Sara Lee’s Disaster in Bread

10 Nov , 2010  

This week Sara Lee announced that it was selling its bread business to Mexico-based baking giant Grupo Bimbo, for $959 million.

The sale is an embarrassment for Sara Lee.  According to the Financial Times, Sara Lee acquired the baking unit in 2001 when it bought Earthgrains Corporation for $2.8 billion, making this a fine example of the buy high and sell low approach.

This is not a good way to build company value.  Not surprisingly, Sara Lee’s stock has performed poorly for a very long time.  Ten years ago you could buy a share for about $20.  Today you can buy a share for about $15.

So what went wrong?

I suspect the problem was simple: optimism.  Back in 2001 I’m certain Sara Lee executives thought they could turn Earthgrains bread into a profitable, growing business.  As a result, they paid a generous price to acquire it.

The reality of the situation soon became clear: bread is fundamentally a very difficult business.  It is capital-intensive and very dependent on operational excellence, getting the right amount of bread to the right stores at just the right moment.  Profits are slim; apparently the Sara Lee unit recently had an operating margin of just 1.4%.

Faced with a difficult, low-margin and slow-growth business Sara Lee elected to give up and sell it off.

Of course, the Sara Lee team should have taken a hard look at the bread business before paying a generous price to buy it.

After this transaction closes, Sara Lee will be down to meats and coffee; the company will use the proceeds of the bread sale to buy back stock.  Unfortunately, meats and coffee are tough businesses, too.  A couple more sales and Sara Lee will simply vanish.

Sara Lee’s bread experience is an important lesson for anyone considering an acquisition.  Never assume you can dramatically improve a business; the fundamentals may well be the fundamentals.  Optimism can cost you a lot of money.

Leave a Reply


Conversation Across the Site

  • Todd { Thank you for this insight, Professor. Students rarely have any insight into the mind of a professor or teacher at any level. Come to think... }
  • Mark Sheldon { Very interesting. Thank you and I think your analysis is generally correct. The one thing I would add is that in a small zoom class... }
  • Marty { Ford , built for change ? This is the company Hank almost bankrupted by refusing to replace the model T }
  • toddholscher { If Trump had the charisma of Reagan, instead of Nixon, it would have been different. Trump was easy to vote against for enough people... this... }
  • Emita Hill { Sobering but all accurate. Happy Thanksgiving, Tim. }
  • Mark Goldman { Disagree wholeheartedly. National unity and bringing back civility to our country is most certainly a benefit -- and a strong one. Trump's pitch on law... }
  • Read more Comments »

Collaborate with Tim

Tim helps companies around the world build great brands. To schedule a program or event click here. To learn more about Tim’s books, click here.