Sara Lee Corporation - SAGE Publications Inc · stores and independent stores at shopping malls. Fruit of the Loom was Sara Lee’s pri-mary competitor in the underwear category

In mid-2004, Kirk Nelson, Supply Chain Analyst in the Wal-Mart Account Divisionof Sara Lee Corporation’s Customer Management Group in Winston-Salem, NorthCarolina, pored over the new sales data he had just received on their Girl’s Panty

(GP) line. He wanted to be well prepared with the latest information before his meet-ing with his boss, Dudley Gentry, Director of the Female Underwear and Sleepwear cat-egory for the division. Wal-Mart stores allocated Sara Lee’s GP line, like many otherproduct lines, a certain shelf space at each store where the line was offered. If a particu-lar style did not perform well, not only would Sara Lee not achieve its revenue objec-tives, but Wal-Mart would not achieve its total margin dollar goals. This carried the riskof losing precious shelf space at Wal-Mart stores, and worse, possible reallocation of thespace to a competitor’s product.

It was Kirk’s responsibility to monitor and analyze the sales data to ensure that SaraLee was using shelf space allocated to the GP line effectively. The task was complicated,however, due to the constant changes not only in demand, but also in competitors’offerings as well as Sara Lee’s own product changes. As Kirk explained, “our productassortment is constantly changing, based on consumers’ interests and sales. From timeto time, we may have to discontinue a style because it is no longer economical to pro-duce, or because consumers’ desire for that product has declined. This allows us to offernew styles with broader appeal.”

Specific styles in the GP line had a life cycle of two to three years with more fre-quent (about every six months) print and color changes. It was therefore extremelyimportant to time the new major style introductions and color print changes correctlyto keep the product line fresh and performing to the satisfaction of both Sara Lee andWal-Mart. One constant danger was the possibility of introducing styles, colors, or printand packaging combinations that competed with and cannibalized existing products oreach other.

That was the dilemma facing Kirk now. The company had recently introduced twonew GP styles; however, they might be cannibalizing an older style that had been sell-ing well. In addition, another new style was now ready for introduction, but Kirk wasunsure which style it should replace. He hoped that an analysis of the sales data wouldhelp him with this decision.

Sara Lee Corporation 1

Sara Lee Corporation

Umit Akinc, Calloway School of Business and Accountancy, Wake Forest UniversityJack Meredith, Babcock Graduate School of Management, Wake Forest UniversityKirk Nelson, Sara Lee Corporation

Copyright © 2007 by Case Research Journal and Umit Akinc, Jack Meredith, and Kirk Nelson.Preparation of this case was partially supported by the Babcock School of Management ResearchProgram and the Calloway School of Business and Accountancy Summer Research Grant Program.

COMPANY HISTORY

Sara Lee’s roots trace to 1939 when Nathan Cummings, a small wholesaler, acquiredC.D. Kenny Company, a small wholesale distributor of sugar, coffee, and tea inBaltimore with net sales of $24 million. Upon later acquiring Sprague, Warner &Company in 1942, the company moved its headquarters to Chicago and changed itsname to Sprague Warner-Kenny Corporation. The company began trading its commonshares on the New York Stock Exchange, and the stock split three-for-one in 1946. Thestockholders voted to change the corporation’s name to Consolidated FoodsCorporation in 1954 to emphasize its diversified role in food processing, packaging, anddistribution and to better identify with multiple segments of the food industry. In 1956,Consolidated Foods acquired Kitchens of Sara Lee and 34 Piggly Wiggly supermarkets.This event marked the entry of Sara Lee into the retail food business for the first time.The decade of the 1960s continued the growth of the corporation with various acqui-sitions that firmly established the company in the food industry and catapulted it intoa diverse set of businesses. Among these acquisitions, those of both Gant and Country-Canadell were significant because they marked the entry into the general apparel andwomen’s intimate apparel businesses, respectively.

Growing by acquisitions continued in the decade of the 1970s. One of the compa-ny’s most important acquisitions occurred in 1979 when it bought Hanes, a well-knownmanufacturer/marketer of women’s hosiery, foundation garments, swimwear, men’s andboys’ underwear, and cosmetics (brands include L’eggs, Bali, Hanes, L’erin). In the mid-1980s, Hanes (now as a division of Consolidated Foods) introduced the Hanes Her Waybrand of women’s apparel, starting with women’s panties and expanding to other cate-gories. Hanes Her Way quickly became a $100 million brand by itself. In 1985,Consolidated Foods changed its name to Sara Lee Corporation to reflect the growingconsumer marketing orientation of the company and to emphasize around the world itshigh-quality, well-known branded products. Sara Lee Corporation celebrated its 50thanniversary in 1989 with sales topping $10 billion and record earnings. Meanwhile,Hanes signed an up-and-coming, young basketball player from the University of NorthCarolina who had recently moved to Chicago—Michael Jordan—to serve as aspokesperson. Hanes introduced the new logo and advertising campaign in 1992, let-ting consumers know that “We just can’t wait’ll we get our Hanes on you.” By 1997,Hanes’ worldwide brand sales surpassed $2 billion with high quality, affordable, casualclothing for today’s everyday lifestyle. The pace of new acquisitions in food, apparel, andpersonal care products continued in the decades of the 1990s, with net sales reaching$20 billion in 1998, and continuing into the new century.

COMPANY BUSINESS AND STRATEGY

Sara Lee’s modest origins had been in domestic food processing and distribution. Bymid-2004, it had become a global corporation with 150,400 worldwide employees,operating in 58 countries and selling in over 200. By this time, it derived 39 percent ofits sales revenue and 47 percent of its profits from outside the United States. The growthand diversification of the corporation into a global conglomerate is a result of manyacquisitions in the last century as well as changing economic conditions.

Recent global competitive forces had become an important influence on thecompany’s basic character and its competitive focus. Strong brand development and

2 Case Research Journal • Volume 26 • Issue 1 • Winter 2006

marketing has always been the major focus for Sara Lee. However, overseas compe-tition from such emerging regions as Eastern Europe, South East Asia, and theMiddle East, powered by newer technology and cheap labor, had made it increasing-ly difficult for U.S. manufacturers to compete. Sara Lee’s operations, particularly inthe apparel business, were no exception. Thus, the company started moving some ofits apparel manufacturing to these regions, expanding its operational base into 55countries. In doing so, however, the company found itself manufacturing a smallerand smaller percentage of the volume it markets globally. As a result, Sara Lee decid-ed to relinquish its focus on manufacturing apparel products and instead concentrateon developing and marketing its high quality, market-leading, repeat-purchase,brand-name products.

At the turn of the millennium, Sara Lee also realized that the company had over-expanded into too many product areas. Thus, in 2000, a new initiative to “reshape” SaraLee emerged, with the goal of narrowing the company’s focus to a smaller number ofconsumer packaged-goods segments. To implement this strategy, Sara Lee divested someof its manufacturing operations while adding some others to build leadership brands inthe core categories of packaged meats, bakery, coffee, tea, underwear, intimate apparel,hair and body care, shoe care, and air fresheners.

This strategic realignment culminated in three broad strategic business areas:

• Food and Beverage• Branded Apparel• Household Products

In the apparel business, Sara Lee marketed a global portfolio of basic, non-fashionapparel brands, which it distributed largely through mass marketers such as Wal-Mart,Target, and K-Mart. This product line occupies the marketing space below the highfashion segment (e.g., Victoria’s Secret, Yves St. Laurent) but above the no-name appar-els. Sara Lee’s major brands in the intimates/underwear segment, for example, includedBali, Barely There, Gossard, Lovable, Playtex, Unno and Wonderbra; in the leg-wearcategory it had L’eggs, Hanes and Just My Size brands; and the sportswear categoryincluded such well-known brands as Champion and Outer Banks.

Hanes had been making comfortable, quality products in underwear, socks, andcasual wear for the whole family for over 100 years. Hanes Knit brand was the corpo-ration’s largest brand and also the world’s largest apparel brand, with total annual salesof $2.2 billion in fiscal 2002. Hanes Her Way, one of Hanes Knit brands, alone had salesrevenue of $750 million in the same year.

THE GP LINE

Underwear for everyone in the family had been a significant portion of Sara Lee’sapparel business, and consumers had known its brands for several decades. Under thegeneral Hanes brand, Sara Lee marketed a broad line of underwear for girls agedbetween four and 12. The GP line included three types of cuts referred to as silhou-ettes—Brief, Bikini, and Hipster. Each silhouette came in up to three price levels, calledprograms, which could be Basic, Fashion, or Character, which covered, respectively, the“good,” “better,” and “best” spectrum of the market. The three cuts not only differedin the use of quality of materials and other frills such as fancy elastic, lace, etc., but alsoin the company’s brand equity in them. Pricing, therefore, reflected these differences.


For instance, Basic was the economy line which came either in plain or simple printssuch as butterflies or flowers. The next step up was the Fashion program which came inmore elaborate prints based on various themes such as beach, sandals, travel, days of theweek, etc. The highest program level was Character, based on popular cartoon charac-ters such as Strawberry Shortcake, Winnie the Pooh, and Barbie. This last category tar-geted the younger slice of the 4–12 age group. Because a licensing fee to the cartooncharacters was involved, Sara Lee had higher brand equity in this line, commandinghigher prices.

Of the three silhouettes, only the Briefs were offered in all three programs: Basic,Fashion, and Character. The Bikini and Hipster silhouettes were only available in theBasic and Fashion programs. Each combination of silhouette and program also came invarious packaging configurations and prints. For instance, Basic targeted the economybuyer and came mostly in packages (called “units”) of six or nine with simple printing.The higher-priced Fashions were available in a 6-pack configuration whereas the high-end, highest-priced Characters were only sold in packages of three.

Sara Lee marketed these products largely through mass marketers such as Wal-Martand Target, but also (though on a much smaller scale) through smaller departmentstores and independent stores at shopping malls. Fruit of the Loom was Sara Lee’s pri-mary competitor in the underwear category. It offered similar products to Sara Lee’s atboth mass merchandisers and smaller stores.

THE WAL-MART ACCOUNT

As of mid-2004, Sara Lee and Wal-Mart had enjoyed a close and growing supplier-cus-tomer relationship for many years. Wal-Mart was not only a significant distributor forSara Lee’s apparel line, but also for the Sara Lee brands in food and beverages as well ashousehold items. Sara Lee brands in all three categories (apparel, food and beverages,and household products) accounted for a sizable portion of Wal-Mart’s total sales. Totalapparel sales to Wal-Mart alone exceeded $1.3 billion in the 12 months prior to mid-2004. In this relationship, Sara Lee had in Wal-Mart a strong distribution channel part-ner with deep market penetration, while Wal-Mart relied on Sara Lee’s wide portfolioof well-known and established brand names. The ability of Sara Lee to reliably supplyWal-Mart with wide product lines at competitive prices was crucial to Wal-Mart sincethese capabilities translated into “everyday low prices” and high availability of prod-ucts—two of Wal-Mart’s success factors.

Sara Lee managed this important relationship with one of its biggest customers byan elaborate sales organization consisting of, for example, more than 40 professionalsjust in the apparel segment. Sara Lee’s Wal-Mart Account apparel team was organizedaround the categories of products sold (see Exhibit 1) and was headed by its ownPresident. One of the most important duties of the Analysts was to monitor the salesdata closely to ensure that the precious allocated retail space in Wal-Mart’s stores wasbeing utilized as effectively as possible. Since in the short-term, the space allocated toGP styles was fixed, it was important to stock that space with an “optimal” assortmentof styles. Generally, introducing a new style required terminating an existing style.Furthermore, it was a distinct possibility that Wal-Mart would take back part of the dis-play space if the product was not performing in terms of total margin. This meant thatthe Analyst was responsible for making recommendations regarding both which stylesto discontinue and which new styles to add.


The Analysts were also responsible for monitoring the sales of the product lines thatwere assigned to them and initiate inventory replenishment actions to ensure that prod-ucts achieved a high “fill rate,” i.e., the proportion of customer requirements filledimmediately. Wal-Mart shared its demand forecasts for various products with its appro-priate suppliers but expected a maximum two-week delivery lead time on most items.Because most of the GP line came from as far away as China, the two-week lead timecreated a supply chain challenge. Managing this long supply chain while still meetingWal-Mart’s delivery standard was complicated by at least two factors. First, Sara Leedealt with a multitude of suppliers in various countries on different continents (China,India, Pakistan, Turkey, Egypt) who were subject to all sorts of disruptions due to suchthings as strikes, unrest, cultural traditions, religious holidays, etc., as well as the com-mon manufacturing difficulties of maintaining quality, material flows, equipment, andlabor. Second, the supply lines were very long, crossing international borders and oceansresulting in delivery times to Sara Lee as long as six months for some items. These fac-tors made the supply time relatively long and highly unpredictable.

To meet this supply chain challenge—supplying Wal-Mart within two weeks withproducts whose supply chains were long and unpredictable—Sara Lee operated a num-ber of distribution centers and tried to maintain appropriate inventories. In order toachieve the delivery performance that Wal-Mart expected and still control the inven-tory investment, Sara Lee relied on good forecasts going out to six months or longer.

In the Wal-Mart Account division, Kirk Nelson reported to the manager ofWomen’s and Girl’s Underwear, who in turn reported to Dudley Gentry, Director of theFemale Underwear and Sleepwear Category. As of mid-2004, Wal-Mart offered the GPline at more than 2,300 stores. At each store, the packages were presented to consumersin “modules” resembling columns and rows of pigeonholes, where each column wasassigned to a particular style (silhouette, program, and packaging combination) whichranged up to a dozen or so. Different sizes, depending on the style, occupied specificshelves in each of the columns. Each style of silhouette, program, packaging combina-tion, and size was assigned a unique SKU for accounting and inventory managementpurposes. In this display arrangement, the “columns” allocated to the Hanes brand GPline from Sara Lee stood side by side with those allocated to the Fruit of the Loom line.Although Wal-Mart also carried an assortment of lower priced, private brands of under-wear, these were not regarded as directly competing products.

Each week, Kirk got a weekly retail sales report from Wal-Mart. A pictorial sampleof this detailed report based on the actual sales data is reproduced in Exhibit 2. The for-mat of this report modeled the module display used at the stores. Each column of theupper table detailed the average unit (i.e., package) sales per store for each group (sil-houette, program, and packaging) for each size. The lower table is the same informationin dollar terms.

CANNIBALIZATION AND REPLACEMENTS

One of the GP line’s longest-running styles had been Fashion-Bikinis sold in 6-packunits at a retail price of about $6.90 per unit. Sara Lee’s net profit margins in the GPline were about the same for all styles and can be assumed to duplicate the average inthe children’s apparel industry, about 2–3 percent. Among similar products (both SaraLee and other brands), this product had been performing well in Wal-Mart stores sincethe start of calendar year 2001, though clearly nearing the end of its life cycle. Kirk was


considering this product as a benchmark to evaluate the performance of other styles.On average, 6,000 units sold each week across 2,300 stores translated into about $18of revenue per store each week for this product, just one of half a dozen styles sold inthis product line.

In November 2002, Sara Lee had introduced a similar product—a Fashion-Briefversion of the 6-pack Fashion-Bikinis—and started selling it in the same Wal-Martstores. The Fashion style had been so popular in the Bikini line that it seemed logical tointroduce it in the Briefs line as well. Because this product was somewhat similar to thesuccessful Fashion-Bikinis, differing only in the silhouette, there was some concernwhether the Fashion-Brief version would “cannibalize” sales of the Fashion-Bikini prod-uct. On the other hand, since the Brief silhouette primarily sold to younger girls where-as the Bikini silhouette sold to older girls, the two styles might actually complement oneanother rather than competing with one another. Weekly unit sales (all sizes combined)for these two products from their introduction to mid-2004 are given in Exhibit 3.

Back in August 2003, Kirk had noticed that one of the Basic-Hipster styles—a 6-pack economy package that had been in the stores for a number of years—was notdoing well. Looking at the sales figures, Kirk felt that they had to replace this stylequickly or they would run the risk of losing the space in the Wal-Mart stores to a com-petitor. Unfortunately, Sara Lee did not yet have an updated Basic-Hipster to replacethis style. Reluctantly, Sara Lee decided to replace it with the new Fashion-Bikini stylethey had been preparing in anticipation of the end of the existing Fashion-Bikini’s lifecycle. The “New Fashion-Bikinis” differed from the existing Fashion-Bikinis primarilyby having more current print themes and more exciting colors. Given the still-limitedsupply of these New Fashion-Bikinis, they decided to substitute it at only 1,700 Wal-Mart stores where the Basic-Hipster’s performance was the poorest. They knew that thisproduct did not replace the discontinued Hipsters well and that it could, in fact, canni-balize the very successful Fashion-Bikinis. However, as Kirk put it, they had no choice—they had to keep the spot until a proper replacement for the Basic-Hipster was availableand his task, after all, was to maximize total sales in the GP line. Weekly unit sales forthese New Fashion-Bikinis are also given in Exhibit 3.

Now that these potentially competing products had been on the shelves for a rea-sonable period, Kirk felt that it was time to do a more extensive analysis of the sales pat-terns of the three products to determine if any cannibalization of the original Fashion-Bikinis had been occurring. If this was indeed the case, it was important to keep thenewer products on the shelves only if they were creating additional incremental revenueand meeting Wal-Mart’s margin dollar expectations.

Checking the values in Exhibit 3, Kirk could see that there was much variability inthe weekly sales of all these products, which did not surprise him. Kirk’s experience withsales of similar products indicated that the products tended to exhibit various persistentseasonal ups and downs with two pronounced peaks corresponding to the “back-to-school” and “Christmas” seasons. To see these patterns more clearly, Kirk used a spread-sheet software package to plot, in Exhibit 4, the weekly sales data in Exhibit 3 for thethree products for each year. As he expected, every product in every year exhibited thesame seasonality.

Kirk decided it was now time to begin the data analysis. To see the effect of theFashion-Briefs introduced in 2002 on the sales of Fashion-Bikinis, Kirk graphed theweekly sales data for the Fashion-Bikinis before and after the introduction of theFashion-Briefs, as shown in Exhibit 5a. Kirk did not believe that this would necessarily


be an accurate assessment of the impact of Fashion-Briefs on the Fashion-Bikini sales,but it was always useful to look at a plot of the data before trying to analyze it. To begin,he thought he would simply calculate the average weekly sales of Fashion-Bikinis for theyear before the Fashion-Briefs were introduced and compare it to the entire year after.He reasoned that by looking at two entire years’ sales, he would be comparing annualaverage sales not influenced by any seasonal fluctuations. He found that the averageweekly demand for the entire year preceding the introduction of the Fashion-Briefs hadbeen 4,853 packages and for the year immediately following the introduction, the aver-age weekly sales had jumped to 5,955 packages, a 23 percent increase. Rather than hurt-ing the sales of the Fashion-Bikinis, it appeared that the new Fashion-Briefs were actu-ally helping sales.

When he mentioned this 23 percent increase to Dudley Gentry at lunch the nextday, Mr. Gentry seemed pleased that the Fashion-Bikini sales had risen, but wonderedif the increase was solely attributable to the introduction of the Fashion-Briefs. Forexample, if the sales for Fashion-Bikinis were trending upwards anyway, then the differ-ence observed may have been due to this trend and not the result of the new style intro-duction. He said that, although it did not appear to be so, it was still possible that theFashion-Briefs were cutting into the sales of the Fashion-Bikinis and the upward-trend-ing Fashion-Bikini sales were hiding the cannibalization.

To see if there was any significant trend in the sales, as Dudley suspected, Kirk usedthe software package’s “linear trend” feature to add a rough trend line to the graph, asshown in Exhibit 5a. There did indeed seem to be an upward trend in the data, but itseemed to continue even after the new product introduction. Still, perhaps the trendwas even higher before the introduction of the Fashion-Briefs and the introduction ofthe new product had reduced the growth rate. Unfortunately, the seasonality in the datamade it difficult to see what was happening. Hence, Kirk decided to look at the cumu-lative sales (Exhibit 5b) and plot a trend line through the cumulative sales up to theintroduction of the Fashion-Briefs, and then extend it on to see if sales increased fasterthan this line.

THE STYLES-TO-OFFER DECISION

Back in his office, Kirk wondered how he might account for the possible increase inFashion-Bikini sales. Solid decisions on which styles to continue and which, if any, todrop, would require a more detailed and sophisticated analysis. He had to find a way toaccount for any sustained trend as well as the seasonal fluctuations in the data before hecould make a convincing argument about the possible negative or positive effect of onestyle or another.

In addition, an e-mail message Kirk received informed him that a proper replace-ment for the Basic-Hipster was now available. He could recommend using it to replaceeither the old or the New Fashion-Bikinis, as originally planned. However, consideringthe higher margins of the Fashion-Bikinis compared to the Basic-Hipsters, Kirk waswondering whether this was the rational thing to do. Of course, the decision dependedon the degree to which the two Fashion-Bikinis (old and New) were working welltogether; i.e., without substantial cannibalization. If there was some cannibalization, hecould recommend replacing one of the Fashion-Bikinis with the new Basic-Hipster.However, which one should it be? Alternatively, if the New Fashion-Bikinis were not


Exhibit 1 Sara Lee’s sales force organization for the Wal-Mart Account

Source: Sara Lee records

cannibalizing the old Fashion-Bikinis in a way that undermined the total revenues, per-haps both Fashion-Bikinis might be carried side by side in all Wal-Mart’s stores.

Finally, Kirk wondered if he could also use the analysis to forecast overall rev-enue expectations for these lines, and perhaps even unit sales of each style combi-nation so their warehouses could maintain adequate supplies to keep Wal-Mart’sstores replenished.


PresidentWal-Mart Account

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VPIntimates, Hosiery and Bras Business

VPUnderwear and Socks Business

DirectorFemale Underwear

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Exhibit 3 Weekly unit sales of the three products

Fashion-Bikinis Fashion-Briefs New Fashion-BikinisWeek 2001 2002 2003 2004 2001 2002 2003 2004 2001 2002 2003 20041 3091 3723 3549 4319 3776 4566 17342 3449 4207 4019 4780 4471 5125 19713 3370 4110 3900 4545 4494 4947 19314 3479 4199 4001 4542 4746 4999 19835 3569 4211 4118 4544 5000 5053 20236 3557 4121 4095 4399 5079 4943 19837 3484 3951 4010 4199 5058 4781 19288 3580 4010 4129 4203 5243 4831 19569 3681 4163 4352 4293 5493 4963 202110 3765 4205 4558 4409 5635 5118 211011 4074 4416 5010 4667 6116 5400 222812 3359 3690 4211 3811 5086 4472 185213 3171 3481 4028 3557 4845 4253 176614 3378 3703 4330 3764 5197 4552 189915 3037 3389 3977 3377 4791 4163 174516 2994 3370 4060 3371 4909 4239 177517 3469 3865 4790 3946 5787 4969 208218 3934 4318 5516 4587 6645 5700 240719 4422 4824 6255 5279 7454 6406 271720 4582 4931 6460 5579 7626 6605 281221 4914 5263 7022 6115 8118 7040 301022 5334 5698 7891 6916 8850 7676 328623 5546 5967 8462 922424 5582 6009 8842 928925 5816 6237 9343 955126 6324 6757 10343 1045127 8132 8672 13250 1327028 8998 9795 14230 1419329 8302 9054 12739 1261630 7462 8185 11117 1107431 5814 6417 8569 848732 4232 4843 6036 593833 2627 3072 3808 372234 2755 3204 3905 3822 80535 3017 3416 4152 4089 92236 3184 3541 4266 4195 100737 3182 3488 4165 4113 103938 3336 3622 4294 4252 112639 3378 3635 4373 4290 119240 3684 3867 4795 4660 135941 4003 4150 5228 5045 154142 4163 4264 5443 5232 166743 4857 4864 6407 6141 202544 5066 5108 6742 6460 218845 6201 6226 8280 7947 274446 7905 7898 10502 10213 358647 9521 9394 12322 1415 12330 439348 6169 6117 7353 4965 7517 269049 2982 2933 3464 2387 3599 132150 2763 2713 3171 2274 3310 123651 2927 2869 3472 2590 3602 135552 4583 4215 5258 3998 5378 203153 4129 3784 3804

Source: Sara Lee records



Exhibit 4 Seasonal pattern of sales

BR: Briefs; BK: Fashion Bikinis; N: New Bikinis.


Exhibit 5a Fashion-Bikini Sales for 2001–2004

Exhibit 5b Cumulative Fashion-Bikini Sales for 2001–2004

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Sara Lee Corporation - SAGE Publications Inc · stores and independent stores at shopping malls. Fruit of the Loom was Sara Lee’s pri-mary competitor in the underwear category