Way UB’s cookie crumbled

I remember that we impertinent hacks of the industrial circuit of the late Eighties used to refer to the chairman of United Biscuits (UB), affectionately if not imaginatively, as Sir Hector MacBiscuit.

I relay this insight into the sophisticated wit of that period only to illustrate the cosiness with which we approached this important area of the UK foods industry. Most of us would have been aficionados of the children’s programme Hector’s House, and Sir Hector himself – now Lord Laing – seemed to be an avuncular figure, who believed in wider and deeper share ownership and high standards of corporate governance, and probably knew Mr Kipling socially.

It wasn’t, of course, fair to UB and its shareholders. Laing was a tough businessman, but somehow you expect tough businessmen to behave like Lord Hanson – wheeler-dealing in products such as tobacco (Imperial) and aggregates (London brick), rather than presiding over scrumptious bikkie brands such as McVitie’s.

Now we know that life is not necessarily any more comfortable in biscuits than bricks. Last week, UB gave the City an unpleasant surprise by announcing that its first-half profits had dived 60 per cent, the interim dividend had accordingly been slashed by 35 per cent and that American interests would have to be sold to limit the damage.

Lord Laing of MacBiscuit is no longer in the chair to answer shareholders’ questions about how this unhappy circumstance arose. But he apparently oversaw much during that period when we assumed he was a homely patriarch of British industry that has disunited UB today.

It would be grossly unfair to suggest that he was the man who broke UB – his successors have undoubtedly made bigger mistakes. However, UB’s recent history demonstrates the dangers of the UK food industry’s over-reaching ambition when it comes to dealings in the US.

It is a curious condition and far from confined to UB. A number of British foods companies have made unhappy moves across the Atlantic, and we should ask ourselves why this is.

But more of that in a moment. First, let’s examine the UB case history. At the root of UB’s problems lies the massive weight of Keebler – the US biscuits concern that UB acquired in 1974. The company has now been put up for sale in the wake of last week’s finger-baking exercise.

There is no doubt that Keebler was a success story. But the point about such success stories in business is knowing when they end. No one ever lives happily ever after in industry. So much so that a happy ending amounts to quitting while you’re ahead.

Keebler largely had a good Eighties under the guidance of chief executive officer Tom Garvin. Its distributive power harried the mighty Nabisco and PepsiCo. But the business was racing close to the limit. That is, it had to trade extremely high volumes or its heavy overhead structure would immediately start eroding margins. It only needed the market to change its characteristics in some kind of power-shift and Keebler would be exposed.

That power-shift occurred when PepsiCo and Proctor & Gamble started the “cookie wars” in the late Eighties, when P&G sought to buy a section of the market. Again, Keebler had a good war, but realised that it would have to spread its product base to survive any other margins assaults by its larger rivals.

With hindsight, its next move was the big mistake. UB, through Keebler, sank $130m (83m) into the US salty-snack manufacturing business and took PepsiCo on in one of the world’s most viciously competitive markets.

PepsiCo may have looked vulnerable at the time, but only in the sense that the American Pacific fleet sometimes looks vulnerable. It can still pack one hell of a punch. And it did.

By 1992, Keebler’s profits had slumped from more than 65m to less than 20m. Rationalisation programmes were put in place, Garvin was replaced and Keebler began a three-year schedule for recovery.

Then fate kicked away its crutches. New products from other rivals took away much of the traditional snack market. Early this year, sales plunged. Keebler will be lucky to break even this year on sales of $1.5bn (962m).

UB has been left reeling, and chief executive Eric Nicoli (appointed 1991) is being asked whether Keebler was held on to for too long. In other words, the action being taken now may be perceived as too little, far too late.

Laing’s old fiefdom must be vulnerable to a takeover approach. There are those who say that as much as 50p of UB’s approximate 300p share price is accounted for by bid premium. With the disposal of Keebler, it will rid itself of this poison pill.

Hanson, whose eponymous chairman once said: “Hector will get his brains beaten out in the US”, is busy elsewhere these days. Nabisco, resettled after the highly leveraged mega-takeover by KKR, may find it attractive. As might Cadbury.

But the question remains: why do the British find American foods markets so attractive, but subsequently find them so difficult to manage?

I am particularly thinking of Grand Metropolitan’s experience with Pillsbury – owner of Burger King and Häagen-Dazs among other things. Costing $5bn (3.2bn), it has, for all its qualities, proved much more of a burden than anyone at GrandMet could have expected.

Today, it is largely sorted, but still leaves a legacy of heavy gearing at GrandMet that handicaps the company’s competitiveness. And that means that at present GrandMet is unable to takeover UB. What goes around, comes around, as they say.

One problem may be that these companies endeavour to run their American interests from over here. This is not strictly true – Garvin would have considered himself in charge, as would the team that managed Pillsbury for GrandMet. But, in the cases of UB and GrandMet, there has never been any psychological doubt as to where their HQs are situated: in good old Blighty. That is not good enough for a market as competitive as US foods.

In this respect, one fears for Reckitt & Colman. It has struggled to shed itself of its UK foods and drinks brands, in order to get into US household products.

To really work, a company needs managers of peer group status on both sides of the Atlantic. And who is the model for that? Why, Hanson, whose Lords Hanson and White bestride the Atlantic like Colossi. Perhaps that is why the former formed the view, earlier than most, that Hector’s House would burn its biscuits in the US.

George Pitcher is joint managing director of media consultancy Luther Pendragon.