marketing

read the essay and answer the questions in the picture

asap urgent

Newell’s Acquisition of Rubbermaid: An Unbelievable Disappointment

J
ohn McDonough, CEO of Newell, specialized in buying small marginal firms and improving their operations. In ten years he bought seventy-five such firms and polished them by eliminating poorer products, employees, and factories, and by stressing customer service. This format began to be called “Newellizing.” It was hardly surprising that most of the acquisitions had strong brand names but mediocre customer service. Rubbermaid fit this mode, though it was by far the biggest acquisition and would nearly double Newell’s sales.

Rubbermaid, manufacturer and marketer of high-volume, branded plastic and rubber consumer products and toys, had been a darling of investors and academics alike. For ten years in a row, it placed in the Fortune survey of “America’s Most Admired Corporations,” and it was No. 1 in both 1993 and 1994. It was ranked as the second most powerful brand in a Baylor University study of consumer goodwill, and received the Thomas Edison Award for developing products to make people’s lives better. Under CEO Stanley Gault, Rubbermaid’s emphasis on innovation often resulted in a new product every day, thereby helping the stock routinely to return 25 percent annually.

Surprisingly, by the middle 1990s, Rubbermaid began faltering, partly because of inability to meet the service demands of Wal-Mart, a major customer. Rubbermaid stock plummeted 40 percent from the 1992 high, leaving it ripe for a takeover. Newell Company acquired Rubbermaid on March 24, 1999, expecting to turn it around. But then Newell had to wonder…

THE ACQUISITION AND WOLFGANG SCHMITT

Former Rubbermaid CEO Wolfgang Schmitt felt a cloak of apprehension settling over him in May 1999. It was only two months after the merger with Newell had been completed, and things were not going as he expected.

Schmitt had become CEO a year after the legendary Stanley Gault retired in 1991. Gault had returned in 1980 to his hometown of Wooster, Ohio (Rubbermaid headquarters) after more than thirty-one years with the General Electric Company. During Gault’s tenure, Rubbermaid stock split four times, to its stockholders’ delight. It was a tough act to follow.

Wolfgang often thought about this, but he was certainly a worthy successor to Gault. He had spent all his working life with Rubbermaid after graduating in 1966 from Otterbein College in Westerville, Ohio (about sixty miles from Wooster) with a degree in economics and business administration. A recruiter visiting the campus convinced him to join Rubbermaid, a rapidly growing company. He started as a management trainee, and in twenty-seven years worked his way up the corporate ranks to become chairman of the board and chief executive officer in 1993. He was proud of this accomplishment and thought his experience must be an inspiration to young people in the company. Any one of them could dream of becoming CEO, with hard work and loyalty. A significant highlight of his professional life came when he was invited back to Otterbein in November 1997 to inaugurate its Distinguished Executive Lecture Series.

During Schmitt’s reign, Rubbermaid reached $2 billion in sales in 1994. When it celebrated its 75-year anniversary a year later, Schmitt set the company’s sights on $4 billion in sales for the turn of the century. To do this, he knew it had to become a truly global company, and so he instigated four foreign acquisitions that year.

He knew he was an effective CEO. When the Newell Company, a slightly larger multinational firm, expressed an interest in merging, Schmitt thought he owed it to his stockholders, and to himself, to pursue this. After all, the two firms’ houseware and hardware products and marketing efforts were compatible, and their combination would result in a $7-billion-a-year consumer products giant. Aiding Schmitt’s decision to merge was a nice severance guarantee of $12 million after taxes in addition to his stock options. While Newell’s CEO John McDonough would assume the CEO position of the merged corporation, Schmitt was to be a vice chairman and would work closely with McDonough to ensure the smooth merger and to help mold the new company.

Now, barely two months later, Schmitt had been shunted aside. He did not have an office at headquarters, his name was not listed on a new report of the seven highest-paid executives, and he was not even included in the list of directors reported to the Securities and Exchange Commission (SEC). He couldn’t help feeling betrayed about no longer having a role in the operations of the company, after he had been so instrumental in bringing about the merger. At 55 years of age, he still had many productive years left. More than this, there was the principle of the thing: This was like a kick in the teeth.

But he was not alone. The presidents of three of Rubbermaid’s five divisions—Home Products, Little Tikes, Graco-Century, Curver, and Commercial Products—had already been replaced since the merger. Furthermore, in the Home Products division, only two of the top eight executives were still there.

NEWELL’S ASSESSMENT OF RUBBERMAID

If John McDonough of Newell was so unhappy with current Rubbermaid management and operations, why did he buy Rubbermaid in the first place—and for $6.3 billion, more than twice current sales? At a shareholders’ meeting a few months after the acquisition, McDonough tried to explain. He told them that Rubbermaid was a troubled company, but that once it was pulled into the revered operations of Newell, it could be great again.

1

The shareholders were told that while jobs were being cut, the operations would be stronger in the long run. As a strength, McDonough noted that Rubbermaid commanded 94 percent brand loyalty and generated great customer traffic in stores. But Rubbermaid executives needed to slash unnecessary costs, introduce robotics, and reduce product variety. For example, was it necessary to have dozens of the same type of wastebasket?

Still, McDonough saw poor customer service as the biggest deficiency of Rubbermaid, the most unacceptable aspect of its operation, and the one that Newell could most easily correct. After all, Newell had achieved a 98.5 percent on-time delivery rate in dealings with Wal-Mart. He would see that Rubbermaid was brought up to this same performance standard.

RUBBERMAID’S CUSTOMER SERVICE PROBLEMS

Perhaps a declining commitment to customer service dated back to the retirement of Gault, though Schmitt would likely dispute that. Customer service can erode without being obvious to top management. While some customers complain, many others simply switch their business to competitors. Still, Rubbermaid’s lapses in customer service should have been obvious for years. After all, Wal-Mart was not tolerant with vendors not meeting its standards. When McDonough’s people began digging deeper into Rubbermaid’s operations, they found that the company wasn’t even measuring customer service. This deficiency is almost the kiss of death when dealing with major retailers.

Up to the mid-1990s, about 15 percent of Rubbermaid’s $2 billion-plus revenues came from Wal-Mart. Rubbermaid had an impressive earnings growth of at least 15 percent a year to go along with 20 percent operating margins, much of this due to the generous space Wal-Mart gave its plastic and rubber products. This was to change abruptly.

In 1995 Wal-Mart refused to let Rubbermaid pass on much of its higher raw-material costs, and began taking shelf space away and giving it to smaller competitors who undersold Rubbermaid. This resulted in a major earnings drop (see 

Table 8.1

) that forced Rubbermaid to shut nine facilities and cut 9 percent of its 14,000 employees. “When you hitch your wagon to a star, you are at the mercy of that star.”

2

TABLE 8.1 Rubbermaid Sales and Earnings, 1992–1997

Wal-Mart not only complained about poor deliveries but began taking more drastic action. Each day Wal-Mart gives suppliers such as Newell a two-hour time slot in which their trucks can deliver orders placed twenty-four hours before. Should the supplier miss the deadline, it pays Wal-Mart for every dollar of lost margin. Now such a fast replenishment of orders required that factories be tied in with Wal-Mart’s computers. Rubbermaid began installing software to do this in 1996 and had spent $62 million by 1999, but still was often not even achieving 80 percent on-time delivery service. This was unacceptable to Wal-Mart, and returns and fines for poor service rose to 4.4 percent of sales in 1998.

3

 Finally, Wal-Mart purged most of its stores of Rubbermaid’s Little Tikes toy line, giving the space to a competitor, Fisher Price. See the following Information Box for a discussion of the power of a giant retailer and the demands it can make.

Wal-Mart had such a high regard for Newell’s customer service that, upon hearing of the impending merger, it again began carrying Little Tikes toys. McDonough vowed to get Rubbermaid’s on-time delivery rate of 80 percent up to Newell’s 98.5 percent, and he began ripping out Rubbermaid’s computer system and writing off the entire $62 million. In addition, McDonough claimed to be able to squeeze $350 million of costs out of Rubbermaid, which would double its operating income.

4

AFTER THE MERGER

When Newell did not quickly turn Rubbermaid around and Newellize it, stockholders were shocked and disappointed. In a time of rising stock prices, Newell Rubbermaid’s shares plunged 20 percent in one day in September 1999 as the now-giant consumer goods firm warned that third-quarter earnings would fall short of expectations. This was only the latest in a string of negatives, and Newell Rubbermaid’s stock was to lose almost half of its value since the Rubbermaid acquisition in March. It blamed lower-than-expected sales of Rubbermaid’s plastic containers and Little Tikes toys. Still, company officials maintained that “the integration process remains on plan.”

6

INFORMATION BOX

THE DEMANDS OF A GIANT RETAILER

Giant retailers, especially the big discount houses, stand in a power position relative to their vendors. Part of this power lies in their providing efficient access to the marketplace. Imagine the problems of a large consumer goods manufacturer in trying to deal with thousands of small retailers rather than the few big firms that dominate their markets. These giant firms can account for 50 percent and more of many manufacturers’ sales. However, if such a major customer is lost or not completely satisfied, a vendor’s viability can be in jeopardy.

Retailers like Wal-Mart make full use of their power position. Take paying of invoices, for example. Many vendors give a 2 percent discount if bills are paid within ten days instead of thirty. Wal-Mart routinely pays its bills closer to thirty days and still takes the 2 percent discount. Wal-Mart has also led in “partnering” with its vendors. This partnering really means that vendors have to pick up more of the inventory management and merchandising costs associated with Wal-Mart stores, with most of the costs involved in providing fast replenishment so that the stores can maintain lean stocks without losing customer sales through stockouts.

So-called slotting fees are common in the supermarket industry, with manufacturers paying to get things on store shelves. It was estimated that some $9 billion annually changed hands in private, unwritten deals between grocery retailers and food and consumer goods manufacturers.

5

The following is an example of a slotting fee stipulation of a supermarket chain:

An item authorized will remain authorized for a minimum of six months (as long as the basic cost does not go up substantially). Many times it is the “slotting fee” that determines whether or not we authorize an item.

Given the coercive power of a big retailer, a vendor is practically forced to meet their demands no matter what the cost.

Do you think a big manufacturer, such as Coca-Cola, can be coerced by a big retailer? Why or why not? What might determine the extent of retailer coercion? Can a manufacturer coerce a retailer?

5 John S. Long, “Specialty Items to Drive New Market,” Cleveland Plain Dealer, October 6, 1999, p. 4-F.

A month later, coinciding with a Wal-Mart announcement that it was expanding vigorously in Europe, Newell Rubbermaid said it would focus on expanding overseas to serve domestic retailers who were moving abroad. The company had been getting a quarter of its sales outside the United States. “Our customers are going international,” McDonough said. “We have the opportunity to follow them. It’s a once-in-a-lifetime opportunity.”

7

The company also maintained that it had sharply reduced the number of late shipments of Rubbermaid products and expected to have 98 percent of orders shipped on time either in the present quarter or next.

8

Was this a wise merger? Did Newell pay too much for a faltering Rubbermaid? It was hardly likely in the first year of a merger that management would admit to maybe having made a mistake. But stockholders were betting with their money. Meantime, Wolfgang Schmitt pondered his exile and the erosion of value of his stock options.

DISAPPOINTMENT

John McDonough resigned as CEO in November 2000, after Newell Rubbermaid cut profit forecasts three times in the year after the Rubbermaid acquisition. Joseph Galli, a “master marketer,” as Forbes proclaimed him, and the first outsider in the company’s 99-year history, became the chief executive in January 2001.

Newell needed a rescuer. McDonough, whose forte was buying underperforming companies and Newellizing them, had met his match. This was the third year of flat or falling profits. For 2001, sales were off 2.4 percent and net income down 42 percent, with share prices reflecting this. The $6 billion purchase of Rubbermaid, its biggest deal, had brought Newell to its knees, and Rubbermaid remained the sickest division.

JOSEPH GALLI

The 43-year-old Galli in nineteen years at Black & Decker had built a reputation as a marketing wunderkind, a brand builder. He was running the company’s crown jewel, the DeWalt brand, a high-margin line of power tools for skilled tradesmen and consumer do-it-yourselfers. Galli recruited teams of college graduates, dubbed “swarm teams,” to be super-missionary salespeople hawking the DeWalt brand not only at store openings but at union halls and Nascar races as well. See the Information Box: Missionary Salespeople.

INFORMATION BOX

MISSIONARY SALESPEOPLE

Missionary or supporting salespeople do not normally try to secure orders. They are used by manufacturers to provide specialized services and create goodwill and more dealer push. They work with dealers, perhaps to develop point-of-service displays, train dealer salespeople to do a better job of selling the product, provide better communication and rapport between distributor and manufacturer, and in general aggressively promote the brand. They are particularly important in selling to self-service outlets, such as supermarkets and discount stores, where there are no retail clerks selling to customers, so that displays, shelf space, and in-stock conditions have to be the selling tools.

Galli’s super-missionaries or swarm teams were small armies of energetic college recruits who also worked Nascar races, trade shows, new store openings, and the like. A typical super-missionary was given the use of a new Ford Explorer Sport Trac, a territory of 14 Wal-Marts, and a mission: Make sure Newell’s pens, bowls, buckets, and blinds are neatly displayed, priced right, and piled high in prominent spots.

9

Evaluate this statement: “Good customer service doesn’t do you much good, but poor customer service can kill you.”

9 Bruce Upbin, “Rebirth of a Salesman,” Forbes, October 1, 2001, p. 100.

Galli brought amazing growth to DeWalt, pushing $60 million in sales in 1992 to more than $1 billion by 1999, in the process providing 64 percent of the company’s $4.6 billion sales. By age 38, Galli was the second-highest-paid executive at Black & Decker and in line for the top position, except that the CEO was not ready to step down anytime soon.

Galli spent his first three months at Newell Rubbermaid traveling the world and meeting every manager he could. His predecessor, John McDonough, was a diabetic whose leg was amputated in 1999 and who spent almost all his time at company headquarters in Beloit, Wisconsin; in his first six months, Galli spent just thirty-six hours there.

Newell hadn’t run a national ad campaign on television in three years. In 2000, the firm spent 0.7 percent on research and development. (Even conservative Colgate spent 2 percent on the innovation of adding a new color of dish detergent.) Sales of the Rubbermaid unit had declined every year since 1998 and were now at $1.8 billion. No-name rivals were taking business away in major retailers such as Wal-Mart, Home Depot, Target, and Bed Bath & Beyond.

Galli tripled spending on new product development for Rubbermaid. He promoted the brand on prime-time TV for the first time in three years with a budget of $15 million, more than was spent in the previous ten years combined. He also budgeted $40 million for his swarm teams.

10

Early in 2003, Galli announced plans to move the headquarters of Newell Rubbermaid from the “cornfields surrounding the hometown of Freeport, Illinois” to Atlanta, “the city of the future,” as Galli depicted it. He thought moving would be a signal that big changes were happening inside and out. He saw that the key to a new image was being in a city that symbolized change and innovation. It didn’t hurt that Atlanta offered a sweet deal, potentially giving the company up to $25 million in tax breaks, as well as $1.3 million in cash for land and equipment purchases, as well as other tax relief.

11

 Could it be that Newell Rubbermaid was on the verge of a turnaround?

ANALYSIS

This case illustrates not only the risks of dealing with behemoth customers, but also the rewards if you can satisfy their demands. After all, in better days Newell Rubbermaid was prepared to follow Wal-Mart to Europe and be a prime supplier of its stores there. But a vendor has to have the commitment and ability to meet stringent requirements. If a 24-hour delivery cycle is demanded, the vendor must achieve this regardless of costs. If selling prices are to be pared to the bone, efficiency must somehow be jacked up and production costs pruned, or else profitability may have to be sacrificed even to the point of extreme concern. Otherwise, the vendor can be replaced.

The alternative? To be content with far less revenue and a host of smaller accounts, or else to have such a brand name as to be partly insulated from price competition. Rubbermaid thought it had this, due to its public accolades in past years. Perhaps this contributed to its apathy regarding its delivery service. But Wal-Mart was hardly impressed with the superiority of this brand’s products, which cost more than alternative suppliers’ and could not be delivered on time.

But note that improving service and shortening replenishment time are not easily or cheaply done. Rubbermaid spent $62 million on computer technology to enable it to meet Wal-Mart’s demands, but it was not enough. Strict control of warehouse inventories and production schedules is essential. The vendor will need to carry more of the inventory burden traditionally assumed by the retailer and incur additional expenses and investment for more manpower and trucks and other equipment. Perhaps the most damning indictment of Rubbermaid’s service deficiencies was how long these continued without being corrected. The problem initially surfaced in 1995, but by 1999 on-time deliveries had still not improved appreciably. What was Rubbermaid top management doing all this time? Wolfgang Schmitt can hardly escape the indictment that in almost five years he had not corrected this serious problem with the most important customer.

The eagerness to merge that we saw in this case, by both McDonough of Newell and Wolfgang Schmitt of Rubbermaid, may not always be in the best interests of shareholders, and certainly not of employees. Communities also suffer, as plants are closed and headquarters moved. It may even not be in the best interest of the executives involved, as Schmitt realized to his dismay, despite taking home a sizable severance package. But is this enough to make up for losing the power and prestige of a top management position, and all the perks that go with it? And what if the value of the stock in the severance package crashes, as Schmitt found to his further dismay? And McDonough in his stock holdings?

In this era of merger mania, a more sober appraisal is needed by many firms. Not all mergers are in the best interests of both parties. Too often a firm pays too much to acquire another firm, as we saw in an extreme example in the previous chapter where Daimler bought Chrysler for $36 billion and nine years later got rid of it for $680 million. Frequently the glowing prospects do not work out.

When an acquisition finally turns out to be unwise, especially where too much is paid for the acquired firm, the conclusion may be that someone fumbled the homework, that the research and investigation of the firm to be acquired was hasty, biased, or downright incompetent. Admittedly, in some cases several suitors may be bidding for the same acquisition candidate, and this then becomes a contest: Who will make the winning bid? The only beneficiaries to such a situation—besides the consultants, lawyers, and investment bankers—are the shareholders of the firm to be acquired.

UPDATE

Galli’s 4½-year tenure did not provide any breakthrough in sales, profits, and stock prices. Newell Rubbmermaid’s sales declined from $6.9 billion in 2000 to $6.3 billion in 2005. The board finally lost patience with its underperforming chief. On October 18, 2005, Newell announced that Joseph Galli resigned by “mutual agreement.”

12

The board appointed Mark Ketchum, a 33-year veteran of Proctor & Gamble, as Newell Rubbermaid’s new CEO. Ketchum embarked on a plan to focus the company’s disparate collection of brands on a single, global mission—listening to end consumers and innovating. He retired as CEO of Newell Rubbermaid in early 2011 after a difficult five-year effort. When he left, the share price was lower than when he took the helm ($23.73 on October 17, 2005, the day Ketchum became interim CEO; $18.08 on January 11, 2011). Net sales declined from $6.3 billion in 2005 to $5.8 billion in 2010, but the company’s gross profit margins (net sales less cost of products sold) improved almost 8 percentage points. The improvement was largely attributable to cost cuts. The dividend was cut twice, extensive layoffs were ordered, and businesses producing about $3 billion a year of commoditized goods were shed.

13

 Not a stellar performance, but not the losses experienced during Galli’s tenure. Michael Polk, former president of global foods, home and personal care at Unilever, became Newell Rubbermaid’s CEO July 18, 2011.

14

 Could he continue Ketchum’s slow turnaround, or even accelerate it?

Invitation to Make Your Own Analysis and Conclusions

What went wrong with the Rubbermaid acquisition? Why couldn’t it be corrected?

WHAT WE CAN LEARN

Customer Service Is Vital in Dealing with Big Customers

We saw in this case the consequences of not being able to meet the service demands of Wal-Mart. A vendor’s very viability may depend on somehow gearing up to meet the service expectations. This should be a top priority if such a customer is not to be lost. Correcting the situation should be a matter of weeks or months, and not years.

A Well-Known Brand Name Does Not Always Compensate for Higher Prices or Poor Service When Dealing with Big Retailers

Generally we think of a well-respected brand name as giving the vendor certain liberties, of insulating the vendor at least somewhat from vicious price competition, and even excusing the vendor from some service standards such as prompt and dependable delivery. After all, a respected brand name gives an image of quality, which lesser brands do not have, as well as an assured body of loyal customers.

Wal-Mart’s dealings with Rubbermaid before the merger certainly disprove that notion. How can this be? It still becomes a matter of power position. Not having Rubbermaid, or Little Tikes toys, was hardly damaging to Wal-Mart with its eager alternative suppliers. But the loss of Wal-Mart, even only the partial loss of being given less shelf space, was serious for Rubbermaid.

The Positive Aspects of Organizational Restructuring for Acquisitions Are Mixed

The idea of restructuring generally means downsizing. Some assets or corporate divisions may be sold off or eliminated, and the remaining organization thereby streamlined. This usually means layoffs, plant closings, and headquarter relocations. In Rubbermaid’s case, the small Ohio town of Wooster faced the loss of its headquarters and some 3,000 jobs. Of course, management’s defense always is that while jobs are being cut, the operations will be stronger in the long run—perhaps, but not always.

Where an organization has become fat and inefficient with layers of bureaucracy, some pruning of personnel and operations is necessary. But how much is too much, and how much is not enough? Certainly those personnel who are not willing to accept change may have to be let go. Weak persons and operations that show little probability of improvement need to be cut, just as the athlete who can’t perform up to expectations can hardly be carried. Still, it is usually better to wait for sufficient information on the “why” of poor performance before assigning blame for unsatisfactory operational results.

Periodic Housecleaning Produces Competitive Health

In order to minimize the buildup of deadwood, all aspects of an organization periodically ought to be objectively appraised. Weak products and operations should be pruned unless solid justification exists for keeping them. Such justification might include good growth prospects or complementing other products and operations or even providing a desired customer service. In particular, staff and headquarters personnel and functions should be scrutinized, perhaps every five years, with the objective of weeding out the redundant and superfluous. Most important, these evaluations should be done objectively, with decisive actions taken where needed. While layoffs may result, they sometimes can be avoided by suitable transfers.

Going back to Rubbermaid, the five-year-long tolerance of little improvement in customer service was inexcusable, and one would think that heads should roll (as undoubtedly some did—and quickly—when Newell took over).

Is There Life without Wal-Mart for a Big Mass-Market Consumer Goods Manufacturer?

Can such a large manufacturer be strong and profitable without selling to the giant retailers? Certainly other distribution channels are available for reaching consumers, such as smaller retailers, different types of retailers, wholesalers, and the Internet. For smaller manufacturers, some of these are viable alternatives to Wal-Mart, Target, Kmart, and the various large department store corporations.

Newell’s and Rubbermaid’s products were diversified but still geared to rather pedestrian household and hardware consumer use, hardly the grist to create a fashion or fad demand. A limited distribution strategy, such as through boutiques, would hardly produce sufficient sales volume. Only the mega-retailers could provide the mass distribution and sales volume needed. Of course, Wal-Mart was not the only large retailer, but it was the biggest. Kmart, Target, and the chain department stores were alternatives. But these tended to be just as demanding as Wal-Mart. This suggests that somehow the demands of giant retailers have to be catered to, regardless of costs or inclinations, by firms like Newell and Rubbermaid.

Missionary Salespeople Can Enhance Customer Service in Dealing with Large Retailers

Many vendors are realizing this today, and such sales-support staff are frequently used to provide the service, rapport, and feedback desirable in dealing with these most important clients. The vendor that provides the best such support may well win out over competitors. Furthermore, such missionaries may alert the vendor to emerging problems or competitive situations that need to be countered. Swarm teams like Galli’s can be a powerful tool in winning the battle for shelf space. But they do not guarantee success, as Galli found in his 4½-year stint as Newell CEO.

Once the Growth Mode Is Lost, It Is Difficult to Win Back

Newell and its albatross acquisition, Rubbermaid, certainly are examples of this. Both were high flying in the early 1990s, but even Galli, a hot-shot marketer with his previous firm, had not been able to turn Newell Rubbermaid around before he was ousted in 2005.