Earth. We believe it will enable a lot of engagement around the consumer and innovation and ultimately drive a whole new level of energy into our culture.”
Also, working in a physical space that is new and not a constant reminder of the old days is a valuable part of the transition while not intended to minimize the significance of Sara Lee.
“We are incredibly proud of the history of the old company, but we are a new company,” Connolly says.
“This [Downers Grove] building houses all the memories of the old company. We’re looking to turn the page and really ‘walk the talk’ in terms of a new company and a new culture,” he adds.
Creating a funnel
When it comes to innovation, Connolly’s mandate is to initially put everything on the table.
“It’s all about creating a funnel, not a tunnel,” he says. Given his demonstrated ability to develop consumer products, most recently with Campbell Soup Co., Connolly is aware that most ideas will never take flight.
“Nobody bats 1,000,” he says. “You always have to be filling the funnel with new ideas,” rather than picking one or two and running with them.
New ideas for products are coming fast and furiously. Connolly and his team are anxious to vet each one over the next year and expedite the development of the brightest ones.
“We are looking to commercialize the biggest and best ideas,” he says.
Some of the early ideas are already being test marketed, including Ball Park’s frozen, flame-grilled burgers and mini-meals. Hoping to grow Ball Park’s annual sales of $400 million, other products are in the development pipeline, including test marketing of sliders and dough-wrapped bratwursts. This “better guy-food” segment is estimated at about $8 billion. Meanwhile, new premium products like chicken curry meatloaf and chicken teriyaki meatballs are also in the testing phase.
This idea-based, action-focused mentality has created energy and a sense of liberation at the management level, says Connolly, and it’s proving to be contagious throughout the company. “They are not about bureaucracy,” he says, and as a leaner, meat-focused company, paralysis-by-analysis is no longer a corporate obstacle to growth.
Connolly says innovations can include line extensions, quality improvements and exploring new product categories in parts of the retail store that were previously ignored. “We shouldn’t stereotype any one of those types of innovations,” says Connolly, based on preconceived ideas. “If someone has a line-extension idea that is a $50 million idea and that’s bigger than a really out-of-the-box, disruptive idea, we’ll go do that.”
He says the company can’t afford to be biased around any product or brand favorites as the new regime touts an organizational meritocracy. “We assess our favorites based on the size of the prize,” he adds.
As Connolly and Grimes look at pushing innovation to that 15-percent-of-revenue goal, the lowest-hanging fruit, in terms of opportunity, is the company’s mainstay brands. “We always look at our big brands first,” Connolly says, “because the big brands have incredible latent potential.” Approaching $1 billion in annual sales, Hillshire Farm, the company’s flagship brand, has been identified by many analysts as the product line with the most potential. Thanks to recent innovation success, sales of Jimmy Dean sausage products has also grown to approximately $1 billion.
“To succeed in the food business, you have got to grow. If you are going to grow, you have to innovate,” Connolly says of Hillshire Farm. “We’ve been less innovation-focused than we should have been, consistently and across the portfolio,” he admits.
Connolly insists the company has a proven growth model that will succeed if it is executed more consistently. That model includes three parts: strength in core brands; extending core brands into adjacent segments; and strengthening the brand portfolio through acquisition of smaller, on-trend brands, similar to the Aidells acquisition in 2011.
“All three of those levers are fair game for us as we think about delivering results,” he says. And Connolly’s team plans to exploit these areas of opportunity.
As Hillshire Brands moves forward, learning from the operations of acquired companies, including San Francisco-based Aidells, has proven valuable, especially in developing new products.
“Aidells is an extraordinary product,” Connolly says, thanks to its superior flavors, ingredients and a successful business model.
“It’s a great business, it’s a great culture and it’s a very entrepreneurial team. We’ve learned a lot as a parent company, about the way Aidells goes to market and the engagement it enjoys with consumers.” He calls the R&D efforts at Aidells a “perpetual innovation machine,” something Hillshire Brands is aspiring to accomplish. Speed to market is another enviable attribute of Aidells, which Sara Lee lacked and Hillshire Brands is committed to adopting. “It’s really demonstrative of a company’s agility,” he says.
Connolly knows a thing or two about delivering results in the very competitive food and beverage business. Prior to his appointment as CEO of Sara Lee’s North American meat business, which was temporarily named MeatCo at the time of his hiring, Connolly spent a decade at Campbell Soup Co., most recently as president of Campbell North America. He helped lead the development of new products, including the V8 V-Fusion line of juice drinks. Ten years before joining Campbell, Connolly managed brands and marketing for Proctor & Gamble. His reputation for successfully leading the innovation of established brands is well documented and looks to serve him well in his newest position.
Two particular areas have Connolly thinking a lot: meat-centric meals and meat snacks. Connolly estimates Hillshire Brands currently has about a 4 percent market share of this $68 billion meat-centric meals segment, and the opportunity for growing that portion is significant. Meanwhile, “we’re not in the meat-snack business today,” and he says this emerging market is an intriguing opportunity. “It’s one we’ve got to look at and evaluate whether or not our trademarks can play in that space,” he says.
A longtime student of consumer trends, Connolly realizes demand for the attention of today’s consumers has never been stronger. Economy-induced stress weighs heavy on them, as well. “When consumers are stressed, they become very discerning. When a consumer is discerning, your product better be provocative,” he says, which is a goal of Hillshire’s products moving forward.
Provocative in consumers’ eyes doesn’t necessarily mean increasing the emphasis on higher-end products, although with Hillshire Brands’ Aidells gourmet brand growing at double-digit growth, there is obvious demand despite an economic recession.
“If they’re not provocative they’re boring and if they’re boring, you’re in trouble,” he says.
Positioning the Hillshire Brands products is being approached with the mindset that there are a diversity of consumer segments and most of them enjoy meat products. Appealing to each of those segments with a solution is the looming challenge. Whether it’s value-conscious consumers shopping on price, convenience-focused shoppers looking for a solution to those willing to pay the extra price for premium products, Connolly’s team is on the prowl to discover solutions.
For value-focused consumers, Hillshire’s State Fair brand is one of the established product lines with room to grow. As for potential in the convenience arena, he says this segment has been critical to the success of the Jimmy Dean brand, especially in the past decade. Further development of products that are easy to access with little or no prep time and those that are easy to clean up are golden opportunities for Hillshire Brands.
“We’ve been incredibly innovation-focused on Jimmy Dean,” Connolly says. “We have an opportunity to be more innovation focused across the balance of our portfolio.”
Under Connolly, opportunities are first considered that appeal to consumers. Secondly, customer-related partnerships are considered. These customer partnerships have diversified dramatically over the years to include non-traditional grocery stores, including convenience stores, drug stores, club stores and even dollar stores. “There are consumers who love meat-centric meals in each and every one of those channels,” Connolly says.
The next challenge after successful innovation comes in developing “what’s next.” The competition, Connolly says, is always watching and can be counted on to mobilize quickly and mimic all successful products.
“You cannot be complacent and rest on your laurels,” because smart competitors will see the successes and quickly develop a ‘me-too’ product. “You’ve always got to have a productive paranoia that they’re coming and you have got to innovate what’s next, even before anybody shows up to knock off your products.”
As part of the new regime, production and processing workers are being invited back into the dialogue, when it comes to growing and innovating. “These are the folks that know more about our assets than anybody on the planet.” Workers at the company’s meat processing plants have been re-engaged and invited back to participate in and contribute to Connolly’s innovation imperative.
“When you become a smaller company, you can reestablish a certain intimacy between the folks in the field at the plants, the folks in the field calling on customers and in the brand teams and R&D teams back at the headquarters. The tightness of the team can become greatly enhanced,” he says.
Creating an inclusive and interconnected team, says Connolly, “creates a sense of energy and camaraderie that anything’s possible.”
Sara Lee’s most recent and substantial plant initiative became operational at its facility in Kansas City, Kan., where Sara Lee invested $140 million to update a former Armour-Eckrich plant. The 200,000-sq.-ft. slicing operation was touted one of the most automated and technology-rich plants in the industry.
Connolly says the project indicates, “We’ll invest capital to get behind big consumer innovation opportunities,” while pointing out the company will be disciplined in its future expenditures. Now that the Kansas City plant has been up and running for more than one year; optimizing how it is utilized in the future is being explored.
“We’ve been doing one thing with the facility and it’s working fine,” Connolly says. “We think there are additional opportunities with that asset as well and we have a team of folks ideating against that right now.”
The focus is on “the best possible product at the lowest imaginable cost. And if automation is the way to do that, that’s great,” but not at the expense of the best possible product. “Your manufacturing assets need to maintain some flexibility so that you can give consumers the breadth of varieties that they need,” he says. “Cost efficiency and flexibility are important to us.”
Earlier this year and leading up to the spin-off, plenty of chatter swirled that Sara Lee’s meat business was being courted by some of the industry’s larger meat processors. Connolly won’t confirm or deny the acquisition rumors, stating only that the company is moving forward to act in the best interest of its stakeholders.
“Everyone would agree that we have very attractive brands in our portfolio,” he says. “We are quite confident in our ability to generate shareholder value as an independent and public company by upping our game on brand building, on innovation and on cost management. So, that’s our game plan. We also know that we are a public company and that we have a fiduciary duty to our shareholders to maximize shareholder value and that’s what we’re always focused on. The play we’re running right now, around building out this portfolio, we believe will create significant shareholder value.”