THE FLY IN CAMPBELL'S SOUP Don't worry, it won't eat much, said the waiter. Trouble is, competitors are slurping lots of the soup sovereign's business. Campbell's response is instructive.
(FORTUNE Magazine) – ANTHONY J.F. O'Reilly knew when he was licked. The top tomato at H.J. Heinz told stockholders three years ago that he would not return to the brand-name soup business. For all its legendary prowess in ketchup, Heinz took on soup king Campbell in the late Sixties only to get gumboed, leaving O'Reilly convinced years later that Campbell's hold on the market was ''unshakable.'' Perhaps he should reconsider. That hold keeps slipping, and Gordon McGovern, Campbell's chief executive, is trying hard to get a grip on things. In January he gave notice to his troops: ''Our share of the market is being challenged, and we must react aggressively for long-term survival.'' In the geography of brands, Campbell's Soup is a continent: It accounts for 30% of the company's sales and even more of the profits. But widening streams of competition have eroded Campbell's U.S. market share from more than 80% in the early Seventies to about 60%. The usurpers hail from all directions: Progresso of St. Louis, the Anglo-Dutch-owned Thomas J. Lipton, plus Japanese noodle makers Maruchan and Nissin Foods. Brands often lose share because their owners get complacent. But Campbell has deployed every weapon in the marketing arsenal -- advertising, promotion, and new products. Two years ago the company proclaimed ''The Year of Soup'' and flexed its muscle. Yet its soup business suffered tonnage declines, bad news in a high-volume operation where unit costs often swell when volume shrinks. CAMPBELL'S FRUSTRATIONS, as well as its latest moves, may signal a need for packaged goods companies to reconsider their tactics. The weapon of choice in the push-and-shove for shelf space has been the line extension -- a product variation that uses the same brand name. For example, Nabisco Brands added a wing to A-1 Steak Sauce by introducing a new A-1 Poultry sauce. Manufacturers have been spawning variants in an attempt to please every conceivable customer preference and deny a sliver of business to the competition. But when it comes to total revenue, the extensions may now be acting as a divisor rather than a multiplier. In the past two years Campbell launched a whole flotilla of extensions: Golden Classics for the premium-price segment (for example, sirloin beef soup with potatoes and mushrooms at 89 cents a can); Campbell Cup, a belated invader of Lipton's soup-in-a-cup turf; Special Request for those who want reduced sodium; Creamy Natural for the additive-averse; and most recently, Home Cookin', a hearty canned soup in the fast-growing ready-to-serve category. Along with all those roll-outs, Campbell spent $204 million last year hawking soup, at least five times more than its nearest competitor. So why did the big offensive fail? Possibly because of the diminishing reach of network TV advertising in an age of cable and VCRs; it has become harder to pull products through stores with advertising. But something else was at work: All those new variations have been cannibalizing sales of old ones. Along with a decline in overall market share, Campbell has taken heavy blows in some old standbys. Unit sales of the famous condensed soup, known as the red and white line in the industry, fell 5% in 1987 for the second year in a row. Chunky, a ready-to-eat soup, dropped 6% in units last year. Accordingly, chief McGovern has eased off on the new-product accelerator. Campbell plans to spend more money promoting the basic soup lines and introducing soups bearing totally different brand names. Don't overestimate McGovern's troubles. In the fiscal year that ended last July, Campbell earned $247.3 million on sales of $4.5 billion. Its balance sheet is one of the strongest in the industry. But sales in the USA division, which includes most of the soup, declined 1% last year. In the first six ) months of the new fiscal year they are up at only a 3.2% annual rate, a decline in inflation-adjusted terms. Campbell's profit-growth rates, return on shareholders' equity, and return on invested capital are below average for its industry. McGovern, usually accessible to the media, refused to talk to FORTUNE. He probably feels snakebit. Since taking over in December 1980, he has lit more fires under his lieutenants than a Boy Scout on bivouac. The uninspired outfit he inherited has been an innovative powerhouse in the past three years, pumping out more than 500 new products designed to lessen its reliance on soup. But McGovern has spent an equal amount of time putting fires out. While the company focused on innovation, it took its eye off the pot elsewhere. McGovern reversed a sales decline at Pepperidge Farm only to find the juice business going sour. Then he had to reel in Mrs. Paul's plunging seafood business. When the latest soup setbacks demanded attention, Campbell was battling for position in such overcrowded categories as frozen food and spaghetti sauce. CAMPBELL'S SOUP business is facing something it hasn't since H.J. Heinz quit making soup under its own name: a well-bankrolled head-to-head competitor. The challenger is Progresso, a brand that Pet Inc., a division of IC Industries, bought in late 1986 from Ogden Corp. An experienced packaged goods marketer whose other products include Old El Paso Mexican foods and Whitman Chocolates, Pet found itself with hidden treasure -- an undermarketed No. 2 brand. Says Ray Morris, Pet's CEO: ''Going in, we were aware of the job Progresso had done in developing some damn good soups. That strengthened our belief that we could do something.'' Pet dumped Progresso's sales force for its own, increased advertising, brought out six new flavors, and went after more customers for its single-serving size. Sales soared nearly 25% last year. Boasts Morris: ''We've taken share away from Campbell's Chunky and Home Cookin'.'' To bring Campbell USA back to glory, McGovern is giving the division president, Herbert Baum, a free hand and a big whip. Baum has reportedly budgeted a 60% increase in advertising outlays and served notice to his half- dozen agencies that the company wants better creative work. Since ads alone cannot win back business, important work has to be done at the stores. Baum has been a veritable sales commando, dropping in on supermarket executives to solicit ideas and promote the company's revamped objectives. ''Talk about a - workaholic,'' marvels one trade customer. ''He's a take-charge guy, and he's got a handle on the business.'' Baum has also been wading into local and regional battles with fistfuls of cash and a willingness to use it. That is a major shift. Like Procter & Gamble, Campbell had always believed in the one-size-fits-all approach to product promotion. It would discount a case of tomato soup, say, 38 cents nationwide, even though that might make marketing sense in some regions and not in others. Take it or leave it. Rivals capitalized on this arrogance and cut lucrative deals with grocers on a local level. Now Campbell has set up regional slush funds that can be spent to shore up holes in the red and white line, for instance, or counter a deal by Lipton. In some areas it is gunning for Progresso by offering to redeem that company's cents-off coupons for cans of Campbell's. The company is warring differently in the aisles too. Although grocers are at liberty to display products as they see fit, most follow layouts, or ''plannograms,'' provided by the manufacturers. Campbell used to play hide- and-seek with its diverse flavors, spreading them around in an effort to lure shoppers to less popular varieties. Consumers can now locate their favorites more easily. For example, Campbell at last has its chickens in a row: chicken noodle next to chicken gumbo next to chicken rice and so on. As with most products, 20% of the flavors account for 80% of the business. The top three sellers: chicken noodle, tomato, and cream of mushroom. LINE EXTENSION flourished because the price and risks of establishing a new brand had come to seem prohibitive. The name Campbell is recognized by every grocery shopper. Logically, the name could sell anything edible. The red and white soup label stood alone for 90 years before the company added Chunky in 1970. Subsequent add-on products haven't produced significant add-on sales. The company's hottest ticket right now is Campbell's Home Cookin', not quite as chunky as Chunky. But as Home Cookin' ascends, Chunky descends, and some consumers can't tell the two apart. Sales of Campbell's other recent entries, Golden Classics and Creamy Natural, are not as zesty. ''It's that classic strategy of competing with yourself,'' says Al Ries, chairman of the marketing agency Trout & Ries. ''We usually think of 40% share being the upper limit for a single brand. When your appetite goes beyond 40%, you've got to think of more than one brand.'' Campbell isn't alone in its predicament. Last year a number of leading labels lost a little ground, including Maxwell House Coffee, Kellogg's cereals, and Ralston's dog food. Says Laurel Cutler, vice chairman of FCB/Leber Katz Partners, one of Campbell's ad agencies: ''Line extension is an exhausted strategy.'' Campbell is prepared to haul in some of its overextended extensions. It has removed Soup for One from the shelves. To expand the market rather than subdivide it, the company is beginning to flank the flagship with new brands. Among them: a ready-to-serve soup sold under the Prego label to fight off Italian-style Progresso; a newly acquired Caribbean-Hispanic label called Casera to challenge Goya Foods, the most popular Hispanic brand; and a Pepperidge Farm brand of ultrafancy soups, at $2 a can and more. The shopper may not even know these products are made by Campbell. What Campbell did with Prego spaghetti sauce shows what it can do in soup, if all goes well. After losing four share points last year to Chesebrough- Pond's Ragu brand, the company trashed a poorly conceived line extension and refocused its attention on the brand's basic selling proposition: homemade taste in a thick sauce, accentuated by spices clearly visible in the jar. After spending virtually nothing on the original product last year -- all the money went to the line extension -- Campbell is spending heavily on the mother ship. Prego picked up nearly five share points in a month at Ragu's expense. R&D could provide another path to a bigger bowl of business. The tin can may be doomed, packaging experts say. How Campbell weans itself from a container developed for armies in Napoleon's day -- a part of the brand's equity and literally of our culture -- will make quite a difference to its future. Campbell is already test-marketing Chunky in a nonrefrigerated, microwavable plastic bowl, as well as a frozen-soup-with-a-snack called Souper Combo. THIS SCARCELY bespeaks a management ready to cede more territory. ''To me there are companies that accept declines and then there is Campbell,'' says John McMillin, a security analyst at Prudential-Bache. ''The point is that the company has been very aggressive.'' Most analysts have Campbell written in for a 20% rise in earnings per share this year, thanks partly to a lower tax rate. Those estimates assume that Gordon McGovern has the remedy for what ails the company. The cure, obviously, includes a lot more soup.
CHART: INVESTOR'S SNAPSHOT CAMPBELL SOUP
SALES (latest four quarters) $4.6 BILLION CHANGE FROM YEAR EARLIER UP 5%
NET PROFIT $265.2 MILLION CHANGE UP 16%
RETURN ON COMMON STOCKHOLDERS' EQUITY 14% FIVE-YEAR AVERAGE 14%
STOCK PRICE RANGE (last 12 months) $43.25-$22.75
RECENT SHARE PRICE $29.50
PRICE/EARNINGS MULTIPLE 10
TOTAL RETURN TO INVESTORS (12 months to 4/8) -14%