ConAgra Pins Hopes on Efficiency Plan
Only three months after he became CEO of ConAgra Inc., Bruce Rohde faced a crisis.
A glut of beef, pork, poultry and grains flooded commodity markets in 1998 as financial problems in Asia closed doors to exports. Prices and profits fell. But having allowed its more than 80 companies to run themselves for decades, ConAgra, the nation’s second-largest food company, was unprepared.
Rohde found that scores of managers responsible for 80,000 employees in 34 countries were more concerned about their own divisions’ performance than ConAgra as a whole.
Salespeople who sold ConAgra’s Lamb Weston French fries to restaurants never bothered to tell other ConAgra companies the same eatery was looking to buy fresh beef.
Food-processing divisions like Swift and Armour were buying nearly two-thirds of their pork and beef from competitors, instead of ConAgra’s slaughter companies like Monfort. ConAgra’s spice makers were not calling on other ConAgra companies for raw materials.
“We weren’t working together,” said Rohde, who’s also the chairman of ConAgra. “We were probably working at cross purposes.”
The inefficiencies cost ConAgra. After having become accustomed to an annual earnings growth rate that averaged 14% per share, the company saw that figure drop to 1.5% in fiscal 1998.
Thus was born Operation Overdrive, Rohde’s initiative to get ConAgra employees to share customers, knowledge and products across company lines. Rohde now demands that ConAgra’s companies buy materials from each other. If that is not cost-effective, managers must explain why.
Opportunities for resource sharing abound, Rohde said, in a company that makes products throughout the food chain--from fertilizer to flour to brand-name consumer products like Healthy Choice frozen dinners, Orville Redenbacher popcorn and Butterball turkeys.
Rohde also believed the nation’s largest food service manufacturer and second-largest retail food supplier had too many distribution centers and plants. As he introduced the restructuring plan last May, he announced 6,700 job cuts and at least 15 plant closings.
ConAgra hopes to save $600 million a year with Operation Overdrive through more efficient operations. The company wants to expand pretax profit margins by 50% by improving its grocery products and advertising them more effectively to demand higher prices. For example, it is putting more meat and less filler into its Armour hot dog and is marketing it more widely.
Before Rohde became chairman, ConAgra could afford to let its companies run themselves as its sales exploded from $570 million in 1975 to more than $20 billion by 1991 amid a string of acquisitions.
That growth came under Mike Harper, who became chairman of ConAgra in 1976 and left in 1993, and continued under Harper’s successor, Phil Fletcher, who led the company until Rohde took over in September 1997.
ConAgra wants to make more acquisitions and emphasize teamwork at the same time, Rohde said. He’s sticking with the company’s goal of 14% annual earnings growth.
The company fell short of that goal in fiscal 1999, but Rohde said industry conditions improved and the benefits of the restructuring are being felt. Sales rose a little over 1% to $24.5 billion in fiscal 1999. Excluding restructuring costs, net income was up 11% to $696 million.
Analysts are supportive of Rohde’s efforts to revive the nation’s largest food company behind Philip Morris’ Kraft Foods, although some question some of his goals.
“It seems to make a lot of sense,” said analyst David Rabinowitz of Schroder & Co. Inc. of Operation Overdrive.
But David Nelson of CS First Boston said ConAgra risks damaging its businesses with its annual growth target.
“They remain committed to the 14%, which I don’t think would be a healthy level over the long term,” said David Nelson of CS First Boston. “If you don’t go for investment in new products and advertising to maintain power and relevance of your brands, then you risk losing those brands.”
Rohde, a 51-year-old attorney whose work with ConAgra dates to 1974 and includes representing it in more than 200 acquisitions, emphasized that the goal is a trend line that has been met on average for 19 years, largely through buying other companies.
“If you have no big goals, you tend to reach only for what you have to,” Rohde said.
Schroder’s Rabinowitz supports ConAgra’s earnings goal, saying that target has been the company’s great strength.
“If ‘Overdrive’ is for real, and I think it is,” Rabinowitz said, “that should be the difference between making the 14% and falling short of the 14%.”
