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Case 33

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Thomas J. Lipton, Inc.

In early September 1980, Don Logan was contemplating the poor reception given to the latest changes in product line profit statements and the measures by which product line financial performance was evaluated. As associate director of financial analysis for Thomas J. Lipton, Inc., Mr. Logan had been the main advocate for the changes. Now he was responsible for insuring a smooth transition to the new system. Mr. Logan's involvement in revising the financial statements began in June 1980 when he proposed that product line profit and loss statements (P&Ls) should be adjusted for inflation. In addition, he proposed that certain corporate expenses

be allocated to individual products and that product line P&Ls contain a capital charge for the fixed assets and working capital employed by product lines. He felt that the proposed P&Ls would measure the real flow of resources associated with each product line, giving a more meaningful assessment of the line's profitability and leading to better decisions by product managers. Allocating assets among product lines would also allow them to be evaluated on the basis of inflationadjusted return on investment rather than the less informative return on sales. Lipton's senior management agreed with the proposed changes and decided that 1981 would be a trial year for the new P&Ls. After working with his staff through the summer implementing the new system, Mr. Logan realized that many of the product managers, whose performance would be measured by the new system, did not understand it. Some of the product managers questioned the principles involved. Others wondered how the new system would affect their particular products. The product managers' concerns caused Mr. Logan to reconsider the entire situation. FOOD PROCESSING INDUSTRY The food processing industry in 1980 was mature and very competitive. During the 1970s, demand for food had remained constant and consumers had become more cost conscious. Due to limited opportunities for expanding existing product lines 212

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THorues J. LrproN. INc.

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and the risks associated with introducing new products, acquisitions represented a relatively safe means of growing. Many food companies pursued policies of acquisition and, as a result, had grown substantially while diversifying their product lines. As the industry became more concentrated, smaller firms found it harder to compete against larger diversified companies. The size and performance of the major U.S. food companies varied significantly. In1979, the industry leader was Beatrice Foods, with $7.5 billion in sales, followed by Kraft, with $6.5 billion. Exhibit 33-1 presents a ranking by 1979 sales of 22 major United States food companies. Consolidated Foods was the fastest growing, having achieved a llVo compound annual sales growth rate between 1974 and 1979. Quaker Oats received recognition as the earnings growth leader after registering a five-year average annual growth rate of 28%. The undisputed industry leader in financial performance was Kellogg.In 1979, it ranked number one in return on investment (20.3%), return on sales (8.5%) and return on equity (25.2%). By comparison, the average return on equity for food companies over the previous five years was 14.JVo, and for all industry, 13.8%.

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IIOMAS J. LIPTON, INC.
Thomas J. Lipton, Inc. was established in 1915 in New York City as a tea importing firm by Sir Thomas Lipton, a flamboyant multimillionaire tea merchant. After his death in 1931, a holding company owned by the Anglo-Dutch corporation Unilever NV purchased the company from his estate. By 1980, Lipton, now based in Engle-

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wood Cliffs, New Jersey, was a diversified food company with sales of $698 million and ranked number 351 on the Fortune 500. Exhibits33-2 and 33-3 present financial statements for 1979. Lipton's sales...
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