The Allstate Corporation

Public Company

Incorporated: 1931 as Allstate Insurance Company

Employees: 36,000

Total Assets: $132.65 billion (2009)

Stock Exchanges: New York, Chicago

Ticker Symbol: ALL

NAICS: 524126 Direct Property and Casualty Insurance Carriers

The Allstate Corporation is the holding company for Allstate Insurance Company, the second-largest property and casualty insurance company by premiums in the United States. In 2008 Allstate controlled about 11 percent of the U.S. home and auto insurance market, second only to State Farm Insurance Companies. While the home and auto markets comprise over 90 percent of Allstate’s premiums, the company also offers life, annuity, pension products, and select coverages for small and medium-sized businesses. Allstate’s customers are served by 12,300 full-time “captive” (employed only by Allstate) agents, and thousands of independent agents in the United States and Canada.

FORMED IN 1931

The idea for Allstate came during a bridge game on a commuter train in 1930, when insurance broker Carl L. Odell proposed to his neighbor, Sears, Roebuck and Co. president and CEO Robert E. Wood, the idea of selling auto insurance by direct mail. Odell suggested that selling insurance by mail could sharply reduce costs by eliminating commissions paid to salesmen. The idea appealed to Wood, and he passed the proposal on to the Sears board of directors, whose members were also intrigued by the concept. AllstateInsurance Company, named after an automobile tire marketed by Sears, went into business in April 1931, offering auto insurance by direct mail and through the Sears catalog. Lessing J. Rosenwald was Allstate’s first chairman of the board, and Odell was named vice president and secretary.

The company’s early success proved Odell and Wood correct with regard to cost-cutting. Selling primarily through the regular Sears catalog, Allstate took in $118,323 in premiums on 4,217 policies in 1931, with a staff of 20 employees based at Sears headquarters in Chicago. Although the company showed underwriting losses in its first two years of operation, by 1933 it earned a profit of $93,000 from 22,000 active policies. That year, the first sale made by an Allstate agent was completed from a Sears booth at the Chicago World’s Fair.

In 1934 Allstate opened its first permanent sales office in a Chicago Sears store, marking the beginning of a transition from direct mail to agents as its principal avenue of sales. The use of Sears stores enabled the company to keep a lid on costs even with the added expense of agents’ commissions. Allstate’s growth through the remainder of the Depression was slow but steady. By 1936 the company’s premium volume had reached $1.8 million. Revenue from premiums more than tripled by 1941, reaching $6.8 million from over 189,000 policies in force. In 1943 James Barker was named chairman of Allstate’s board.

U.S. participation in World War II slowed Allstate’s growth somewhat, since automobile production and usage were curtailed. New legislation, however, helped pave the way for a period of explosive growth that the company would experience after the war’s end. In 1941, when only about a quarter of U.S. drivers had auto liability insurance, a law was passed in New York State firmly establishing the financial responsibility of drivers for damage or injuries resulting from auto mishaps. New York’s law inspired a flurry of legislation in other states, and by the mid-1950s nearly every state had some sort of financial responsibility law on its books.

POSTWAR BOOM YEARS

During the 10-year period after World War II, Allstate grew at a phenomenal pace, nearly doubling its size every two years. There were 327,000 Allstatepolicyholders paying premiums totaling over $12 million in 1945, and by 1955 Allstate’s sales had risen to $252 million, with more than 3.6 million policies in force.

Growth was facilitated by a change in the company’s structure that was implemented in 1947. That year, Allstate decentralized its operations, adopting a three-tiered structure. Research and policy development were conducted at Allstate’s home office. Zone offices were created to interpret company directives, and in turn oversee the regional offices, where the programs were put into effect. Some regions were further organized into district service offices and local sales/service centers. The restructuring extended to the first non-U.S. offices as well. Allstate became an international company in 1953 when its first Canadian office opened. Along with the restructuring, the 1947 introduction of the Illustrator Policy, which simplified the language of policies and added pictures to enhance customers’ understanding of their coverage, facilitated growth.

During the 1950s Allstate became more than an auto insurer. Throughout the decade, Allstate expanded its services to include the entire spectrum of insurance. Personal liability insurance was introduced in 1952. In 1954Allstate began offering residential fire insurance. Commercial fire, personal theft, and homeowners’ insurance were all added in 1957. Through a subsidiary, Allstate Life Insurance Company, life insurance became part of the company’s package in 1957 as well. In 1958 personal health and commercial liability insurance were added to the Allstate line. By the end of the decade, boat owners, group life, and group health insurance were all being offered. A new entity, Allstate Enterprises, Inc., was created in 1960 as an umbrella for a variety of noninsurance businesses to come. Among the activities eventually conducted under the Allstate Enterprises banner were a motor club and a number of finance operations, including vehicle financing, mortgage banking, and mutual fund management.

Allstate’s well-known slogan, “You’re in Good Hands With Allstate,” first appeared in 1950 after its creation by the company’s general sales manager, Davis W. Ellis. By the end of the decade it was used in the company’s first network television advertising campaign, which featured actor Ed Reimers, who would be the voice of Allstate from 1957 until 1979.

Allstate’s growth throughout the 1950s paved the way for continued growth over the next few decades. Not only did the company increase its sales volume but it also increased its offerings and its operating space. In 1963 theAllstate Life Insurance subsidiary passed the $1 billion mark in insurance in force, after only six years of operation. By that time, over 5,000 agents were selling Allstate life, automobile, home, and business insurance. Two new subsidiaries, Allstate Insurance Company of Canada and Allstate Life Insurance Company of Canada, were formed the following year. In 1966 the Judson B. Branch Research Center (later renamed the Allstate Research and Planning Center) was opened in Menlo Park, California. The company’s home office was moved to a new 723,000-square-foot complex in the Chicago suburb of Northbrook, Illinois, a year later. Meanwhile, Allstate continued to make additional types of insurance available to its customers throughout the decade, including workman’s compensation insurance in 1964, surety bonds in 1966, ocean marine coverage in 1967, and a business package policy in 1969.

oss of $1.68 billion.

THE 1970S: DIVERSIFICATION AND INTERNATIONAL EXPANSION

By 1970 there were 6,500 Allstate Insurance agents. That year, Allstateunveiled a mutual fund. In 1972 Allstate entered the mortgage banking business by acquiring National First Corporation. The following year, the company purchased PMI Mortgage Insurance Company, marking its entry into that field. Around the same time, Allstate insurance became available through independent agents in rural areas not covered by agents working directly for the company. For 1973 Allstate generated earnings of $203 million, nearly 30 percent of parent company Sears’s total.

The 1970s also saw Allstate dramatically increase its presence outside the United States. In 1975 the company entered the Japanese market through a joint venture (Seibu Allstate Life Insurance Company, Ltd.) and purchased Lippmann & Moens, a group of Dutch insurance operations. The remainder of the decade also included the formation of Tech-Cor, Inc., an auto-body research and reclamation firm, in 1976, and the establishment of a Commercial Insurance Division (later called Allstate Business Insurance) to oversee the company’s commercial operations in 1978. In the same year a new wholly owned subsidiary, Northbrook Property and Casualty Insurance Company, was formed. Also in 1978, Allstate Reinsurance Co. Limited, a London subsidiary of Allstate International, was incorporated. Two new policies, the Basic Homeowners Policy and the Healthy American Plan (life insurance), were introduced in 1978 and 1979, respectively.

Allstate was the sixth-largest insurance group in the United States by 1980. At that time, the company was operating 4 zone offices, 31 regional offices, 219 claimservice offices, 687 automobile damage inspection stations, and 2,720 sales/service centers. For 1980 the company reported $450 million in net income on revenue of $6.2 billion, as well as assets of $10.5 billion and 40,000 employees. In 1981 two Dean Witter Reynolds insurance companies, Surety Life Insurance Company and Lincoln Benefit Life Company, became part of the Allstate Life Insurance group. Allstate, Dean Witter, and Coldwell Banker joined forces the following year to form the Sears Financial Network, first appearing in eight Sears stores and later expanding to many other locations.

THE 1980S: REORGANIZATION OF CORPORATE STRUCTURE

Donald F. Craib, Jr., was named chairman of the board of Allstate in 1982. Under Craib, a major reorganization of Allstate’s corporate structure was initiated. The “New Perspective,” as it was called, entailed the elimination of zone offices, as well as other streamlining and decentralizing moves. A new, more flexible life insurance plan, the Universal Life policy, was also unveiled that year. By the end of 1983, Allstate’s claim staff consisted of 12,500 employees, the largest force in the industry.

In 1985 Allstate rolled out its Neighborhood Office Agent (NOA) program. In its first year, the NOA program placed 1,582 agents in 944 locations. The following year, the company launched an extensive $30 million advertising campaign that included nine new television commercials and the creation of a new tag line: “Leave It to the Good Hands People.” The campaign, which extended to print and radio as well, emphasized family protection. For 1986 the company reported income of over $750 million on revenue of $12.64 billion.

A number of business insurance developments took place at Allstate in 1987. First, the company’s Commercial Insurance Division and Reinsurance operation were combined under the Business Insurance umbrella. In addition, two new programs were launched in that area. The “Topflight” program created special ties between the company’s Northbrook subsidiary and certain independent agents. The STAR-PAK program offered a new business package policy that provided special services such as the delivery of price quotes within five hours. Allstate also launched the Allstate Advantage Program, a three-tiered rating system for auto insurance, in 1987. A new board chairman and chief executive officer, Wayne E. Hedien, was named in 1989.

Throughout the 1980s the company had grown at a rate that could not be supported by its profits. It had roughly doubled its number of premiums during the decade, but in doing so it had burdened itself with a large number of high-risk policyholders. This growth had increased the company’s costs both in terms of claims payouts and regular operating expenses. Meanwhile, the company also had to contend with customer backlash against insurance rates, including a court battle in California involving the 1988 passage of Proposition 103, which called for a rollback on premium rates. Allstate’s income shrank from $946 million in 1987 to $701 million in 1990. Fiscal concerns relating to Proposition 103 were abated after the California Supreme Court ruled that insurance companies were allowed a fair rate of return.

THE 1990S: NATURAL DISASTERS AND SPINOFF FROM SEARS

After a solid year in 1991, Allstate suffered losses from Hurricane Andrew, which afflicted serious damage on south Florida in August 1992. This natural disaster led to a net loss for Allstate of $825 million for the year, obscuring an otherwise outstanding year for the company. Subsequently, an insurance crisis developed in Florida. The Florida Legislature was unable to enact a solution the following spring, and Allstate announced a plan to not renew some 300,000 Florida property customers living in areas at high risk for hurricanes. A state-mandated moratorium on nonrenewals was imposed until November 15, 1993. On November 9, 1993, the Florida Legislature approved a catastrophe fund bill designed to protect insurance consumers and the insurance industry from the financial devastation caused by severe hurricanes. The bill enabled Allstate to renew about 97 percent of its Florida property customers in 1994.

In June 1993 20 percent of Allstate was offered to the public. The offering was an extraordinary success, generating $2.4 billion in capital. That sum was the largest ever raised in an initial public offering in the United States to that point. The separation of Allstate from Sears was part of Sears’s new focus on its traditional business of merchandising. With newly found financial strength from the successful public offering, Allstate posted impressive numbers for 1993: a record net income of $1.3 billion on revenue of $20.9 billion.

A dip in profits followed in 1994, however, in the wake of another natural disaster which involved massive claims against Allstate. The Northridge, California, earthquake, which struck in January, resulted in claims totaling over $1 billion. In its wake, as had happened following Hurricane Andrew,Allstate (and most other insurers) attempted to stop writing policies for homeowners’ insurance in the state, and California eventually passed legislation creating a state Earthquake Authority to help pay future catastrophe claims.

Allstate became completely independent in June 1995, when Sears gave up its 80 percent stake in the company, distributing 350.5 million shares ofAllstate stock to its own stockholders. Allstate also streamlined its operations, selling off the PMI Mortgage Insurance subsidiary to raise funds for corporate growth.

Concurrent with the positives of Allstate’s independence and financial success, controversies were surfacing on a number of fronts. In Texas, the company’s use of Allstate-run law firms to represent claimants in court was questioned, while in California Allstate was accused of falsifying engineering reports to minimize earthquake damage claims. In several other states, attorneys general were investigating allegations that the company was overcharging single car owners for auto insurance. Additional states were examining the practice of Allstate mailing out its “Do I Need an Attorney?” pamphlet to auto accident claimants in an attempt to dissuade them from consulting an attorney. The company fought these and all such actions vigorously.

Allstate, along with a number of other insurance carriers, was also accused of “redlining,” or denying insurance, to inner city and minority homeowners. In this case, the company announced it was making changes to its policy guidelines which would improve the opportunity for such customers to obtain insurance. As Allstate moved into the 21st century, some controversies were resolved. Court rulings and regulations, for example, prompted Allstate to stop sending out its “Do I Need an Attorney?” pamphlet. However, many issues remained.

THE 21ST CENTURY: INNOVATION AND CHALLENGES

Like most companies during the Information Age, Allstate modified many of its practices to take advantage of improvements in computer technology. For instance, Allstate installed a software program known as Colossus which was designed to evaluate claims by comparing data about a specific claim with data from previous claims of a similar nature. In theory, such software would allow Allstate to come up quickly with a settlement amount in an acceptable range.

Allstate’s goal of implementing a program like Colossus was to improve the efficiency of its claims process. The financial results were certainly apparent, as the company earned high profits between 1996 and 2006. However, during this same period claims payouts (as a percentage of premium income) fell from 79 percent to 58 percent for Allstate, and from 64 percent to 55 percent for the property-casualty industry as a whole. This decrease in claims payouts coincided with an increased amount of Internet discussion regarding claims paid by Allstate and other insurance carriers. Some people grumbled that payments were too low, or that they were delayed inordinately. Whether such criticisms were valid is a matter of some debate. However, the combination of higher profits, lower payouts, and the ease with which comments can be posted on the Internet have created a situation where such criticisms spring up regularly. Every time a large calamity occurs, such as Hurricane Katrina in 2005 or California wildfires in 2007, stories surface afterwards regarding policyholders upset about the amount of their settlement.

Insurance companies also have to deal with costly calamities that are not natural disasters. As might be expected, the 2008 global financial collapse caused fiscal trouble for Allstate. The company’s property and liability income diminished to a trickle, and the company’s financial unit posted a net loss of $1.72 billion in 2008. This led to an overall net loss of $1.68 billion for Allstate. The company bounced back fairly well in 2009, with income from property/liability increasing almost sevenfold from the previous year. Although the financial unit continued to post a net loss, it showed signs of recovery, with losses reduced in 2009 by more than two-thirds. Overall, Allstatereturned to profitability in 2009 and entered the 2010s poised to continue its role as a leading insurer.

KEY DATES

1931:	Allstate offers auto insurance via direct mail and Sears catalog.
1934:	Company opens first permanent sales office.
1950:	The slogan “You’re in good hands with Allstate” debuts.
1953:	First non-U.S. office opens in Canada.
1973:	Allstate accounts for 30 percent of earnings for parent company Sears.
1992:	Damage from Hurricane Andrew causes company to post loss.
1993:	Twenty percent of Allstate sells in an initial public offering.
1995:	Sears divests itself of remaining control (80%) of Allstate.
2008:	Global financial meltdown leads to net income l

Raytheon Co.

Public Company
Incorporated: 1922 as American Appliance Company
Employees: 73,000
Sales: $23.17 billion (2008)
Stock Exchanges: New York
Ticker Symbol: RTN
NAICS: 336414 Guided Missile and Space Vehicle Manufacturing; 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instruments Manufacturing; 334413 Semiconductor and Related Device Manufacturing; 334419 Other Electronic Component Manufacturing; 335211 Electric Houseware and Fan Manufacturing; 336413 Other Aircraft Part and Auxiliary Equipment Manufacturing

Raytheon Company is the fourth largest defense contractor in the United States and the world’s largest missile builder. Raytheon’s principal missiles are the Patriot, Sidewinder, and Tomahawk systems. Aside from its missile business, the company designs and produces aircraft radar systems, weapons sights and targeting systems, and communications and battle-management systems. Raytheon ranks as a leading provider of marine electronics, shipboard and sonar systems, and Global Positioning System (GPS) devices. The company relies on the U.S. government for more than 85 percent of its annual sales.

BEGINNINGS IN RADIO TUBES

Raytheon was founded in 1922 when a civil engineer named Laurence Marshall was introduced to an inventor and Harvard physicist named Charles G. Smith by Dr. Vannevar Bush. Marshall proposed a business partnership with Smith and Bush after hearing that Smith had developed a new method for noiseless home refrigeration using compressed gases and no moving parts. Marshall raised $25,000 in venture capital from investors and a former World War I comrade and incorporated the partnership in Cambridge, Massachusetts (near Bush’s employer, the Massachusetts Institute of Technology), as American Appliance Company.

Marshall and Smith never developed their refrigeration technologies for the market, but instead shifted their attention to vacuum tubes and other electronic devices. In 1924 Marshall made a three-month tour of the United States to study the pattern of growth in the electronics market. Noting rapidly growing consumer demand for radios, Marshall negotiated the purchase of patents for the S-tube, a gas-filled rectifier that converted alternating current (AC) used in households to the direct current (DC) used in radio sets (ironically, the technology had been developed by Smith and Bush some years earlier while they worked for the American Research and Development Corporation). Up to that time, radios ran on an auto storage battery called the A battery and a high-voltage B battery, which were costly, cumbersome, messy, and relatively expensive to replace.

In 1925, shortly before S-tube production began, a firm in Indiana laid claim to the American Appliance company name. The partners decided to change their corporate name to Raytheon Manufacturing Company. Despite the fact that raytheon is Greek for “god of life,” the name actually was chosen for its modern sound. By 1926, Raytheon had become a major manufacturer of tube rectifiers and generated $321,000 in profit on sales of $1 million.

Virtually all the tubes produced by Raytheon were used in radio sets whose design patents were held by RCA. In 1927 RCA altered its licensing agreements with radio manufacturers to stipulate that the radios could be built only with new rectifier tubes (called Radiotrons) manufactured by RCA.Raytheon was, in effect, denied access to its markets. The company was forced to switch to the production of radio-receiving tubes, a field in which more than 100 companies were engaged in fierce competition.

Marshall’s response to operating in this difficult environment was to diversify.Raytheon acquired the Acme-Delta Company, a producer of transformers, power equipment, and electronic auto parts. Profits resulting from new products were immediately put back into research and development to improve products, particularly in industrial electronics and microwave communications.

Marshall also sought the support of the National Carbon Company (a division of Union Carbide Corp.) during this difficult period. In 1929, National Carbon took a $500,000 equity position in Raytheon and held an option to buy the remaining portion of the company for an additional $19.5 million. National Carbon knew that Raytheon rectifier tubes had originally replaced its B battery business and also was convinced that its battery distribution would do well handling replacement tubes marked Eveready-Raytheon. Although the cooperative project was unsuccessful, National Carbon’s investment carriedRaytheon through the Great Depression. National Carbon allowed its option to acquire Raytheon to lapse in 1938.

MOVING INTO DEFENSE CONTRACTING DURING WORLD WAR II

With world war looming in 1940, U.S. President Franklin Roosevelt and British Prime Minister Winston Churchill authorized the joint development of new radar technologies by American and British institutions. Through the Radiation Laboratory at the Massachusetts Institute of Technology, Raytheonwas chosen to develop the top-secret British magnetron, a microwave radar power tube. The technology would provide the range and clearer images required for successful detection and destruction of enemy planes, submarines (when they surfaced), and German warships. The new device had more than 100 times the power of previous microwave tubes and was cited as one of the Allies’ top secrets. Britain, however, needed the United States’ manufacturing capacity. In June 1941 Raytheon also won a contract to deliver 100 radar systems for navy ships.

Workers produced 100 magnetrons a day until Plant Manager Percy Spencer discovered a method, using punch presses, to raise production to more than 2,500 a day. Spencer’s ingenuity won Raytheon an appropriation of $2 million from the U.S. Navy for the construction of a large new factory in Waltham, Massachusetts. By the end of the war, Raytheon magnetrons accounted for about 80 percent of the one million magnetrons produced during the war. By 1944, virtually every U.S. Navy ship was equipped with Raytheon radar. The company became internationally known for its reliable marine radar. The company also offered complete radar installations, with the help of subcontractors, and developed tubes for the VT radio fuse, a device that detonated fired shells when it sensed they were near solid objects. Over the course of the war, Raytheon’s sales increased 55 times, from $3 million in 1940 to $168 million in 1945.

Raytheon was fortunate to be involved in a high-growth area of defense industry. When the war ended, companies specializing in high-technology military systems suffered less from cuts in the postwar defense budget than aircraft or heavy-vehicle manufacturers, or shipbuilders. In large part as a result of the war, Raytheon emerged as a profitable and influential, but still financially vulnerable, electronics company.

During the spring of 1945 Raytheon’s management formulated plans to acquire several other electronics firms. As part of a strategy to consolidate independent component manufacturers into one company, in April the company purchased Belmont Electronics for $4.6 million. Belmont, located in Chicago, was a major consumer of Raytheon tubes and was developing a television for the commercial market. That October, Raytheon acquired Russell Electric for $1.1 million and entered merger negotiations with the Submarine Signal Company. Sub-Sig, as the company was known, was founded in Boston in 1901 as a manufacturer of maritime safety equipment, including a depth sounder called the fathometer. Sub-Sig manufactured a variety of sonar equipment during the war and, like Belmont, was a majorRaytheon customer. When the two companies agreed to merge on May 31, 1946, it was decided that Sub-Sig would specialize in sonar devices and thatRaytheon would continue to develop new radar systems.

Despite Raytheon’s strengthened position as a result of the mergers, the company faced severe competition in both the sonar and radar markets from companies such as General Electric, RCA, Westinghouse Electric, and Sperry. Belmont, which planned to bring its television to market in late 1948, suffered a crippling strike during the summer and, as a result, lost much of its projected Christmas business. Unstable price conditions the following spring created further losses from which the subsidiary was, in large part, unable to recuperate. Laurence Marshall, although a superb engineer, was generally regarded as a poor manager. His inability to effect positive changes within the company led him to resign as president in February 1948. The following December he resigned as CEO, but he remained chairman of the board until May 1950, when he resigned after failing to gain support for a proposed merger with International Telephone & Telegraph (ITT). Charles F. Adams, a former financial adviser who joined Raytheon in 1947, assumed Marshall’s responsibilities.

The sudden resumption of military orders after the outbreak of the Korean War in June 1950 greatly benefited Raytheon, as Defense Department contracts enabled the company to develop new technologies with initially low profitability. That year, a “Lark” missile equipped with a Raytheon-designed guidance system made history when it intercepted and destroyed a navy drone aircraft. Raytheon’s advanced research center, called Lab 16, was designed to develop the Sparrow air-to-air and Hawk surface-to-air missiles.Raytheon became a partner in Selenia, a joint venture with the Italian firms Finmeccanica and Fiat, which was established to develop new radar technologies. Raytheon’s association with Selenia afforded it an opportunity to work with the Italian rocket scientist Carlo Calosi.

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Raytheon’s Belmont operation was re-formed in 1954, but two years later all radio and television operations were sold to the Admiral Corporation.Raytheon continued, however, to develop new appliances, such as the Radarange microwave oven. In 1956 Charles Adams hired Harold S. Geneen, a highly innovative and dynamic manager, as executive vice-president. Three years later, however, Geneen left Raytheon to become chief executive of ITT. Richard E. Krafve (who once headed the Ford Motor Company’s Edsel project) enjoyed only a short tenure as Geneen’s successor; he disagreed frequently with Adams and was apparently unable to gain the respect of engineers. Thomas L. Phillips, manager of the Missile Division, replaced Krafve.

In 1956 and 1957, Raytheon and Minneapolis-Honeywell jointly operated a computer company called Datamatic. Raytheon soon sold its interest to Honeywell when Datamatic failed to compete effectively against IBM. Raytheon’s joint venture projects with Italian companies continued to expand, however. D. Brainerd Holmes, a former director of the U.S. manned space flight program, joined Raytheon in 1963 to manage the company’s military business, reporting to Phillips.

DIVERSIFYING IN THE SIXTIES AND SEVENTIES

Raytheon’s top managers began to recognize weaknesses in the company’s organizational structure perhaps as early as 1962; Raytheon, they decided, had become too dependent on government contracts. Thus in 1964 Adams and Phillips, who had become chairman and president, respectively, conceived a plan that aimed to diversify the company’s operations. Raytheonacquired Packard-Bell’s computer operations and a number of small electronics firms. In 1965 Raytheon acquired Amana Refrigeration Company. Although Raytheon had invented the microwave oven 20 years earlier, it needed Amana to commercialize the technology. (Spencer had accidentally discovered microwave cooking in 1945 when a candy bar in his pocket melted as he stood near an operating magnetron tube; the company began selling commercial refrigerator-sized Radaranges in 1947, then five years later started selling, with limited success, expensive consumer models through a licensing deal with Tappan Stove Company.) In 1967 Raytheon helped launch a domestic revolution when it introduced the first countertop microwave under the Amana name, featuring 100 volts of power and priced at just less than $500. That same year, Caloric Corporation, a major manufacturer of gas ranges and appliances, was acquired as well. By the end of the decade,Raytheon had absorbed a number of additional companies, including E.B. Badger Co., Inc., a designer and builder of petroleum and petrochemical plants; United Engineers and Constructors, a designer and builder of power plants; textbook publisher D.C. Heath & Company; and a geological survey company called Seismograph Service Corporation.

Raytheon’s association with Selenia became strained in 1967. Raytheon’s directors concluded that its Italian partners were unwilling to reform the operations of Selenia and Elsi (a jointly operated electronics firm). They voted to sell Raytheon’s share of the companies to its partners and end their association with Calosi. Nevertheless, the defense department in 1967 selected Raytheon as the prime contractor for the new SAM-D surface-to-air missile. Renamed the Patriot in honor of the nation’s bicentennial, the missile entered full-scale production in 1976. Initially designed as a defense against high-tech aircraft, the Patriot was upgraded about ten years later with the capability to intercept and destroy short-range ballistic missiles.

The goal of reducing Raytheon’s proportion of sales to the government from 85 percent to 50 percent was achieved on schedule in 1970. However, while Raytheon’s sales continued to rise, profits began to lag. Intracompany discussions determined that, with the exception of D.C. Heath, Raytheonshould dispense with its marginally performing educational services units. In 1972, after several relatively small acquisitions, Raytheon purchased Iowa Manufacturing Company (later called Cedarapids, Inc.), a producer of road-building equipment.

When Charles Adams retired as chair in 1975, Tom Phillips was elected the new chairman and chief executive officer. Brainerd Holmes was promoted to president. Raytheon’s financial performance during the mid-1970s was impressive: from 1973 to 1978 sales and profits grew at annual rates of 15 percent and 26 percent, respectively. Acquisitions in the latter years of the decade included Switchcraft, Inc., an electronics manufacturer, and Glenwood Range and Modern Maid gas range producers. The laundry products and kitchen appliance divisions of McGraw-Edison, which included the popular Speed Queen brand name, were added in 1979. The company’s retained earnings were placed in high-yielding money market accounts until needed to finance acquisitions.

In 1977 Phillips tried to acquire Falcon Seaboard, an energy resources company involved primarily in strip mining coal, but withdrew the offer when favorable terms could not be reached. Instead, Phillips entered into negotiations to acquire Beech Aircraft, a leading manufacturer of single- and twin-engine aircraft. Raytheon acquired Beech in February 1980 for $800 million. The new affiliate recorded annual losses in each of the ensuing seven years, finally turning a profit in 1988.

At this time Raytheon’s business with the government consisted mainly of radar systems, solar systems, communications equipment, and the Hawk, Sparrow, Patriot, and Sidewinder missiles, all of which totaled less than 40 percent of Raytheon’s sales. Raytheon was more widely exposed to commercial computer and consumer markets, but these markets had become unexpectedly competitive, leading Raytheon management to reconsider its trend of moving away from stable military contracts.

Raytheon’s Data Systems division, created in 1971 through the merger of the company’s information processing and display units, established a small market by manufacturing terminals for airline reservation systems. Raytheonfailed, however, to integrate Data Systems effectively with a word-processing subsidiary called Lexitron, which it acquired in 1978. As the computer products market expanded, Data Systems found itself unable to compete. After mounting losses, the division was sold to Telex in 1984. In January 1986Raytheon acquired Yeargin Construction Company, a builder of electrical and chemical plants, and the following October it acquired Stearns Catalytic World Corporation, an industrial plant maintenance company.

When Brainerd Holmes retired on May 31, 1986, as he reached the traditional retirement age of 65, he was succeeded as president by R. Gene Shelley, who himself retired in July 1989 and was replaced by Dennis J. Picard. Picard succeeded Tom Phillips as chairman and chief executive of Raytheon in 1990, and Max E. Bleck rose to president.

FOCUSING ON DEFENSE AND COMMERCIAL ELECTRONICS: NINETIES AND BEYOND

While other major defense contractors moved to convert to civilian interests in the wake of post-Cold War defense budget cuts, Raytheon planned to buttress its position within its four main business segments: defense and commercial electronics, aircraft products, energy and environmental services, and major appliances. In 1992, Picard announced a new five-year plan. Its goals included increasing foreign military sales from 20 percent to 40 percent of total defense revenues; doubling energy and environmental services’ $1.7 billion in sales; doubling Beech’s $1.1 billion in sales; and increasing appliance sales by 60 percent.

The versatile Patriot missile, Raytheon’s single most important product in the early 1990s, was considered pivotal to an increase in the company’s overseas sales. From the end of the Gulf War until late in 1994, Raytheonreceived nearly $2.5 billion in orders for the missiles from overseas customers. The corporation’s environmental and energy service was consolidated to form Raytheon Engineers & Constructors International Inc. (RECI), one of the world’s largest engineering and construction groups, in 1993. The acquisitions of Harbert Corp., Gibbs & Hill, and key segments of EBASCO Services, Inc., that year were intended to help boost RECI’s annual sales. The corporate jet unit of British Aerospace plc also was purchased that year for $387.5 million. The acquisition helped expand Beech’s penetration of the business aircraft market. An extensive overhaul of the appliance segment, including downsizing, consolidation, and the 1994 acquisition of UniMac Companies, helped increase that division’s sales and profits. Raytheon, meantime, exited from the publishing field with the 1995 sale of D.C. Heath to Houghton Mifflin Co. for $455 million.

EXPANDING THE DEFENSE BUSINESS

The end of the Cold War and the resulting defense budget cuts ushered in a wave of mergers and consolidations in the defense industry by the mid-1990s. Raytheon was a key participant in this trend and also worked to rationalize its defense businesses. In early 1995 the company createdRaytheon Electronic Systems from the merger of its Missile Systems Division and Equipment Division. Later that year Raytheon acquired Dallas-based E-Systems Inc. for more than $2.3 billion, gaining a leading developer of military intelligence communications systems. In 1996 Raytheon added two of Chrysler Corporation’s defense businesses in a deal valued at about $475 million. The Chrysler units acquired were its electrospace systems operation, which was involved in satellite communications, secure communications, and electronic warfare systems; and its airborne-technologies operation, which modified commercial aircraft for use by the armed forces and by heads of state, often equipping the planes with high-tech signal-jamming and encoding equipment. Both of these units complemented the activities of E-Systems and, therefore, were consolidated into the newly named Raytheon E-Systems.

Raytheon’s appetite was not yet sated, and in fact grew in 1997, when the company acquired the defense business of Texas Instruments Inc. for $2.9 billion in July and the defense business of Hughes Electronics Corporation, a subsidiary of General Motors Corporation, for $9.5 billion in December. The Texas Instruments deal brought to Raytheon a number of complementary operations, including laser-guided weapons systems, missiles, airborne radar, night vision systems, and electronic warfare systems. The Hughes defense unit was a leading supplier of advanced defense electronics systems and services. These latest acquisitions propelled Raytheon into the top three among defense contractors and into the top position in defense electronics. They also led to a marked increase in revenues, from $12.33 billion in 1996 to $19.53 billion in 1998. Following the completion of the Hughes transaction,Raytheon consolidated its defense businesses (Raytheon Electronic Systems,Raytheon E-Systems, and the Texas Instruments and Hughes units) into a new operation called Raytheon Systems Company. In connection with this restructuring and a smaller restructuring of Raytheon Engineers & Constructors, Raytheon took a $495 million restructuring charge in 1997 for a plan that by 1999 eliminated more than 14,000 jobs from the workforce and closed about 28 facilities in the United States. In December 1997, the company also created a new subsidiary called Raytheon Systems Limited, which was based in the United Kingdom and was formed to develop products for export from that country.

DIVESTING NON-DEFENSE ASSETS

By this time it was clearly evident that Raytheon had made a marked shift in strategy, placing a greater emphasis on its defense businesses, alongside the commercial electronics applications that developed out of the defense operations. The divestment of additional noncore operations was further evidence of this trend, with the divestments also helping to hold down the company’s mounting debt load, which exceeded $10 billion by the end of 1997 thanks to the defense acquisitions. In 1997 Raytheon sold its home appliance, heating, air conditioning, and commercial cooking operations to Goodman Holding Co. for $522 million. That same year, the company sold its Switchcraft and Semiconductor divisions in separate transactions totaling $183 million. Divestments continued in 1998, including the sale of the firm’s commercial laundry business for $334 million. Operations consisted of the defense units, Raytheon Commercial Electronics, Raytheon Aircraft Company, and Raytheon Engineers & Constructors. In December 1998 Daniel P. Burnham, a vice-chairman of AlliedSignal, Inc., took the helm atRaytheon as president and CEO. Picard remained chairman until August 1999, when Burnham took on that title as well.

Late in 1999 Raytheon revealed that it had uncovered pervasive management and financial problems in its defense electronics operations that forced it to cut its earnings projections for the fourth quarter and all of 2000. The company was over budget or behind schedule on more than a dozen Pentagon contracts, and other projects, both in the United States and overseas, were being delayed at the contract stage itself, including several billion-dollar deals involving Patriot missiles. With earnings down, Raytheonwould be unable to reduce its $9.5 billion debt as quickly as it hoped. For the year, net income stood at $404 million, less than half the $844 million figure of the previous year. Meantime, late in 1999 the company launched a further restructuring, with additional job cuts, the closure or amalgamation of ten plants, and a charge of $668 million. To flatten the organizational structure,Raytheon Systems Company was reorganized into several smaller units: Electronic Systems; Command, Control, Communication and Information Systems; Raytheon Technical Services Company; and Aircraft Integration Systems. On the positive side for 1999, Raytheon contracted with the United Kingdom to develop a $1.3 billion high-tech radar surveillance system called Airborne Stand-Off Radar. That year also saw the sale of the Cedarapids subsidiary for $170 million.

As it worked to fix the problems in its defense operations, Raytheon was awarded a few more large contracts in August 2000. The U.S. Army awarded a joint venture partnership of Raytheon and Lockheed Martin a $1.24 billion production contract on the Javelin Antitank Weapon System, which the partners first began producing in 1997. In addition, Lockheed Martin selectedRaytheon for the design, development, and manufacture of three radar systems for the Theater High Altitude Area Defense System, a $4 billion missile defense system contracted for by the U.S. Army. Raytheon’s portion of the project amounted to $1.3 billion. Meantime, Raytheon’s ongoing series of divestitures were nearing their conclusion. In July 2000 RaytheonEngineers & Constructors was sold to Morrison Knudsen Corporation for more than $800 million. Later in the year it was reported that RaytheonAircraft Company was being shopped around. The sale of the aircraft unit essentially would focus Raytheon exclusively on defense and commercial electronics. Once again, these further divestments were in part aimed at slashing the burdensome debt load, which had crept back up over the $10 billion mark by late 2000. Raytheon would need to rein in this debt load and clear up its other financial problems if it wished to return to or surpass the steadily, if unspectacularly, profitable years that preceded the major 1997 acquisitions.

FINANCIAL WOES

Hopes for a brighter financial future were pinned on Burnham’s ability to replicate the success he produced at Allied Signal, but he failed to meet expectations. Raytheon posted a meager $138 million profit in 2000 and then slipped into the red, recording a $755 million loss in 2001 and a $640 million loss in 2002. Investors’ anxiety increased at the end of 2002, when the anticipated invasion of Iraq by U.S. forces piqued expectations for a rousing display by defense contractors. Raytheon, the fourth largest defense contractor in the United States, was not among the companies benefiting from the expected increase in defense spending. Raytheon’s cash flow from operations in 2002 was $424 million, a figure dwarfed by the $2.29 billion recorded by Lockheed Martin. Raytheon’s shares decreased in value by 3.6 percent in 2002, while Lockheed Martin’s shares increased in value from 25 percent. “I just want this company to be managed better,” an analyst said in the January 29, 2003 release of the America’s Intelligence Wire, referring toRaytheon. “I want this great defense business to shine through.”

SWANSON TAKES THE HELM IN 2003

In April 2003, Burnham resigned, ending his troubled, five-year stay at the company. “He was brought in to turn the company around and it hasn’t turned around,” an analyst commented in the April 23, 2003 release of the America’s Intelligence Wire. William H. Swanson, who had been promoted to the post of president in July 2002, replaced Burnham as chief executive officer. Swanson, who joined Raytheon in 1972, took charge of the company shortly before it moved its headquarters from Lexington back to Waltham.

With military campaigns underway in Afghanistan and Iraq, Raytheon enjoyed a surge in business. In December 2003, the company was awarded a $1.04 billion contract to upgrade the U.S. Navy’s Cobra Judy radar system, the same month its aircraft unit secured a $360 million order for 58 business jets from NetJets Inc. Raytheon began building Tomahawk Block IV missiles in 2004, producing a weapon featuring a two-way satellite data link that enabled controllers to change targets mid-flight. By 2007, Raytheon delivered its 1,000th Tomahawk Block IV to the U.S. Navy. In 2005, the company won a $1 billion contract from the U.S. Army to develop and to demonstrate the Joint Land Attack Cruise Missile Defense Elevated Netted Sensor System (JLENS), a system that provided over-the-horizon detection and tracking of incoming cruise missiles.

SALE OF RAYTHEON AIRCRAFT: 2006

Swanson’s tenure witnessed the arrival of massive defense contracts and it also saw the departure of a major business segment. In 2006, the company sold Raytheon Aircraft Co. to Hawker Beechcraft Corp., a company formed by GS Capital Partners and Onex Partners. The Wichita, Kansas-based subsidiary, which generated $2.9 billion in annual revenue by delivering 416 aircraft in 2005, was sold for $3.3 billion.

Financially, Swanson’s first five years at the helm of Raytheon were far more successful than Burnham’s five years in charge. From 2003 to 2008, the company’s net income increased from $365 million to $1.67 billion, peaking at $2.57 billion in 2007. The company’s revenue performance exhibited less vitality than its profit performance, as its annual volume rose and sank erratically, but the five-year period did see an overall increase from $18.1 billion to $23.1 billion. At the end of the decade, Raytheon continued to win large contracts for its expertise in missile production—in 2009, the United Arab Emirates awarded the company a $3 billion contract for its Patriot missile system—but it also was beginning to explore business opportunities outside the defense sector. The company was attempting to use its weapon and defense technology to create innovative products and systems for civilian use, devoting its resources to projects that used radiation to aid in toll collection efforts, radio technology to facilitate oil extraction, and software to enable companies to determine which web sites their employees visited. The years ahead would determine if Raytheon could develop a sizable non-military stream of revenue and achieve the more balanced business stance enjoyed by its larger rivals.

Key Dates

1922:

American Appliance Company is founded.

1925:

Company changes its name to Raytheon Manufacturing Company and begins making tubes for radios.

1940:

Raytheon is chosen to develop magnetrons, a tube used in microwave radar systems, marking the company’s entrance into defense technology.

1941:

U.S. Navy contracts with Raytheon on the delivery of 100 ship radar systems.

1950:

Raytheon’s Lark missile comes to the fore when it successfully intercepts and destroys a test drone.

1965:

Amana Refrigeration is acquired.

1967:

Company introduces the first countertop microwave under the Amana name.

1976:

Production of the Patriot missile defense system begins.

1980:

Company acquires Beech Aircraft.

1993:

Company acquires the corporate jet unit of British Aerospace.

1995:

E-Systems Inc. is acquired.

1997:

Raytheon acquires the defense businesses of Texas Instruments Inc. and Hughes Electronics Corporation; its home appliances unit is divested.

2000:

Raytheon Engineers & Constructors is sold to Morrison Knudsen Corporation.

2003:

Company headquarters are moved from Lexington, Massachusetts, to Waltham, Massachusetts.

2006:

Raytheon Aircraft Co. is sold for $3.3 billion.

2007:

Company delivers its 1,000th Tomahawk Block IV missile system to the U.S. Navy.

2009:

United Arab Emirates awards Raytheon a contract for Patriot missiles valued at $3 billion.

Wal-Mart Stores, Inc.

Public Company
Incorporated: 1969
Employees: 2,200,000
Sales: $443.85 billion (2012)
Stock Exchanges: New York Pacific
Ticker Symbol: WMT
NAICS: 445110 Supermarkets and Other Grocery (Except Convenience) Stores; 452910 Warehouse Clubs and Superstores; 452990 All Other General Merchandise Stores; 454110 Electronic Shopping and Mail-Order Houses

Wal–Mart Stores, Inc., is the largest retailer in the world, operating 10,130 stores in 27 countries. In the United States, Wal–Mart oversees more than 4,400 retail outlets, primarily under the Walmart and Sam’s Club banners. Internationally, more than 90 percent of the company’s 5,600 stores operate under a banner other than Walmart, including names such as Walmex, Asda, Seiyu, and Best Price. Overseas business accounts for approximately 28 percent of the company’s annual revenues. Domestically and abroad, the company’s stores stock groceries, electronics, apparel, appliances and home furnishings, hardware, sporting goods, and health care products.

ORIGIN OF WAL–MART DISCOUNT CONCEPT: 1962

Founder Sam Walton graduated from the University of Missouri in 1940 with a degree in economics and became a management trainee with J.C. Penney Company. After two years he went into the army. Upon returning to civilian life three years later, he used his savings and a loan to open a Ben Franklin variety store in Newport, Arkansas. In 1950 he lost his lease, moved to Bentonville, Arkansas, and opened another store. By the late 1950s, Sam and his brother J. L. (Bud) Walton owned nine Ben Franklin franchises.

In the early 1960s Sam Walton took what he had learned from studying mass-merchandising techniques around the country and began to make his mark in the retail market. He decided that small-town populations would welcome, and make profitable, large discount shopping stores. He approached the Ben Franklin franchise owners with his proposal to slash prices significantly and operate at a high volume, but they were not willing to let him reduce merchandise as low as he insisted it had to go. The Walton brothers then decided to go into that market themselves and opened their first Wal–Mart Discount City in Rogers, Arkansas, in 1962. The brothers typically opened their department-sized stores in towns with populations of 5,000 to 25,000, and the stores tended to draw from a large radius.

COMPANY PERSPECTIVES

Saving people money to help them live better was the goal that Sam Walton envisioned when he opened the doors to the first Walmart more than 40 years ago. Today, this mission is more important than ever to our customers and members around the world. We work hard every day in all our markets to deliver on this promise. We operate with the same level of integrity and respect that Mr. Sam put in place. It is because of these values and culture that Walmart continues to make a difference in the lives of our customers, members and associates.

Wal-Mart’s concept involved huge stores offering customers a wide variety of name-brand goods at deep discounts that were part of an “everyday low prices” strategy. Walton was able to keep prices low and still turn a profit through sales volume as well as an uncommon marketing strategy. Wal-Mart’s advertising costs generally amounted to one-third that of other discount chains. Most competitors were putting on sales and running from 50 to 100 advertising circulars per year, but Wal–Mart kept its prices low and ran only 12 promotions a year.

By the end of the 1960s the brothers had opened 18 Wal–Mart stores, while still owning 15 Ben Franklin franchises throughout Arkansas, Missouri, Kansas, and Oklahoma. These ventures became incorporated as Wal–MartStores, Inc., in October 1969.

THE CHAIN EXPANDS: 1970–79

The 1970s held many milestones for the company. Early in the decade, Walton implemented his warehouse distribution strategy. The company built its own warehouses so it could buy in volume and store the merchandise, then proceeded to build stores throughout 200-square-mile areas around the distribution points. This practice cut Wal-Mart’s costs and gave it more control over operations because merchandise could be restocked as quickly as it sold and advertising was specific to smaller regions and cost less to distribute.

Wal–Mart went public in 1970, initially trading over the counter. In 1972 the company was listed on the New York Stock Exchange. By 1976 the Waltons had phased out their Ben Franklin stores so that the company could put all of its expansion efforts into the Wal–Mart stores. In 1977 the company made its first significant acquisition when it bought 16 Mohr-Value stores in Missouri and Illinois. Also in 1977, based on data from the previous five years, Forbesranked the nation’s discount and variety stores, and Wal–Mart ranked first in return on equity, return on capital, sales growth, and earnings growth.

In 1978 Wal–Mart began operating its own pharmacy, auto service center, and jewelry divisions, and acquired Hutchenson Shoe Company, a shoe-department lease operation. By 1979 there were 276 Wal–Mart stores in 11 states. Sales had gone from $44 million in 1970 to $1.25 billion in 1979. Wal–Mart became the fastest company to reach the $1 billion mark.

ESTABLISHMENT OF SAM’S CLUBS: 1983

Wal–Mart sales growth continued into the 1980s. In 1983 the company opened its first three Sam’s Wholesale Clubs and began its expansion into bigger city markets. Business at the 100,000-square-foot cash-and-carry discount membership warehouses proved to be good. The company had 148 such clubs by 1991, by which time the name had been shortened to Sam’s Clubs.

The company continued to grow rapidly. In 1987 Wal–Mart acquired 18 Supersaver Wholesale Clubs, which became Sam’s Clubs. The most significant event of that year, however, was the opening of a new Wal-Mart’s merchandising concept that Walton called Hypermart USA. Hypermart USA stores combined a grocery store, a general merchandise market, and such service outlets as restaurants, banks, shoe shine kiosks, and videotape rental units in a space that covered more area than six football fields. Prices were reduced as much as 40 percent below full retail level, and sales volume averaged $1 million per week, compared with $200,000 for a conventional-sized discount store.

Making customers feel at home in such a large-scale shopping facility required inventiveness. The Dallas store had phone hotlines installed in the aisles for customers needing directions. Hypermart floors were made of a rubbery surface for ease in walking, and the stores offered electric shopping carts for the disabled. To entertain children, there was a “ball pit” or playroom filled with plastic balls, an idea borrowed from Swedish furniture retailer Ikea.

EVOLUTION OF HYPERMART INTO THE WAL–MARTSUPERCENTER: 1988

There were also wrinkles to work out. Costs for air conditioning and heating the gigantic spaces were higher

than expected. Traffic congestion and limited parking proved a drawback. Customers also complained that the grocery section was not as well-stocked or maintained as it needed to be to compete against nearby grocery stores.Wal–Mart began addressing these problems by, for example, redesigning the grocery section of the Arlington, Texas, store. In 1988 Wal–Mart also opened five smaller “supercenters” that averaged around 150,000 square feet. The stores featured a large selection of merchandise and offered better-stocked grocery sections, without the outside services such as restaurants or video stores. These stores, dubbed Wal–Mart Supercenters, proved much more successful than the Hypermart format, which was eventually abandoned. Hundreds of Supercenters were subsequently opened during the 1990s.

Wal–Mart received some criticism during this period for its buying practices. One analyst, according to an article in the January 30, 1989, issue ofFortune, described the treatment sales representatives received at Wal–Mart: “Once you are ushered into one of the spartan little buyer’s rooms, expect a steely eye across the table and be prepared to cut your price.” Wal–Mart was known not only for dictating the tone with its vendors, but often for dealing directly only with the vendor, bypassing sales representatives. In 1987, 100,000 independent manufacturers representatives initiated a public information campaign to fight Wal-Mart’s effort to remove them from the selling process, claiming that their elimination jeopardized a manufacturer’s right to choose how it sells its products.

During this time, however, Wal-Mart’s revenues kept going up, and the company moved into new territory. Wal–Mart enjoyed a 12-year streak of 35 percent annual profit growth through 1987. In 1988 the company operated in 24 states concentrated in the Midwest and South, overseeing 1,182 stores, 90 wholesale clubs, and two hypermarts. David D. Glass, who was named president and CEO in 1988 but who had been with the company since 1976, was a key player in Wal-Mart’s expansion.

In a move motivated by good business sense and public relations efforts,Wal–Mart sent an open letter to U.S. manufacturers in March 1985 inviting them to take part in a “Buy-American” program. The company offered to work with them in producing products that could compete against imports. “Our American suppliers must commit to improving their facilities and machinery, remain financially conservative and work to fill our requirements, and most importantly, strive to improve employee productivity,” Walton said in the April 1988 issue of Nation’s Business. Product conversions, that is, arranging to buy competitively priced U.S.-made goods in place of imports, were regularly highlighted at weekly managers’ meetings. William R. Fields, executive vice president of merchandise and sales, estimated that Wal–Mart cut imports by approximately 5 percent between 1985 and 1989. Nonetheless, analysts estimated that Wal–Mart still purchased between 25 and 30 percent of its goods from overseas, about twice the percentage of competitor Kmart Corporation.

A RETAIL GIANT GROWS: 1990–92

Wal–Mart also came under criticism for its impact on small retail businesses. Independent store owners often went out of business when Wal–Mart came to town, unable to compete with the superstore’s economies of scale. In fact, Iowa State University economist Kenneth Stone conducted a study on this phenomenon and said in the April 2, 1989, issue of the New York Times Magazine: “If you go into towns in Illinois where Wal–Mart has been for 8 or 10 years, the downtowns are just ghost towns.” He found that businesses suffering most were drug, hardware, five-and-dime, sporting goods, clothing, and fabric stores, while major appliance and furniture businesses picked up, as did restaurants and gasoline stations, because of increased traffic.

Nevertheless, Wal–Mart developed a record of community service. The company began awarding $1,000 scholarships to high school students in each community Wal–Mart served. At the same time, the company’s refusal to stock dozens of widely circulated adult and teen magazines, including Rolling Stone, had some critics claiming that Wal–Mart was willfully narrowing the choices of the buying public by bowing to pressure from conservative special interest groups.

In 1990, the year in which Wal–Mart became the number one retailer in the United States, stores were added in California, Nevada, North Dakota, Pennsylvania, South Dakota, and Utah. The company also opened 25 Sam’s Clubs, of which four were 130,000-square-foot prototypes incorporating space for produce, meats, and baked goods. In mid-1990, the company acquired Western Merchandise, Inc., of Amarillo, Texas, a supplier of music, books, and video products to many of the Wal–Mart stores. Late in 1990 Wal–Mart acquired the McLane Company, Inc., a distributor of grocery and retail products based in Temple, Texas, for about $275 million. Early in 1991, in a $162 million transaction, The Wholesale Club, Inc., of Indianapolis merged with Sam’s Clubs, adding 28 stores that were to be integrated with Sam’s by year-end. In addition, Wal–Mart agreed to sell its nine convenience store-gas station outlets to Conoco Inc.

Wal-Mart’s expansion continued, and by 1992 the company opened about 150 new Wal–Mart stores and 60 Sam’s Clubs, bringing the total to 1,720Wal–Mart stores and 208 Sam’s Clubs. Some of these stores represented a change in policy for the company, opening near big cities with large populations. Another policy change was instituted by the company when it announced that it would no longer deal with independent sales representatives.

In 1991 Wal–Mart introduced its new store brand, Sam’s American Choice, whose first products were beverages including colas and fruit juices. The beverages were made by Canada’s largest private-label bottler, Cott Corporation, but the colas were supplied from U.S. plants. Future plans called for the introduction of many different types of products that would match the quality of national brands, but at lower prices.

BEGINNING OF FOREIGN EXPANSION: 1991

Also in 1991 Wal–Mart ventured outside the United States for the first time when it entered into a joint venture with Cifra, S.A. de C.V., Mexico’s largest retailer. The venture developed a price-club store called Club Aurrera that required an annual membership of about $25. Shoppers could choose from about 3,500 products ranging from fur coats to frozen vegetables. Within the year, the joint venture operated three Club Aurreras, four Bodegas discount stores, and one Aurrera combination store.

Expansion in the United States also continued, and from 1992 to 1993, 161Wal–Mart stores were opened, while only one was closed. Another 48 Sam’s Clubs and 51 Bud’s Warehouse Outlets also were opened. Expansions or relocations took place at 170 Wal–Mart stores and 40 Sam’s Clubs. By 1993 the 2,138 stores included 34 Wal–Mart Supercenters and 256 Sam’s Clubs.

Founder Sam Walton died on April 5, 1992, of bone cancer. A fairly smooth management transition at Wal–Mart ensued: Walton had already handpicked his successor, David Glass, who had served as CEO since 1988. S. Robson Walton, eldest son of the founder, was named chairman of the board.

In January 1993 Wal-Mart’s reputation was shaken when a report on NBC-TV’s Dateline news program reported on child laborers in Bangladesh producing merchandise for Wal–Mart stores. The program showed children working for five cents an hour in a country that lacked child labor laws. The program further alleged that items made outside the United States were being sold under “Made in USA” signs as part of the company’s Buy American campaign instituted in 1985. Glass appeared on the program saying that he did not know of any “child exploitation” by the company, but did apologize about some of the signs incorrectly promoting foreign-made products as domestic items.

In April 1993 Wal–Mart introduced another private label, called Great Value. The brand was initially used for a line of 350 packaged food items for sale in its Supercenters. The proceeds from the company’s other private label, Sam’s American Choice, were to be channeled into the Competitive Edge Scholarship Fund, which the company launched in 1993 in partnership with some vendors and colleges. In the same year, Wal–Mart spent $830.5 million to purchase 91 Pace Membership Warehouse clubs from Kmart, which had decided to shut down the Pace chain. Wal–Mart subsequently converted the new units into Sam’s Clubs. The Sam’s Club chain was thereby solidified soon after the emergence of a rival, PriceCostco Inc. The product of the October 1993 merger of Price Co. and Costco Wholesale Corp., PriceCostco, which was later renamed Costco Wholesale Corporation, would within a few years overtake the Sam’s Club chain as the nation’s top warehouse membership club. Overall, Wal–Mart posted profits of $2.33 billion on revenues of $67.34 billion in 1993. The company workforce exceeded half a million people.

GROWTH SLOWDOWN: 1994–98

In the mid-1990s Wal–Mart continued to grow in the United States, but at a slower pace than previous years. Whereas the company had always posted double-digit, comparable-store sales increases, starting in fiscal 1994 these sales increases had fallen to levels closer to the retail industry average of 4 to 7 percent. Furthermore, overall net sales typically had risen 25 percent or more per year in the 1980s and early 1990s. For fiscal years 1996, 1997, and 1998, however, net sales increased 13 percent, 12 percent, and 12 percent, respectively.

The company was beginning to reach the limits of expansion in its domestic market. This was reflected in the scaling back of the Wal–Mart discount store chain, which reached a peak of 1,995 units in 1996 before being reduced to 1,921 units by 1998. The company staked its domestic future on the Wal–MartSupercenter chain, which was expanded from 34 units in 1993 to 441 units in 1998. Most of the new Supercenters, 377 in total, were converted Wal–Martdiscount stores, as the company sought the additional per-store revenue that could be gleaned from selling groceries. Meanwhile, the Sam’s Club chain was struggling and was not as profitable as the company overall. As it attempted to turn this unit around, Wal–Mart curtailed its expansion in the United States. There were only 17 more Sam’s Clubs in 1998 than there were in 1995.

Another vehicle for company growth was aggressive international expansion. Following its earlier move into Mexico, Wal–Mart entered into the other NAFTA market in 1994 when it purchased 122 Woolco stores in Canada from Woolworth Corporation in a $335 million deal. Over the next few years Wal–Mart entered Argentina, Brazil, and China through joint ventures. By 1997Wal–Mart had set up several joint ventures with its Mexican partner, Cifra. That year, these joint ventures were merged together and then merged into Cifra. Wal–Mart then took a controlling 51 percent stake in Cifra for $1.2 billion. The company thereby held a majority stake in the largest retailer in Mexico, whose 402 stores included 27 Wal–Mart Supercenters, 28 Sam’s Clubs, and 347 units consisting of several chains, including Bodegas discount stores, Superamas grocery stores, and Vips restaurants.

In December 1997 Wal–Mart entered Europe for the first time when it acquired the 21-unit Wertkauf hy-permarket chain in Germany for an estimated $880 million. The Wertkauf format was similar to that of the Wal–Mart Supercenter. The profitable Wertkauf chain had annual sales of about $1.4 billion and was the eighth-largest hypermarket operator in Germany. Also in December 1997 Wal–Mart bought out its minority partner in its Brazilian joint venture, which by that time ran five Wal–Mart Supercenters and three Sam’s Clubs. By early 1998 the company also operated nine Wal–MartSupercenters and five Sam’s Clubs in Puerto Rico. Later that year Wal–Martannounced plans to triple its retail base in China by the end of 1999, aiming for a total of nine stores at that time. Moreover, in July 1998 the company announced that it had purchased a majority stake in four stores and six additional development sites in Korea, extending its expansion in Asia. Around this same time, however, a Wal–Mart expansion into the troubled nation of Indonesia under a franchise agreement failed.

During fiscal 1997 Wal-Mart’s international operations were profitable for the first time. By 1998 international sales had reached $7.5 billion, an impressive figure given that the company had begun its foreign expansion only in 1991. However, this figure represented just 6.4 percent of overall sales. Although growth in sales at home was slowing, Wal–Mart managed to exceed the $100 billion mark in overall revenues for the first time during fiscal 1997 and that year also gained further prestige through its selection as one of the 30 companies of the Dow Jones Industrial Average, a replacement for the troubled Woolworth. The firm also became the largest nongovernmental employer in the United States, with 680,000 domestic workers.

As another possible outlet for shoring up its top position in retailing in the United States and for increasing sales amid its nearing the saturation point for its Supercenters, Wal–Mart in late 1998 began testing a new format, the Wal–Mart Neighborhood Market. In an attempt to compete directly with traditional supermarkets and with convenience stores, this new concept consisted of a 40,000-square-foot store offering produce, deli foods, fresh meats, other grocery items, and a limited selection of general merchandise. The new store also featured a drive-through pharmacy. The company hoped that the Neighborhood Market would allow it to penetrate markets unable to support the huge 100,000-square-foot Supercenters, such as very small towns and certain sections within metropolitan areas.

DOMESTIC AND INTERNATIONAL EXPANSION: 1999–2002

By 1999 Wal–Mart was the world’s largest retailer (and the largest nongovernmental employer in the world, with 1.14 million employees) and was also the leading retailer in both Mexico and Canada. However, it was Europe that was at the forefront of the corporation’s international expansion in the late 1990s. In December 1998 Wal–Mart bolstered its German operations through the purchase of 74 Interspar hypermarkets from SPAR Handels AG.

Then in July 1999 the company entered the U.K. market for the first time by acquiring ASDA Group plc for about $10.8 billion. Ranking as the third-largest supermarket operator in the United Kingdom, ASDA operated 229 stores at the time of its acquisition and generated about $13.2 billion in annual revenues. Its stores were run in a fashion similar to that of Wal–MartSupercenters: They were large-format units offering food, apparel, and general merchandise at everyday low prices, with an emphasis on private-label brands and an avoidance of promotions. The stores acquired in the United Kingdom continued to operate under the ASDA name, whereas the German units were eventually re-badged as Wal–Mart Supercenters.

In January 2000 H. Lee Scott, Jr., a 20-year company veteran, was promoted from chief operating officer to president and CEO. Scott succeeded Glass, who remained on the board of directors as chairman of the executive committee. The new leader had played an important role in reversing the declining results at Wal-Mart’s domestic operations. One key to the turnaround was the adoption of a more aggressive approach to controlling bloated inventories at the stores and warehouses. Making better use of technology led both to significant decreases in inventory levels and to improved performance in keeping store shelves better stocked. Also during 2000 Wal–Mart spent $587 million to purchase another 6 percent of Cifra, which was subsequently renamed Wal–Mart de México S.A. de C.V. Wal–Martheld a stake of approximately 62 percent in this subsidiary.

During 2001 Wal–Mart became the largest food retailer in the United States as its grocery sales reached $56 billion. This milestone was achieved in large measure through the aggressive rollout of the Wal–Mart Supercenter format. By early 2002 there were about 1,050 Supercenters in the United States, while the number of Wal–Mart discount stores had declined to fewer than 1,650. In fiscal 2002 alone, 178 Supercenters were opened, whereas there was a net reduction in discount units of 89 (121 had been converted to Super-centers, one was closed, and 33 were opened). At the same time, theWal–Mart Neighborhood Markets format had grown to include 31 stores, providing a further base for the ever rising grocery revenue.

Despite some setbacks in its attempt to penetrate the very difficult German retail market, Wal–Mart kept up its steady international expansion. In 2001 the first Wal–Mart Supercenter in Puerto Rico opened for business. Then in December 2002 the firm paid approximately $242 million for Supermercados Amigo, Inc., the leading supermarket chain in Puerto Rico, with 37 outlets. Next on the expansion roster was Japan. In May 2002 Wal–Mart acquired a 6.1 percent interest in The Seiyu, Ltd., for about $51 million. Seiyu operated about 400 stores in Japan of various formats but mainly of the food-and-clothing variety. It ranked as Japan’s fifth-largest supermarket chain. In December 2002 Wal–Mart spent another $459 million to expand its stake in Seiyu to 35 percent, and it also had the right to increase it to nearly 67 percent by 2007. By 2003 Wal–Mart had more than 330,000 workers outside the United States, and its international operations produced $40.7 billion in sales that year, representing a 15 percent increase over the preceding year as well as about 17 percent of total revenues. International operating profits for 2003 jumped nearly 56 percent, hitting $2.03 billion. In May 2003 Wal–Mart, seeking to focus solely on retailing, sold its McLane wholesale distribution subsidiary to Berkshire Hathaway Inc. for $1.5 billion.

PUBLIC RELATIONS BATTLE CONTINUES: 2003

Overall fiscal 2003 revenues of $244.52 billion made Wal–Mart Stores, Inc., the world’s largest corporation. Its achievement of becoming the first nonmanufacturing company to top the Fortune 500 was fitting as the company increasingly had served as a symbol of both the positive and negative aspects of the U.S. economy of the early 21st century. In an October 6, 2003, article titled “Is Wal–Mart Too Powerful?,” Business Week suggested a number of ways in which to view the power of Wal–Mart, such as its drive to keep costs and prices down being at least partly responsible for the low rate of inflation in the late 20th and early 21st centuries; its cost-cutting focus also being a contributing factor in the shifting of factories outside the United States; and its 2002 imports from China of $12 billion representing 10 percent of total U.S. imports from that country. Furthermore, Wal–Mart had always taken a hard line on labor costs, particularly by resisting efforts to unionize its workforce. Two consequences of this were the company’s extraordinarily high turnover rate of 44 percent per year for its hourly workers and the fact that in 2001 the average Wal–Mart sales clerk made less than the federal poverty level.

As another way of looking at the power of Wal–Mart, Fortune in its March 3, 2003, issue estimated that the company’s share of the U.S. gross national product (GNP) in 2002 was 2.3 percent. This approached the levels reached by General Motors Corporation (3 percent in 1955) and U.S. Steel Corp. (2.8 percent in 1917) when these firms were at their respective peaks. Fortuneestimated that Wal-Mart’s share of the nation’s economy would become the biggest ever by around 2006, assuming the continuation of its then current growth rate.

As it continued to be dogged by detractors opposed to its business practices,Wal–Mart launched a public relations offensive in 2003 to counter the relentless criticism it faced. However, the retail giant had to contend with much more than just the attacks of journalists and social critics. It was facing a barrage of potentially damaging lawsuits. These included a host of class-action lawsuits involving employee claims that they were asked to work off the clock and to not take scheduled breaks. A sex discrimination lawsuit that potentially could involve 1.5 million current and former female employees alleged that Wal–Mart engaged in a pattern of discrimination against women in pay and promotion. In addition, in the fall of 2003 a federal investigation was launched into the company’s use of a cleaning contractor that employed illegal immigrants.

Notwithstanding these legal battles, Wal–Mart was placing no brakes on its drive to become ever larger. During 2004 the company planned to open at least 220 new Supercenters, while its discount store chain would be reduced by a net of about 90 units. This would mean that for the first time there would be more Supercenters than Wal–Mart discount stores in the United States. The Neighborhood Market chain was scheduled to grow by between 25 and 30 units, and Sam’s Club would add about 15 stores. The international store count would likewise increase, by about 100 units.

COMPETITIVE PRESSURE MOUNTS: 2005–12

Expansion delivered growth to Wal–Mart, but midway through the decade the only way the company could increase its sales and profits was by opening new stores. Same-store sales were sagging and becoming a growing concern, which prompted management to reach out to more affluent customers. The company was losing business to chains with better product quality, cleaner stores, and faster checkout lines, ceding market share to retailers such as Target Corporation, whose same-store sales were increasing impressively. The company began remodeling its stores and in October 2005 it launched an upscale women’s clothing line, Metro 7. Exsto, a trendy urban sportswear line for men, followed in July 2006, but the brands, as well as other attempts to lure more affluent customers, failed to ignite growth. In 2007 the company conceded defeat and scuttled efforts to lure more affluent customers to its stores.

Soon after Wal-Mart’s ill-fated attempt to alter its image, economic conditions deteriorated, creating an ideal environment for the Bentonville-based retailer. “The U.S. has suffered three recessions since 1990,” Investor’s Business Daily‘s Paul Whitfield wrote in a May 14, 2009, article, “but none has ever knocked Wal–Mart Stores into negative year-ago comparisons in annual [earnings per share] or sales.” Wal–Mart thrived while other retailers floundered, posting a 9 percent increase in profits and a 7 percent increase in sales in 2009.

Despite the company’s stellar performance during the global financial crisis at the end of the decade, there were areas of concern that management needed to address. Greater success in online retailing was a priority for the company, an aspect of Wal-Mart’s business that accounted for only a fraction of its annual revenues. Amazon, in particular, was perceived as a major threat to the company in the online realm. Wal–Mart also faced increasing competition from discount retailers who operated relatively small stores, competitors such as Dollar General, Big Lots, and Family Dollar. In response to the incursion of the smaller, so-called dollar stores, the company created a new format, 3,500-square-foot stores operating under the Walmart on Campus banner, in early 2011. In mid-2011 the company launched another chain, Walmart Express, which operated at 15,000-square-foot locations. The company announced it intended to open “hundreds of the smaller format stores over the next three years,” according to the January 9, 2012, issue ofInvestor’s Business Daily.

KEY DATES

1962:

Samuel Walton and his brother J. L. (Bud) Walton open their first Wal–Mart Discount City in Rogers, Arkansas.

1969:

The brothers are operating 18 Wal–Mart stores in Arkansas, Missouri, Kansas, and Oklahoma; they incorporate these ventures as Wal–MartStores, Inc.

1970:

Wal–Mart stock begins trading over the counter.

1983:

First Sam’s Wholesale Clubs, later renamed Sam’s Clubs, are opened.

1988:

Company opens its first Wal–Mart Supercenters.

1990:

Wal–Mart becomes the largest retailer in the United States.

1991:

Foreign expansion begins with the creation of a joint venture with Cifra, S.A. de C.V., Mexico’s largest retailer.

1997:

Company enters Europe through acquisition of the 21-unit Wertkauf hypermarket chain in Germany.

1999:

ASDA Group plc, the third-largest U.K. supermarket operator, is acquired for $10.8 billion.

2002:

Wal–Mart takes a 35 percent interest in The Seiyu, Ltd., a leading Japanese retailer.

2008:

Store logo changed to Walmart and the iconic spark added.

2011:

Wal–Mart launches two small-format chains: Walmart on Campus and Walmart Express.

Kellogg Co.

Public Company
Incorporated: 1906 as Battle Creek Toasted Corn Flake Company
Employees: 32,400
Sales: $12.82 billion (2008)
Stock Exchanges: New York
Ticker Symbol: K
NAICS: 311230 Breakfast Cereal Manufacturing; 311412 Frozen Specialty Food Manufacturing; 311423 Dried and Dehydrated Food Manufacturing; 311812 Commercial Bakeries

The Kellogg Company, located in Battle Creek, Michigan, has long been a dominant force in the ready-to-eat cereal industry. Founder Will Keith (W. K.)Kellogg once estimated that 42 cereal companies were launched in the breakfast-food boom during the early years of the 20th century. His own venture, founded as the Battle Creek Toasted Corn Flake Company, was among the last, but it has outlasted most of its early competitors. The KelloggCompany, as it was ultimately named, followed a straight and profitable path, avoiding takeovers and diversification, relying heavily on advertising and promotion, and posting profits nearly every year of its existence. By the early 21st century Kellogg Co. has expanded its leadership position beyond the cereal category to include convenience foods, such as cereal bars, cookies, toaster pastries, frozen waffles, and crackers. On the strength of a 32,000-member workforce, operations span 19 countries, and the company markets its products in approximately 180 countries worldwide.

KELLOGG’S CORN FLAKES ARE BORN

By the time Kellogg launched his cereal company in 1906, he had already been in the cereal business for more than 10 years as an employee of the Adventist Battle Creek Sanitarium run by his brother, Dr. John HarveyKellogg. Dr. Kellogg, a strict vegetarian and the sanitarium’s internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kellogg’s Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments.

The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes, one for each wheat berry, and flaked cereals were born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A 10-ounce box sold for 15 cents, which meant that the Kelloggscollected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek. In 1900 production was moved to a new $50,000 facility. When the new factory building was completed, Dr. Kellogginsisted that he had not authorized it, forcing his brother to pay for it himself.

Meanwhile, other companies were growing quickly, but Dr. Kellogg refused to invest in the company’s expansion. Its most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C. W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In 1902 Sanitas improved the corn flake it had first introduced in 1898. The new product had better flavor and a longer shelf life than the 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. By late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

BATTLE CREEK TOASTED CORN FLAKE COMPANY IS LAUNCHED

The next year W. K. Kellogg launched the Battle Creek Toasted Corn Flake Company with the help of another enthusiastic former sanitarium patient.Kellogg recognized that advertising and promotion were the keys to success in a market flooded with look-alike products; the company spent a third of its initial working capital on an ad in Ladies’ Home Journal.

Orders, fueled by early advertising efforts, continually outstripped production, even after the company leased factory space at two additional locations. In 1907 output had reached 2,900 cases a day, with a net profit of about a dollar per case. In May 1907 the company became the Toasted Corn Flake Company. That July a fire destroyed the main factory building. On the spot, W. K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. “That’s all the business I ever want,” he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One anonymous campaign told newspaper readers to “wink at your grocer and see what you get.” Winkers got a free sample of Kellogg’s Corn Flakes. In New York City, the ad helped boost Corn Flakes sales 15-fold. In 1911 the advertising budget reached $1 million.

By that time, W. K. Kellogg had finally managed to buy out the last of his brother’s share of the company, giving him more than 50 percent of its stock. W. K. Kellogg’s company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kellogg’s Sanitas Food Company had been renamed the Kellogg Food Company and used similar slogans and packaging. W. K. Kellogg sued his brother for rights to the family name and was finally successful in 1921.

COMPANY REINCORPORATES AS THE KELLOGGCOMPANY

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name “Toasted Corn Flakes,” and had expanded its product line so much that the name no longer accurately described the company. Kellogg had introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915, and All-Bran in 1916.

Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W. K. Kellogg’s son John L. (J. L.) Kellogg, who began working for the company in its earliest days. J. L. Kellogg developed a malting process to give the corn flakes a more nutlike flavor, saved $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. His father credited him with more than 200 patents and trademarks.

Sales and profits continued to climb, financing several additions to the Battle Creek plant and the addition of a plant in Canada, opened in 1914, as well as an ever-increasing advertising budget. The one exception came just after World War I, when shortages of raw materials and railcars crippled the once-thriving business. W. K. Kellogg returned from a world tour and canceled advertising contracts and sampling operations, and for six months he and his son worked without pay. The company issued $500,000 in gold notes in 1919, and in 1920 posted the only loss in its history. Even so, Kelloggrejected a competitor’s buyout offer.

SEARCHING FOR A SUCCESSOR

At that point the Battle Creek plant had 15 acres of floor space, production capacity of 30,000 cases a day, and a shipping capacity of 50 railcars a day. Each day it converted 15,000 bushels of white southern corn into Corn Flakes. The company had 20 branch offices and employed as many as 400 salesmen. During the next decade the Kellogg Company more than doubled the floor space at its Battle Creek factory, and opened a plant in Sydney, Australia, in 1924.

Also during that period, W. K. Kellogg began looking for a successor since in 1925 he had forced his son, who had served briefly as president, out of the company after J. L. had bought an oat-milling plant and divorced his wife to marry an office employee. W. K. Kellogg objected both to his son’s moral lapse and to his preference for oats. Several other presidents followed, but none could manage well enough to keep W. K. Kellogg away. During the Great Depression the company’s directors decided to cut advertising, premiums, and other expenses.

When Kellogg heard of it, he returned from his California home, called a meeting, and told the officers to press ahead. They voted again, this time adding $1 million to the advertising budget. The company’s upward sales curve continued right through the Depression, and profits improved from around $4.3 million a year in the late 1920s to $5.7 million in the early 1930s.

In 1930 W. K. Kellogg established the W.K. Kellogg Foundation to support agricultural, health, and educational institutions. Kellogg eventually gave the foundation his majority interest in the Kellogg Company. The company, under W. K. Kellogg’s control, also did its part to fight unemployment, hiring a crew to landscape a 10-acre park on the Battle Creek plant grounds and introducing a six-hour, four-shift day.

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VANDERPLOEG NAMED PRESIDENT OF KELLOGGCOMPANY

In 1939 Kellogg finally found a permanent president, Watson H. Vanderploeg, who was hired away from a Chicago bank. Vanderploeg led the company from 1939 until his death in 1957. Vanderploeg expanded Kellogg’s successful advertise-and-grow policy, adding new products and taking them into new markets. In 1941 the company began a $1 million modernization program, updating old steam-generation equipment and adding new bins and processing equipment.

The company also added new plants in the United States and abroad. Domestic plants were established in Omaha, Nebraska; Lockport, Illinois; San Leandro, California; and Memphis, Tennessee. Additional foreign operations were established in Manchester, England, in 1938, followed by plants in South Africa, Mexico, Ireland, Sweden, the Netherlands, Denmark, New Zealand, Norway, Venezuela, Colombia, Brazil, Switzerland, and Finland. During the five years after World War II, Kellogg expanded net fixed assets from $6.6 million to $20.6 million. As always, this expansion was financed entirely out of earnings.

The company also continued to add new products, but it never strayed far from the ready-to-eat cereal business. In 1952 more than 85 percent of sales came from 10 breakfast cereals, although the company also sold a line of dog food, some poultry and animal feeds, and Gold Medal pasta. Barron’s noted that Kellogg’s profit margins, consistently between 6 and 7 percent of sales, were more than double those of other food companies.

The company produced 35 percent of the nation’s ready-to-eat cereal and was the world’s largest manufacturer of cold cereal. Kellogg’s success came from its emphasis on quality products; high-speed automated equipment, which kept labor costs to about 15 percent of sales; and substantial foreign earnings that were exempt from the excess-profits tax. Dividends tended to be generous and had been paid every year since 1908. Sales, which had been $33 million in 1939, began to top $100 million in 1948. By the early 1950s an estimated one-third of those sales were outside the United States.

KELLOGG’S BEGINS TELEVISION ADVERTISING

In the early 1950s Kellogg’s continued success was tied to two outside developments: the postwar baby boom and television advertising. To appeal to the new younger market, Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kellogg’s entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created cartoon pitchmen to sell the products on Saturday morning television. Tony the Tiger was introduced in 1953 following a contest to name the ambassador for the new cereal, Kellogg’s Sugar Frosted Flakes of Corn. Sales and profits doubled over the decade and in 1960 Kellogg earned $21.5 million on sales of $256.2 million and boosted its market share to 40 percent.

The company continued adding new cereals, aiming some at adolescent baby boomers and others, like Special K and Product 19, at their parents. Kellogg’s Corn Flakes still led the cereal market and got more advertising support than any other cereal on grocers’ shelves. Kellogg poured nearly $10 million into advertising Corn Flakes in both 1964 and 1965, putting more than two-thirds of those dollars into television.

In 1969 Kellogg finally made a significant move away from the ready-to-eat breakfast-food business, acquiring Salada Foods, a tea company. The following year Kellogg bought Fearn International, which sold soups, sauces, and desserts to restaurants. Kellogg added Mrs. Smith’s Pie Company in 1976 and Pure Packed Foods, a maker of nondairy frozen foods for institutional customers, in 1977. Kellogg also bought several small foreign food companies.

FACING INCREASING CRITICISM

The diversification may have been motivated in part by increasing attacks on Kellogg’s cereal business. Criticism boiled over in 1972 when the Federal Trade Commission (FTC) accused Kellogg and its leading rivals General Mills and General Foods of holding a shared monopoly and overcharging consumers more than $1 billion during the previous 15 years. The FTC said the companies used massive advertising (12 percent of sales), brand proliferation, and allocation of shelf space to keep out competitors and maintain high prices and profit margins. There was no disputing the profit margins, but the companies argued that the advertising and product proliferation were the result of competition, not monopoly. The cereal companies won their point following a lengthy hearing.

During the same period, the industry’s presweetened cereals and related advertising also took a beating. The American Dental Association accused the industry of obscuring the sugar content of those cereals, and Action for Children’s Television lodged a complaint with the FTC, saying that the mostly sugar cereals were equivalent to candy. Kellogg flooded consumer groups and the FTC with data playing down the sugar content by showing that only 3 percent of a child’s sugar consumption was coming from presweetened cereals. This publicity caused sales of sugared cereal to fall 5 percent in 1978, the first decline since their introduction in the 1950s.

The biggest threat to Kellogg’s continued growth was not criticism, but rather the aging of its market. By the end of the 1970s growth slowed dramatically as the baby boom generation passed from the under-25 age group, which consumed an average of 11 pounds of cereal a year, to the 25 to 50 age group, which ate less than half as much cereal. Cereal-market growth dropped, and Kellogg lost the most. Its market share fell from 43 percent in 1972 to 37 percent in 1983.

NEW CHAIRMAN LAMOTHE CONTINUES TO PUSH CEREAL BUSINESS

While Wall Street urged the company to shift its growth targets into anything but the stagnating cereal market, Kellogg continued to put its biggest efforts into its cereal business, emphasizing some of the same nutritional concepts that had given birth to the ready-to-eat breakfast business. Kellogg was less unwilling than unable to diversify. It made three unsuccessful bids for the Tropicana Products orange juice company and another for Binney & Smith, makers of Crayola crayons. Despite its problems, Kellogg believed the cereal business still represented its best investment opportunity. “When you average 28 percent return on equity in your own business, it’s pretty hard to find impressive acquisitions,” said Chairman William E. LaMothe, a onetime salesman who became CEO in 1979.

In 1984 Kellogg bought back about 20 percent of its own stock from the W.K.Kellogg Foundation, a move that increased profits and helped defend the company against future takeover attempts, while satisfying a legal requirement limiting the holdings of foundations without giving potential raiders access to the stock.

Meanwhile, the company’s response to generally sagging markets in the late 1970s was much like W. K. Kellogg’s during the Depression: more advertising. Kellogg also boosted product research and stepped up new-product introductions. In 1979 the company rolled out five new products and had three more in test markets. By 1983 Kellogg’s research and development budget was $20 million, triple the 1978 allotment.

Targeting a more health-conscious market, Kellogg spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Kellogg added almost as many products in the next two years as it had in the previous four. In 1984Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal.

By the mid-1980s the results of Kellogg’s renewed assault on the cereal market were mixed. The company’s hopes of raising per capita cereal consumption to 12 pounds by 1985 fell flat. However, Kellogg did regain much of its lost market share, claiming 40 percent in 1985, and it continued to outperform itself year after year. In 1986 Kellogg posted its 30th consecutive dividend increase, its 35th consecutive earnings increase, and its 42nd consecutive sales increase.

KELLOGG SELLS TEA OPERATIONS

In 1988 the company sold its U.S. and Canadian tea operations, in a demonstration of Kellogg’s renewed commitment to the cereal market. In the early 1990s, however, Kellogg failed to move fast enough to profit from the oat bran craze and lost market share in the United States, primarily to General Mills, Inc.’s, oat-heavy brands such as Cheerios and Honey Nut Cheerios.

Further erosion resulted from an upsurge in sales of private-label store brands, notably those produced by Ralston Purina Company spinoff Ralcorp Holdings Inc. By developing knockoffs of such Kellogg standbys as Corn Flakes and Apple Jacks and selling them for as much as a dollar less per box, Ralcorp and other companies increased private-label cereal market share to 6 percent by 1994 at the expense of Kellogg and other makers of brand-name cereals. Sales of branded cereals increased only 3 percent in 1994 over 1993; in this flat market, Kellogg’s U.S. market share fell to as low as 33.8 percent in 1994.

In order to hold on to as much of its market share as it could, Kelloggmanagement once again turned to increased marketing and advertising in 1990. Even in the face of the pressure from lower-priced private-label products, the company also continued to raise its prices in the early 1990s to generate sufficient revenue. This trend was finally reversed in 1994, however, when General Mills lowered its prices, forcing Kellogg to do the same.

In the midst of these difficulties, LaMothe retired in 1992 and was replaced as chairman and CEO by the president of Kellogg, Arnold G. Langbo. Under Langbo’s direction, the company underwent a reengineering effort in 1993 that committed the company to concentrating its efforts on its core business of breakfast cereal. That year and the next, Kellogg divested itself of such noncore assets as its Mrs. Smith’s Frozen Foods pie business, Cereal Packaging, Ltd., based in England, and its Argentine snack food business.

Kellogg’s emphasis on its core business was also extended to its operations outside the United States, where company officials saw the greatest potential for future growth. By 1991 Kellogg held 50 percent of the non-U.S. cereal market, and 34 percent of its profits were generated outside the United States. In most of the markets in which it operated, it had at least six of the top 10 cereal brands. Looking to the future, Kellogg’s primary target markets of Europe, Asia, and Latin America had not reached the more mature levels of the United States.

While per capita cereal consumption in the United States was 10 pounds per year, in most other markets it was less than 2 pounds. After expanding into Italy in the early 1990s, Kellogg became the first major cereal company to open plants in three markets: the former Soviet Union with a plant in Riga, Latvia, in 1993; India with a plant in Taloja in 1994; and China with a plant in Guangzhou in 1995. With these new operations, Kellogg had 29 plants operating in 19 countries and could reach consumers in almost 160 countries.

KELLOGG COMPETES WITH GENERAL MILLS FOR MARKET SHARE

Although Kellogg had a commanding position internationally, it faced a new and more formidable international competitor starting in 1989. General Mills and the Swiss food titan Nestlé S.A. established a joint venture called Cereal Partners Worldwide (CPW), which essentially combined the cereal brands and cereal-making equipment of General Mills with Nestlé’s name recognition and vast experience with retailers in numerous markets. By 1994, CPW was already beginning to eat into Kellogg’s market share in various countries.

Overall, Kellogg’s difficulties in the 1990s had slowed, but not stopped, the firm’s tradition of continual growth. Net sales increased at the modest rates of 7 percent, 2 percent, and 4 percent in 1992, 1993, and 1994, respectively (1994 was Kellogg’s 50th consecutive year of sales growth). With U.S. sales still accounting for 59 percent of the overall total, however, and competition heating up overseas, Kellogg faced its most challenging environment since the early 1920s.

In addition to its aggressive expansion into overseas markets that still held huge potential for growth, Kellogg revitalized its new product development program. More disciplined than the scattershot approach of the 1980s, the program was beginning to produce products such as Low Fat Granola, Rice Krispies Treats, and a line of cereal developed as a result of the 1994 partnership with ConAgra, Inc., under the food conglomerate’s Healthy Choice brand.

In 1997 and 1998 operations were expanded in Australia, the United Kingdom, Asia, and Latin America, but extremely competitive market conditions resulted in declines in sales and earnings in 1998. The result was a refocusing in two key areas: new product development and the complete overhaul of corporate headquarters and the North American organization structure.

Product development included the addition of new cereals, innovative convenience foods, and new grain-based products; product improvement measures added to the nutritional value of all products. The Ensemble line of heart-healthy foods was introduced in November 1998 and included frozen entrees, bread, dry pasta, baked potato crisps, frozen mini-loaves, cookies, and a ready-to-eat cereal similar to the General Mills Cheerios line.

An increase in overall marketing investments was targeted for the seven largest cereal markets: the United States, the United Kingdom, Mexico, Canada, Australia, Germany, and France. In response to the growth of “on-the-go” convenience foods, geographic distribution was expanded for such products as Nutri-Grain bars, Rice Krispies Treats squares, and Pop-Tarts toaster pastries.

NEW CHAIRMAN GUTIERREZ REORGANIZES COMPANY

In an effort to reduce costs and create a more focused and accountable workforce, about 25 percent of its North American workforce was let go and steps were taken toward the reorganization of the corporate structure. As a result, several top officers left in 1998 and 1999. In April 1999, Cuban-born Carlos M. Gutierrez, a 25-year veteran of the company, became CEO. Gutierrez’s vision for Kellogg was “to begin a process of renewal designed to strengthen significantly the ability of the Kellogg Company to compete and prosper in the 21st century.” His new team included eight new top executives, including four who joined the company in 1999 and 2000.

Gutierrez took many bold steps to hold on to the company’s position as the world’s leading producer of ready-to-eat cereal in spite of declining stock value, including selling the Lender’s bagel division to Aurora Foods and shutting down the Ensemble line of cholesterol-reducing foods. Despite protestations from the community and workforce, the historic hometown plant in Battle Creek was closed and 550 jobs were eliminated. In late 1999,Kellogg acquired Worthington Foods, Inc., manufacturer of meat alternatives, frozen egg substitutes, and other healthful food products, under the brands of Morningstar Farms, Natural Touch, Worthington, and Loma Linda.

As in 1999, Kellogg continued the process of renewal in 2000, with its second consecutive year of earnings growth. Sales, however, declined by 0.4 percent and share performance was again disappointing. With sales falling or remaining stagnant in the ready-to-eat cereal business, the strategy of the company involved allocating resources first to the U.S. markets, and then to other core markets in the United Kingdom/Republic of Ireland, Mexico, Canada, and Australia/New Zealand; setting targets for long-term growth; and executing a sound business plan.

To strengthen their competitive position, in 2000 Kellogg acquired Kashi Company, a natural cereal company in the United States; two convenience food businesses in Australia; and the Mondo Baking Company, a manufacturer of convenience foods in Rome, Georgia. On October 26, 2000, the company announced that an agreement had been reached to acquire Keebler Foods Company, the largest acquisition in the 95-year history of the company. The acquisition, completed in March 2001, brought to Kellogg not only Keebler’s cookie and cracker business, but also their direct store door (DSD) delivery system, which was expected to increase the growth potential of snack foods such as Kellogg’s Nutri-Grain bars and Rice Krispies Treats squares.

In the fourth quarter of 2000, Kellogg’s operations were restructured into two major divisions—USA and International—to streamline operations and reduce costs. Kellogg International was further delineated into Europe, Latin America, Canada, Australia, and Asia. In U.S. operations, Kellogg’s Raisin Bran Crunch cereal remained the most successful new U.S. cereal product since the mid-1990s, with a 0.9 percent market share. Consumer promotions included American Airlines frequent flyer miles, and affiliations with NASCAR, the Olympics, and Major League Soccer. Other advertising connections were made with the movie How the Grinch Stole Christmas. Kellogg also launched Eet and Ern, an Internet-based consumer loyalty program.

HEIGHTENED COMPETITION

The Kellogg International division had responsibility for all markets outside the United States, providing products to more than 160 countries on six continents worldwide. The four largest Kellogg International markets were the United Kingdom/Republic of Ireland, Mexico, Canada, and Australia/New Zealand. The United Kingdom/Republic of Ireland remained Kellogg’s largest market outside the United States, and experienced a 3 percent increase in cereal sales during 2000. The fastest-growing international market was Mexico, where the DSD delivery system was effectively implemented.

Cereal competitor General Mills had closed the gap in the U.S. market share, and passed Kellogg in 2001 as the number one cereal maker. According toKellogg CEO Gutierrez, “after a year of change, a stronger Kellogg is emerging.” The change marked the building of a better business model in which “short-term sales and earnings growth were sacrificed to lay the foundation for great value creation in the future.” In Kellogg USA, the acquisition of Keebler, completed in 2001, resulted in a more profitable sales mix. Advertising through brand building was increased with tie-ins with Disney, American Airlines, and the Cartoon Network.

In the cereal category, Special K Red Berries cereal was launched in March 2001 and proved to be the most successful new product in this category since the 1998 introduction of Raisin Bran Crunch. Pop-Tarts increased its sales and category share and benefited from the introduction of Chocolate Chip Pop-Tarts. A number of products in the snacks category benefited from the inclusion in Keebler’s DSD delivery system. Growth was also evident in the natural and frozen foods category, with Kashi proving to be the fastest-growing brand in the natural cereals category.

Like Kellogg USA, Kellogg International’s focus on “volume to value” in 2001 was applied to sales, marketing, and new-product initiatives. In the United Kingdom, the most important brands and innovation projects were prioritized. Successful product campaigns were launched for Crunchy Nut Red cereal and Special K bars. Kellogg India Ltd. was permitted by the Foreign Investment Promotion Board to launch new products including Cheez-It crackers, Keebler cookies, and Special K cereal. In other parts of Europe,Kellogg pulled back on investments in smaller markets and attempted to bring prices in line in preparation for the launch of the euro currency.

By 2002 the Kellogg team, headed by Chairman Gutierrez, remained optimistic for the future of the Kellogg Company. After a year of significant changes, the company announced that it had emerged stronger and with a clearer focus. The year 2002 indicated progress in the form of sustainable, reliable sales and earnings growth. With products manufactured in 19 countries and marketed in more than 160 countries worldwide, Kellogg was focused on regaining and retaining its position as the world’s leading producer of cereal and a leading producer of convenience foods.

PRODUCT EVOLUTION

In 2002, Kellogg began developing new products. The company’s Morningstar Farms business developed a veggie burger for Burger King Corp., and a new popcorn category was added to its snack food line. It also was in 2002 that Kellogg entered the home textiles business for the first time, when it partnered with Teka USA to develop a line of beach towels, bath towels for children, and kitchen textiles as part of an effort to extend its brand beyond the grocery store.

In early 2003, Kellogg earmarked approximately $50 million to advertise a range of additional new products, including Pop-Tart Yogurt Blasts, Tony’s Cinnamon Krunchers Cereal, Eggo Froot Loops Waffles, and its chocolate graham Smorz cereal. Also in 2003, several leadership changes took place. Midway through the year, Brad Davidson was named president of the company’s U.S. snacks division. In August, the newly created position of president and chief operating officer was filled by David Mackay. In addition, Jeff Montie was promoted to executive vice-president, and also named president of the company’s North American Morning Foods arm.

In 2004 construction of a new production plant in Toluca, Mexico, was planned in order to support burgeoning sales in that country. In addition, the company relocated its Keebler unit from Elmhurst, Illinois, to Battle Creek, Michigan. In November 2004, President George W. Bush nominated KelloggCEO Carlos Gutierrez to serve as head of the U.S. Department of Commerce. Following this development, James M. Jenness was named as Gutierrez’s successor. The nomination of Gutierrez was confirmed by the U.S. Senate in early 2005.

Kellogg parted with approximately $30 million in 2005 to acquire the fruit snacks business of Kraft Foods. The deal included approximately 400 Kraft employees, as well as a 300,000-square-foot facility in Chicago. In addition, the license to produce Nickelodeon fruit snacks also was acquired.

BRAND BUILDING PARTNERSHIPS

It also was in 2005 that Kellogg extended an existing partnership with the U.S. Olympic Committee. Following this, the company became an official sponsor of both the 2006 and 2008 U.S. Olympic Teams, along with the 2007 U.S. Pan American Team. The deal allowed Kellogg to keep using Olympic athletes, as well as the U.S. Olympic Team logo, in its promotional and marketing efforts.

Kellogg secured additional marketing muscle in 2006 when it cemented a multi-year promotional partnership with DreamWorks. The deal allowed the company to use the home videos and animated films of DreamWorks to promote products such as fruit snacks, toaster pastries, cereals, and cereal bars.

On the leadership front, Chief Marketing and Customer Officer Alan Harris announced his retirement, ending a 22-year career with the company. In October 2006, David Mackay was named CEO, succeeding Jim Jenness, who continued to serve the company as chairman. By late 2006 Special K was Kellogg’s leading brand, with estimated annual sales of $500 million. The brand’s evolution was assured when the company revealed plans for a national rollout of several new products, including Special K Chocolatey Delight cereal, as well as a related line of protein bars and protein waters.Kellogg rounded out the year by announcing the approval of a $650 million stock buyback program for 2007.

Expansion occurred at Kellogg as the company headed into the end of the decade. In early 2008, the company acquired the United Bakers Group, a cracker, breakfast cereal, and biscuit company based in Voronezh, Russia. In June, international growth continued as Kellogg snapped up the Qingdao, China-based cookie and cracker company Zhenghang Food Co. Finally, in September the company acquired Indy-Bake Products LLC and Brownie Products Company, adding cracker and cookie bakery operations in Seelyville, Indiana, and Gardner, Illinois.

Despite difficult economic conditions in 2009, Kellogg remained on solid footing. On September 15, 2009, the company paid shareholders its 339th consecutive quarterly dividend since 1925. With operations in 19 countries and products sold in 180 countries worldwide, Kellogg remained a leading player in the cereal and convenience foods industry.

Key Dates

1894:

The wheat flake is first produced by brothers Dr. John Harvey Kellogg and Will Keith Kellogg.

1898:

Kellogg’s corn flake is introduced.

1906:

Battle Creek Toasted Corn Flake Company is founded in Battle Creek, Michigan, by Will Keith Kellogg.

1909:

Company is renamed the Kellogg Toasted Corn Flake Company.

1914:

International expansion begins in Canada.

1915:

Bran Flakes cereal is introduced.

1922:

Company is reincorporated as the Kellogg Company.

1930:

The W.K. Kellogg Foundation is established.

1938:

Expansion in the United Kingdom begins.

1969:

Kellogg acquires a tea company, Salada Foods.

1976:

Kellogg acquires Mrs. Smith’s Pie Company.

1982:

Nutri-Grain cereals are marketed.

1988:

Kellogg sells its U.S. and Canadian tea operations.

1994:

Kellogg teams with ConAgra to create a cereal line sold under the Healthy Choice label.

1999:

Company acquires Worthington Foods.

2000:

Kellogg acquires natural cereal maker Kashi Company; company reorganizes its operations into two divisions (USA and International).

2001:

General Mills passes Kellogg as the number one cereal maker; Kelloggacquires Keebler Foods.

2004:

CEO Carlos Gutierrez resigns to serve as head of the Commerce Department; James M. Jenness is named as Gutierrez’s successor.

2007:

A $650 million stock buyback program begins.

2009:

The company pays shareholders its 339th consecutive quarterly dividend since 1925.

Coca-Cola Co.

Public Company
Incorporated: 1892
Employees: 146,200
Sales: $46.54 billion (2011)
Stock Exchanges: New York
Ticker Symbol: KO
NAICS: 312111 Soft Drink Manufacturing; 311930 Flavoring Syrup and Concentrate Manufacturing; 311411 Frozen Fruit, Juice, and Vegetable Manufacturing; 311920 Coffee and Tea Manufacturing; 312112 Bottled Water Manufacturing

The Coca–Cola Company is the world’s largest nonalcoholic beverage company, marketing more than 500 brands in more than 200 countries. Coca–Cola Company sells four of the five best-selling soft drinks in the world: Coca–Cola, Diet Coke, Fanta, and Sprite. The company owns 15 brands that each generate more than $1 billion in annual revenue. The company operates 85 beverage production facilities, 20 of which are located outside of North America.

CREATION OF A BRAND LEGEND: 1886

The inventor of Coca–Cola, Dr. John Stith Pemberton, came to Atlanta from Columbus, Georgia, in 1869. In 1885 he set up a chemical laboratory in Atlanta and went into the patent medicine business. Pemberton invented such products as Indian Queen hair dye, Gingerine, and Triplex liver pills. In 1886 he concocted a mixture of sugar, water, and extracts of the coca leaf and the kola nut. He added caffeine to the resulting syrup so that it could be marketed as a headache remedy. Through his research Pemberton arrived at the conclusion that this medication was capable of relieving indigestion and exhaustion in addition to being refreshing and exhilarating.

The pharmacist and his business partners could not decide whether to market the mixture as a medicine or to extol its flavor for its own sake, so they did both. In Coca–Cola: An Illustrated History, Pat Watters cited a Coca–Cola label from 1887 which stated that the drink, “makes not only a delicious … and invigorating beverage … but a valuable Brain Tonic and a cure for all nervous affections.” The label also claimed that “the peculiar flavor of Coca–Coladelights every palate; it is dispensed from the soda fountain in the same manner as any fruit syrup.” The first newspaper advertisement for Coca–Cola appeared exactly three weeks after the first batch of syrup was produced, and the famous trademark, white Spenserian script on a red background, made its debut at about the same time.

Coca–Cola was not, however, immediately successful. During the product’s first year in existence,

COMPANY PERSPECTIVES

At The Coca–Cola Company we strive to refresh the world, inspire moments of optimism and happiness, create value, and make a difference.

Pemberton and his partners spent around $74 in advertising their unique beverage and made only $50 in sales. The combined pressures of poor business and ill health led Pemberton to sell two-thirds of his business in early 1888. By 1891 a successful druggist named Asa G. Candler owned the entire enterprise. It had cost him $2,300. Dr. Pemberton, who died three years earlier, was never to know the enormous success his invention would have in the coming century.

Candler, a religious man with excellent business sense, infused the enterprise with his personality. Candler became a notable philanthropist, associating the name of Coca–Colawith social awareness in the process. He was also an integral part of Atlanta both as a citizen and as a leader. Candler endowed Emory University and its Wesley Memorial Hospital with more than $8 million. Indeed, the university could not have come into existence without his aid. In 1907 he prevented a real estate panic in Atlanta by purchasing $1 million worth of homes and reselling them to people of moderate income at affordable prices. During World War I, Candler helped to avert a cotton crisis by using his growing wealth to stabilize the market. After he stepped down as the president of Coca–Cola, he became the mayor of Atlanta and introduced such reforms as motorizing the fire department and augmenting the water system with his private funds.

RAPID GROWTH UNDER THE CANDLERS: 1891–1919

Under Candler’s leadership, which spanned a 26-year period, Coca–Cola Company grew quickly. Between 1888 and 1907, the factory and offices of the business were moved to eight different buildings in order to keep up with the company’s growth and expansion. As head of the company, Candler was most concerned with the quality and promotion of his product. He was particularly concerned with production of the syrup, which was boiled in kettles over a furnace and stirred by hand with large wooden paddles. He improved Pemberton’s formula with the help of a chemist, a pharmacist, and a prescriptionist. In 1901, responding to complaints about the presence of minute amounts of cocaine in the Coca–Cola syrup, Candler devised the means to remove all traces of the substance. By 1905 the syrup was completely free of cocaine.

In 1892 the newly incorporated Coca–Cola Company allocated $11,401 for advertising its drink. Advertising materials included signs, free sample tickets, and premiums such as ornate soda fountain urns, clocks, and stained-glass lampshades, all with the words “Coca–Cola” engraved upon them. These early advertising strategies initiated the most extensive promotional campaign for one product in history. Salesmen traveled the entire country selling the company’s syrup, and by 1895 Coca–Cola was being sold and consumed in every state in the nation. Soon it was available in some Canadian cities and in Honolulu, and plans were underway for its introduction into Mexico. By the time Candler left the company in 1916, Coca–Cola had also been sold in Cuba, Jamaica, Germany, Bermuda, Puerto Rico, the Philippines, France, and England.

An event that had an enormous impact on the future and very nature of the company was the 1899 agreement made between Candler and two young lawyers that allowed them to bottle and sell Coca–Cola throughout the United States. Five years later, in 1904, the one-millionth gallon of Coca–Cola syrup had been sold. In 1916 the now universally recognized, uniquely contour-shaped Coke bottle was invented. The management of all company advertising was assigned to the D’Arcy Advertising Agency, and the advertising budget had ballooned to $1 million by 1911. During this time, all claims for the medicinal properties ofCoca–Cola were quietly dropped from its advertisements.

World War I and the ensuing sugar rationing measures slowed the growth of the company, but the pressure of coal rations led Candler’s son, Charles Howard, to invent a process whereby the sugar and water could be mixed without using heat. This process saved the cost of fuel, relieved the company of the need for a boiler, and saved a great amount of time since there was no need for the syrup to go through a cooling period. The company continued to use this method of mixing into the 1990s.

Although Asa Candler was fond of his company, he became disillusioned with it in 1916 and retired. One of the reasons for this decision was the new tax laws which, in Candler’s words, did not allow for “the accumulation of surplus in excess of the amount necessary for profitable and safe conduct of our particular business.” (It has also been suggested that Candler refused to implement the modernization of company facilities.)

THE WOODRUFF ERA BEGINS: 1923

Robert Winship Woodruff became president of the company in 1923 at the age of 33. His father, Ernest Woodruff, along with an investor group, had purchased it from the Candler family in 1919 for $25 million, and the company went public in the same year at $40 a share. After leaving college before graduation, Woodruff held various jobs, eventually becoming the Atlanta branch manager and then the vice president of an Atlanta motor company, before becoming the president of Coca–Cola Company.

Having entered the company at a time when its affairs were quite tumultuous, Woodruff worked rapidly to improve Coca–Cola Company’s financial condition. In addition to low sales figures in 1922, he had to face the problem of animosity toward the company on the part of the bottlers as a result of an imprudent sugar purchase that management had made. This raised the price of the syrup and angered the bottlers. Woodruff was aided in particular by two men, Harrison Jones and Harold Hirsch, who were adept at maintaining good relations between the company and its bottling franchises.

Woodruff set to work improving the sales department. He emphasized quality control, and began advertising and promotional campaigns that were far more sophisticated than those of the past. He established a research department that became a pioneering market research agency. He also worked hard to provide his customers with the latest in technological developments that would facilitate their selling Coca–Cola Company to the public, and he labored to increase efficiency at every step of the production process so as to raise the percentage of profit from every sale of Coca–Cola syrup.

Through the 1920s and 1930s such developments as the six-pack carton of Coca–Cola, which encouraged shoppers to purchase the drink for home consumption, coin-operated vending machines in the workplace, and the cooler designed by John Stanton expanded the domestic market considerably. By the end of 1930, as a result of the company’s quality control efforts, Coca–Cola tasted exactly the same everywhere.

Considered slightly eccentric, Woodruff was a fair employer and an admired philanthropist. In 1937 he donated $50,000 to Emory University for a cancer diagnosis and treatment center, and over the years gave more than $100 million to the clinic. He donated $8 million for the construction of the Atlanta Memorial Arts Center. Under his leadership Coca–ColaCompany pioneered such company benefits as group life insurance and group accident and health policies, and in 1948 introduced a retirement program.

MARKETING PROPELS GROWTH: 1941–53

Woodruff was to see Coca–Cola Company through an era marked by important and varied events. Even during the Great Depression the company did not suffer thanks to Woodruff’s cost-cutting measures. When Prohibition was repealed, Coca–Cola Company continued to experience rising sales. It was World War II, however, that catapulted Coca–Cola Company into the world market and made it one of the country’s first multinational companies.

Woodruff and Archie Lee of the D’Arcy Advertising Agency worked to equate Coca–Cola with the American way of life. Advertisements had, in Candler’s era, been targeted at the wealthy population. In Woodruff’s time the advertising was aimed at all Americans. By early 1950, African Americans were featured in advertisements, and by the mid-1950s there was an increase in advertising targeted at other minority groups. Advertising never reflected the problems of the world, only the good and happy life. Radio advertising began in 1927, and through the years Coca–Cola sponsored many musical programs.

During World War II, Woodruff announced that every man in uniform would be able to get a bottle of Coca–Cola for five cents no matter what the cost to the company. This was an extremely successful marketing maneuver and provided Coca–Cola Company with good publicity. In 1943, at the request of General Eisenhower, Coca–Cola plants were set up near the fighting fronts in North Africa and eventually throughout Europe in order to help increase the morale of U.S. soldiers. Thus, Coca–Cola was introduced to the world.

Coca–Cola was available in Germany prior to the war, but its survival there during the war years was due to a man named Max Keith who kept the company going even when there was little Coca–Cola syrup available. Keith developed his own soft drink, using ingredients available to him, and called his beverage Fanta. By selling this beverage he kept the enterprise intact until after the war. When the war was over the company continued to market Fanta. By 1944, the Coca–Cola company had sold one billion gallons of syrup, by 1953 two billion gallons had been sold, and by 1969 the company had sold six billion gallons.

DIVERSIFICATION, NEW PRODUCTS, AND FOREIGN EXPANSION: 1955–66

The years from the end of World War II to the early 1980s were characterized by extensive and rapid change. Although Woodruff stepped down officially in 1955, he still continued to exert a great amount of influence on the company. There were a series of chairmen and presidents to follow before the next major figure, J. Paul Austin, took the helm in 1970. In 1956, after 50 years with the D’Arcy Advertising Agency, Coca–Cola Company turned its accounts over to McCann-Erickson and began enormous promotional campaigns. The decade of the 1950s was a time of the greatest European expansion for the company. During this decade Coca–Cola Company opened approximately 15 to 20 plants a year throughout the world.

The company also began to diversify extensively, beginning in 1960, when the Minute Maid Corporation, maker of fruit juices and Hi-C fruit drinks, was acquired. Four years later the Duncan Foods Corporation also merged with the company. In 1969 Coca–Cola Company acquired the Belmont Springs Water Company, Inc., which produced natural spring water and processed water for commercial and home use. The following year the company purchased Aqua-Chem, Inc., producers of desalting machines and other such equipment, and in 1977 Coca–Cola Company acquired the Taylor Wines Company and other wineries.

In addition to its diversification program, Coca–Cola Company also expanded its product line. Fanta became available in the United States during 1960 and was followed by the introduction of Sprite (1961), TAB (1963), and Fresca (1966), along with diet versions of these drinks. One reason that Coca–Cola Company began to introduce new beverages during the 1960s was competition from Pepsi Cola, sold by PepsiCo, Inc. Pepsi’s success also motivated Coca–Cola Company to promote its beverage with the slogan “It’s the Real Thing,” a subtle, comparative form of advertising that the company had never before employed.

CHALLENGES AND SUCCESS OVERSEAS: 1967–81

Things did not always run smoothly for Coca–Cola Company. When Coca–Cola was first introduced to France, the Communist party, as well as conservative vineyard owners, did what they could to get the product removed from the country. They were unsuccessful. Swiss breweries also felt threatened, and spread rumors about the caffeine content of the drink. More consequential was the Arab boycott in 1967, which significantly hindered the company’s relations with Israel. In 1970 the company was involved in a scandal in the United States when an NBC documentary reported on the bad housing and working conditions of Minute Maid farm laborers in Florida. In response, the company established a program that improved the workers’ situation. In 1977 it was discovered that Coca–Cola, for various reasons, had made $1.3 million in illegal payments over a period of six years, mostly to executives and government officials in foreign countries.

During the 1970s, under the direction of Chairman Austin and President J. Lucian Smith,Coca–Cola was introduced in Russia as well as in China. To enter the Chinese market, the company sponsored five scholarships for Chinese students at the Harvard Business School, and supported China’s soccer and table-tennis teams. The beverage also became available in Egypt in 1979, after an absence there of 12 years. Austin strongly believed in free trade and opposed boycotts. He felt that business, in terms of international relations, should be used to improve national economies, and could be a strong deterrent to war. Under Austin,Coca–Cola also started technological and educational programs in the Third World countries in which it conducted business, introducing clean water technology and sponsoring sports programs in countries too poor to provide these benefits for themselves.

Austin’s emphasis was on foreign expansion. Furthermore, under Austin’s management the company became more specialized. Whereas Woodruff was aware of all facets of the company, Austin would delegate authority to various departments. For instance, he would give general approval to an advertising scheme, but would not review it personally. Smith was responsible for the everyday operations of the company, and Austin would, among other things, set policies, negotiate with foreign countries, and direct the company’s relations with the U.S. government.

THE GOIZUETA ERA BEGINS: 1981

Roberto Goizueta became chairman in 1981, replacing Austin. The Cuban immigrant immediately shook up what had become a risk-averse, tradition-obsessed, barely profitable company. Less than a year after becoming chairman, he made two controversial decisions. First, he acquired Columbia Pictures for about $750 million in 1982. Goizueta thought that the entertainment field had good growth prospects, and that it would benefit from Coca–ColaCompany’s expertise in market research.

Second, without much consumer research, Goizueta introduced Diet Coke to the public, risking the well-guarded trademark that until then had stood only for the original formula. Something had to be done about the sluggish domestic sales of Coca–Cola and the intense competition presented by Pepsi. In 1950 Coca–Cola had outsold Pepsi by more than five to one, but by 1984 Pepsi had a 22.8 percent share of the market while Coca–Cola had a 21.6 percent share. Goizueta’s second 1982 gamble paid off handsomely when Diet Coke went on to become the most successful consumer product launch of the 1980s, and eventually the number three soft drink in the entire world.

In 1985 Goizueta took another chance. Based on information gathered from blind taste tests, Goizueta decided to reformulate the 99-year-old drink in the hope of combating Pepsi’s growing popularity. The change to New Coke was not enthusiastically greeted by the U.S. public. Within less than a year the company brought back the “old” Coca–Cola, calling itCoca–Cola Classic. New Coke was universally considered the biggest consumer product blunder of the 1980s, but it was also viewed in a longer term perspective as a positive thing, because of the massive amount of free publicity that the brand received from the debacle.

In September 1987 Coca–Cola Company agreed to sell its entertainment business to TriStar Pictures, 30 percent of which was owned by Coca–Cola Company. In return, Coca–ColaCompany’s interest in TriStar was increased to 80 percent. Coca–Cola Company’s holding in TriStar was gradually distributed as a special dividend to Coca–Cola Company shareholders until the company’s interest was reduced to a minority, when TriStar changed its name to Columbia Pictures Entertainment and sought its own listing on the New York Stock Exchange. Although the company’s flirtation with entertainment appeared to be ill-advised,Coca–Cola Company ended up with $1 billion in profits from its short-term venture.

PURCHASE OF BOTTLING OPERATIONS: 1983–93

In the mid-1980s, Coca–Cola Company reentered the bottling business, which had long been dominated by family-operated independents. The company began repurchasing interests in bottlers worldwide with a view toward providing those bottlers with financial and managerial strength, improving operating efficiencies, and promoting expansion into emerging international markets. The trend started domestically, when the parent company formedCoca–Cola Enterprises Inc. through the acquisition and consolidation of two large bottlers in the South and West in 1986. The parent company acquired more than 30 bottlers worldwide from 1983 to 1993. By then, the market value of the company’s publicly traded bottlers exceeded the company’s book value by $1.5 billion.

Called “one of the world’s most sophisticated and powerful marketing organizations,” the company’s schemes for the 1990s included the 1993 global launch of the “Always Coca–Cola” advertising theme. The new campaign was formulated by Creative Artists Agency, which took over much of the brand’s business in 1992 from longtime agency McCann-Erickson Worldwide. In addition to the new campaign, a 32-page catalog of about 400 licensed garments, toys, and gift items featuring Coca–Cola slogans or advertising themes was released. The 1994 introduction of a PET plastic bottle in the brand’s distinctive, contour shape resulted from corporate marketing research indicating that an overwhelming 84 percent of consumers would choose the trademarked bottle over a generic straight-walled bottle.

The company’s primary challenge for the last decade of the 20th century came in the diet segment, however, where top-ranking Diet Coke was losing share to ready-to-drink teas, bottled waters, and other “New Age” beverages, which were perceived as more healthful and more natural than traditional soft drinks. Coca–Cola Company fought back by introducing its own new alternative drinks, including POWERade (1990), the Page 143  |  Top of Articlecompany’s first sports drink, and the Fruitopia line (1994). In 1992 the company and Nestlé S.A. of Switzerland formed a 50-50 joint venture, Coca–Cola Nestlé Refreshment Company, to produce ready-to-drink tea and coffee beverages under the Nestea and Nescafé brand names. Also during this time, Coca–Cola Company purchased Barq’s, a maker of root beer and other soft drinks.

Goizueta died of lung cancer in October 1997, having revitalized and awakened what had been a sleeping giant. Goizueta had turned the company into one of the most admired companies in the world, racking up an impressive list of accomplishments during his 16-year tenure. Coca–Cola Company’s share of the global soft drink market was approaching 50 percent, while in the United States Coca–Cola had increased its share to 42 percent, overtaking and far surpassing Pepsi’s 31 percent. Revenues increased from $4.8 billion in 1981 to $18.55 billion in 1996, while net income grew from $500 million to $3.49 billion over the same period. Perhaps Goizueta’s most important and influential contribution to the storied history of Coca–Cola Company was his relentless focus on the company’s shareholders. The numbers clearly showed that he delivered for his company’s owners. Return on equity increased from 20 percent to 60 percent, while the market value of Coca–Cola Company made a tremendous increase, from $4.3 billion to $147 billion.

CHALLENGING AND STORMY TIMES: 1997–99

Goizueta’s right-hand man, Douglas Ivester, was given the unenviable task of succeeding perhaps the most admired chief executive in the United States. Ivester’s reign turned out to be both brief and stormy. Although Coca–Cola Company remained steadily profitable, it was beset by one problem after another in the late 1990s. Having restructured its worldwide bottling operations under Goizueta, the company moved into a new phase of growth based on the acquisition of other companies’ brands. Its already dominant market share and a sometimes arrogant and aggressive approach to acquisitions led some countries, particularly in Europe, to take a hard line toward the company. In late 1997, for example,Coca–Cola Company announced it would acquire the Orangina brand in France from Paris-based Pernod Ricard for about $890 million. French authorities, who had fined Coca–ColaCompany for anticompetitive practices earlier that year, blocked the purchase.

In December 1998 Coca–Cola Company announced that it would purchase several soft drink brands, including Schweppes, Dr Pepper, Canada Dry, and Crush, outside the United States, France, and South Africa from Cadbury Schweppes plc for $1.85 billion. After encountering regulatory resistance in Europe, Australia, Mexico, and Canada, the two companies in July 1999 received regulatory approval for a new scaled-down deal valued at about $700 million, which included 155 countries but not the United States, Norway, Switzerland, and the member states of the European Union with the exception of the United Kingdom, Ireland, and Greece. Later in 1999 separate agreements were reached that gaveCoca–Cola the Schweppes brands in South Africa and New Zealand.

With nearly two-thirds of sales originating outside North America, Coca–Cola Company was hit particularly hard by the global economic crisis of the late 1990s, which moved from Asia to Russia to Latin America. In Russia, where the company had invested $750 million from 1991 through the end of the decade, sales fell about 60 percent from August 1998, when the value of the ruble crashed, to September 1999. Rather than retreating from the world stage, however, Ivester viewed the downturn as an opportunity to make additional foreign investments at bargain prices, essentially sacrificing the short term for potentially huge long-term gains. While the economic crisis was still wreaking havoc, Coca–Cola Company was faced with another crisis in June 1998 when several dozen Belgian schoolchildren became ill after drinking Coca–Cola that had been made with contaminated carbon dioxide. Soon, 14 million cases of Coca–Cola products were recalled in five European countries in the largest recall in company history, and France and Belgium placed a temporary ban on the company’s products.

Although short-lived, the crisis was a public relations disaster because company officials appeared to wait too long to take the situation seriously, admit that there had been a manufacturing error, and apologize to its customers. Meanwhile, around this same time, four current and former employees had filed a racial discrimination suit against the firm in the United States, a suit that was later granted class-action status.

Despite the seemingly endless string of challenges the company faced in the late 1990s,Coca–Cola Company was also moving forward with new initiatives. In February 1999 the company announced plans to launch its first bottled water brand in North America. Dasani was described as a “purified, non-carbonated water enhanced with minerals.” In October 1999 the company announced that it would redesign the look of its Coca–Cola Classic brand in 2000 in an attempt to revitalize the flagship’s stagnant sales. Labels would continue to feature the iconic contour bottle but with a cap popped off and soda fizzing out. In addition, the Coke Classic slogan “Always,” which had been used since 1993, would be replaced with the tagline “Enjoy,” which had been used on Coca–Cola bottles periodically for decades. The company also planned to increase the appearances of the eight-ounce contour bottle, in a particularly nostalgic move.

The renewed emphasis on this classic brand icon and the resurrection of the “Enjoy” slogan seemed to be a fitting way for a company to launch itself into the new millennium. The company ended 1999 with the surprising news that the beleaguered Ivester would retire in early 2000 after just two and a half years at the helm. Taking over was Douglas N. Daft, a native Australian and 30-year Coca–Cola Company veteran who had headed the company’s operating group covering the Middle and Far East and Africa. He was named president and chief operating officer in December 1999 before becoming chairman and CEO the following February.

CONTINUING STRUGGLES: 2000–04

Daft’s first year was a hectic one. In January 2000 the company announced a drastic restructuring based on a plan drafted by a Daft-led team. Coca–Cola Company said it would lay off about 6,000 employees, or 20 percent of the workforce, the largest cutback in the company’s history. The cuts were later scaled back to about 5,200, but the company still took about $1.6 billion in one-time charges for a plan that aimed to save $300 million in operating costs per year.

In November 2000 Daft engineered a tentative deal to take over the Quaker Oats Company for $15.75 billion. This would have added the Gatorade brand, which dominated the sports drink sector, and it would also have complemented the company’s strategy of strengthening its lineup of noncarbonated beverages. At the last minute, however, Coca–Cola Company’s board pulled the plug on the deal, mainly concerned that the price was too high. The company’s archrival PepsiCo quickly swooped in to complete a $13.4 billion acquisition of Quaker Oats. Also in November, Coca–Cola Company reached an agreement to settle the race-discrimination class-action lawsuit that had been brought against it. The company agreed to a $192.5 million settlement and also to have certain of its employment practices overseen by an outside task force. About 2,000 current and former African-American employees were eligible for settlement awards.

Another of Daft’s main objectives was pumping up an arid new product pipeline, but he garnered only mixed results. The company found moderate success with the 2001 debut of Diet Coke with Lemon, before making a much bigger splash with Vanilla Coke one year later. The latter received the firm’s largest new product launch since the New Coke debacle. To supplement these meager advances, and particularly to try to capture a greater share of the noncarbonated beverage sector, Daft turned to partnerships as a potential source of renewed growth. In January 2001 an agreement was reached with Nestlé S.A. to form a joint venture called Beverage Partners Worldwide. Within several years, this venture was marketing ready-to-drink tea (Nestea, Belté, Yang Guang, and several other brands) and coffee (Nescafé, Taster’s Choice, and Georgia Club) products in the United States and about 45 other countries.

Coca–Cola Company and the Procter & Gamble Company (P&G) agreed in March 2001 to create a $4 billion joint venture that would have joined the Minute Maid brand and distribution network with P&G’s snack and juice brands. However, Coca–Cola pulled out of the deal just a few months later, having decided to try to build the Minute Maid brand on its own. Then in July 2002 Coca–Cola Company and Groupe Danone formed a joint venture to produce, market, and distribute Danone’s Dannon and Sparkletts bottled-water brands in the United States. In a separate deal, Coca–Cola took over the U.S. marketing, sales, and distribution of Danone’s Evian water brand, the French firm’s biggest seller.

In March 2003 the company slashed another 1,000 jobs from the payroll, half of them at headquarters. Also that year, Coca–Cola Company was the recipient of more negative publicity when it was revealed that several midlevel employees had rigged a marketing test for Frozen Coke done three years earlier at Burger King restaurants in the Richmond, Virginia, area. The scandal led to the departure of the head of Coca–Cola Company’s fountain division, and the company issued an apology to Burger King and its franchisees and offered to pay them $21 million. An early 2004 launch of the Dasani brand into the European market was aborted when bottles in Britain were found to contain elevated levels of bromate, a substance that can cause cancer after long-term exposure.

This latest product recall came as Coca–Cola was in the midst of another change at the top. In February 2004 Daft announced his intention to retire following a search for a new chief executive. After considering a number of outside candidates, the company hired a semi-outsider, E. Neville Isdell, in June 2004. An Irish citizen who had grown up in Africa, Isdell was a former senior executive at Coca–Cola Company who had led the company’s push into a number of new markets around the globe in the 1980s and 1990s. He left the company in 1998 to become chairman of Coca–Cola Beverages, a major bottler, and then retired in 2001.

ACQUISITIONS FUEL GROWTH: 2005–11

Isdell performed well during his brief time in charge of the company. He oversaw the launch of Coca–Cola Zero, a low-calorie beverage marketed toward males between the ages of 18 and 34. It was the biggest product launch by the company since the introduction of Diet Coke 22 years earlier. In 2007, facing increasing competition from alternative beverages, Isdell completed the acquisition of Energy Brands, Inc., a company that operated under the name Glacéau. Coca–Cola Company paid $4.1 billion to gain control of popular Glacéau brands such as Vitaminwater, Smartwater, Fruitwater, and Vitaminenergy.

Isdell was replaced as CEO in 2008 by Muhtar Kent, who joined Coca–Cola Company in 1978. Kent held numerous leadership positions during his career, including general manager of Coca–Cola Turkey and Central Asia; COO of the company’s North Asia, Eurasia, and Middle East Group; and president of Coca–Cola International. During his first year as CEO (he was named chairman in 2009), Kent began talks with Coca–Cola Enterprises Inc. (CCE), the world’s largest Coca–Cola bottler. The discussions centered on the possibility of Coca–Cola Company acquiring CCE, but negotiations stalled in early 2009, only to be revived when it became known that the company’s archrival was plotting a similar move. PepsiCo made an offer to purchase its two largest bottlers, Pepsi Bottling Group and PepsiAmericas, seeking to realize cost synergies and secure greater flexibility in distributing its beverages. PepsiCo completed the transaction in early 2010, paying $7.8 billion to buy the bottlers.

Within weeks, Coca–Cola Company announced it had reached an agreement with CCE. The company paid $12.4 billion to acquire the North American operations of CCE as well as CCE’s bottling facilities in Norway and Sweden. Coca–Cola Company, whose payroll swelled by nearly 60,000 employees once the acquisition was completed, hoped to save an estimated $350 million in operational efficiencies over a four-year period by acquiring the bottling operations.

In late 2011, one month after the CCE acquisition was completed, Coca–Cola Company signed an agreement with one of the largest independent beverage companies in the Middle East. Under the terms of the agreement, Coca–Cola Company spent $980 million to acquire half of Aujan Industries, which marketed a range of popular beverage brands, including Rani, Vimto, and Barbican.

Looking forward, Kent and his management team had bold plans. In 2011, the company’s 125th anniversary, management announced “2020 Vision,” Coca–Cola Company’s plan for doubling revenues by the end of the decade. As part of the plan, the company and its bottling partners were planning to invest nearly $30 billion by 2016 on new manufacturing facilities, new distribution systems, and new marketing investments in emerging economies. In Russia, the company planned to invest $3 billion over a five-year period. In China, it planned to spend $4 billion over a three-year period. In the Middle East and North Africa,Coca–Cola Company planned to invest $5 billion by the end of the decade.

KEY DATES

1886:

Pharmacist Dr. John Styth Pemberton concocts Coca–Cola, a mixture of sugar, water, caffeine, and extracts of the coca leaf and the kola nut.

1891:

Asa G. Candler, a druggist, gains complete control of Pemberton’s enterprise.

1943:

Coca–Cola plants are set up near fighting fronts in North Africa and Europe, helping boost American GI spirits and introduce Coke to the world market.

1960:

Minute Maid Corporation is acquired.

1982:

Columbia Pictures is acquired for $750 million and Diet Coke is introduced to the market.

1987:

Company sells its entertainment business to Tri-Star Pictures.

1999:

Company acquires the rights to sell Schweppes, Canada Dry, Dr Pepper, and Crush brands in 157 countries, not including the United States, Canada, Mexico, and most of Europe.

2010:

North American bottling operations of Coca–Cola Enterprises are acquired for $12.4 billion.

Cabot Oil & Gas

(Added only at the end of 2008 — no entry in Directory)

https://en.wikipedia.org/wiki/Cabot_Oil_%26_Gas

Murphy Oil Corp.

Public Company
Incorporated: 1950 as Murphy Corporation
Employees: 7,539
Sales: $18.42 billion (2007)
Stock Exchanges: New York
Ticker Symbol: MUR
NAIC: 211111 Crude Petroleum and Natural Gas Extraction; 324110 Petroleum Refineries; 424710 Petroleum Bulk Stations and Terminals; 447190 Other Gasoline Stations

Murphy Oil Corporation is a moderate-sized U.S.-based integrated oil company, with worldwide exploration and production activities and refining and marketing operations confined to the United States and the United Kingdom. Murphy conducts onshore and offshore oil and gas exploration and production mainly in the United States (particularly the Gulf of Mexico), western Canada and offshore eastern Canada, the United Kingdom’s North Sea, Ecuador, Malaysia, and the Republic of Congo. The company owns two U.S. oil refineries located in Meraux, Louisiana, and Superior, Wisconsin, and one in the United Kingdom at Milford Haven, Wales. On the marketing side, Murphy sells refined products through approximately 150 SPUR wholesale stations and more than 970 Murphy USA retail gasoline stations in 23 states in the southern and midwestern United States. Most of the Murphy USA outlets are located in the parking areas of discount retail giant Wal-Mart Stores, Inc. In the United Kingdom, Murphy sells refined products via nearly 400 gasoline stations, most of which operate under the MURCO name.

EARLY YEARS: FROM TIMBER TO OIL EXPLORATION

The Murphy story began in the early 1900s in El Dorado, Arkansas, where Charles H. Murphy Sr. started a lumber company with thousands of acres of timberland along the Arkansas-Louisiana border. Although he drilled his first oil well in the Caddo Pool of northern Louisiana in 1907, his primary efforts in oil exploration did not actually commence until 1936, when he and his associates discovered two large oilfields in southern Texas and Arkansas. At this time Murphy realized his land holdings were worth more for oil than for timber.

Murphy’s business interests gradually expanded into a loose collection of partnerships, corporations, and individual holdings. In 1944, after he and his associates discovered their largest deposit near Delhi, Louisiana, they brought their diverse entities together as C.H. Murphy & Company.

Charles H. Murphy suffered a stroke late in the decade, and his son, 21-year-old Charles H. Murphy, Jr., was put in charge during his subsequent illness. With his new role in the company the younger Murphy was not able to attend college but eventually educated himself by reading the classics and learning foreign languages, and his ambitions grew with the goals of the company. He saw that corporate status would be necessary to achieve company objectives, so, in 1950 he incorporated C.H. Murphy & Company as Murphy Corporation, the direct predecessor of Murphy Oil Corporation.

During the early 1950s, Murphy continued to explore for oil on the more than 100,000 acres of company-owned land, which also contained timber and farming operations. In 1956, two years after Charles H. Murphy Sr. died, his son brought the company public, offering shares on the New York Stock Exchange.

CREATION OF AN INTEGRATED OIL COMPANY

Toward the end of the decade Murphy began an expansion program that eventually led to the company’s status as an integrated oil company. He helped found the 51 percent owned Ocean Drilling and Exploration Company (ODECO), an outfit one reviewer called “one of the true pioneers and innovators in the off-shore drilling industry.” In 1958 he exchanged 71,958 shares for Murphy’s first refinery: Lake Superior Refining Company’s Superior, Wisconsin, installation.

In 1960 Murphy continued to grow, acquiring Amurex Oil Co., River States Oil Co., and National Petroleum Corp. Most importantly, that year a merger took place with Spur Oil Co., an outfit whose extensive service station network would become Murphy’s own.

After acquiring a second refinery in 1961—Ingram Oil and Refining Company’s Meraux, Louisiana, installation—Murphy began expanding the company’s drilling network. In 1962 he obtained the Western Natural Gas Company’s Venezuelan properties and production. In the following years the company would begin exploring the Persian Gulf, Libya, the North Sea, the Louisiana shore, and other lands in the continental United States. It would also take large land positions in British Columbia, off the shore of Nova Scotia, in New Zealand’s Tasman Sea, and off the coast of New South Wales in Australia.

As a result of this overwhelming concentration on fossil fuels, Murphy reorganized the company as Murphy OilCorporation on January 1, 1964, placing the company’s farm and timber interests, which included 200,000 owned acres and 100,000 acres managed for others, into a wholly owned subsidiary, Deltic Farm & Timber Co., Inc.

In the mid-1960s, the company scored large successes in Iran’s Sassan Field and in Libya. Between 1964 and 1969 the company’s production of crude oil and liquids increased from 16,000 barrels per day to 37,000 barrels per day, while refinery intake rose from 43,000 barrels per day to 90,000 barrels per day. Much of the gasoline refined by the company went to owned or independently operated gas stations using the SPUR name. By 1969 there were 942 leased and owned SPUR stations and 1,332 SPUR stations operated by others. Of these, 548 were in the United Kingdom, 315 in eastern Canada, and 127 in Sweden.

ODECO also grew during the late 1960s. Between 1964 and 1969, its revenues more than doubled from $12.4 million to $28.5 million. Of all drilling contractors ODECO was in a unique position to help its corporate parent. The company contracted work for itself in addition to farming some jobs out, and therefore received portions of successful leases on their proceeds, adding to Murphy’s total reserves. By 1968 ODECO was operating 12 drilling barges and according to the Wall Street Transcript was considered “one of the best growth stocks in theoil industry.”

About the only Murphy product that did not grow during the 1960s was natural gas production, which fell from a record 65.6 million cubic feet per day in 1962 to 60.3 cubic feet per day in 1969. Rising production, however, did not always translate into rising profits. Steep transportation costs, high exploration costs, weak refined products prices, and losses in Europe led to declining profits from 1967 through 1969, when net income fell from $8.2 million to $6.2 million.

Despite these losses, Murphy, who still controlled 51 percent of the stock, continued to expand the company. In 1969 he created Murphy Eastern Oil Company, in London, to monitor diversified overseas operations. The same year he signed off on ODECO’s formation of Sub Sea International, Inc., to operate various undersea systems such as diving bells and underwater welding chambers.

In 1970, a year in which profits rose to $9.3 million, reflecting higher prices and lower ocean freight costs,Murphy Oil began drilling in the British North Sea through an 8 percent participation with Burmah Oil and Williams Bros. To finance this project as well as drilling barges for ODECO and additional acreage in the Gulf of Mexico, the company sold $34 million in convertible debentures in 1969 and 800,000 shares of common stock in June 1971.

By 1971, the company as a whole was reporting revenues of $300 million. While two-thirds of its crude reserves were in Iran, Libya, and Venezuela, it had also created Murphy Oil Company, Ltd., which oversaw exploration, production, and marketing operations in Canada and was headquartered in Calgary, Alberta.

PROFITING FROM HIGH OIL PRICES IN POST-EMBARGO PERIOD

The OPEC oil embargo of 1973 was a boon for Murphy Oil. Sales shot up from $377.6 million in 1972 to $499 million and $862 million in 1973 and 1974, respectively. At the same time profits ballooned from $14.3 million to $48.5 million and $60.9 million. In 1977 the company surpassed $1 billion in sales for the first time, selling $1.11 billion worth of fossil fuel products and services.

Prices remained high at the end of the decade. In 1979, after North Sea drilling paid off in the huge Ninian Field (the United Kingdom’s third largest), the company racked up three consecutive years of record sales and income. Revenues surpassed $2 billion for the first time in 1980 while in 1981 profits reached $163 million despite a total $119 million increase in American, Canadian, and British crude oil excise taxes.

Throughout the industry, high prices made higher cost and higher risk exploration activities economically viable. Murphy invested heavily in prospects in Alaska and off the coast of Spain, and although he balanced these more risky plays with leases near established properties in the Gulf of Mexico, the company’s activities reflected those of an industry that was taking more chances and using more drilling rigs. This was good news at ODECO, where executives ordered several new platforms to satisfy demand.

On February 15, 1982, the company experienced a tragedy inherent in the ocean drilling business. During a severe storm off the coast of Newfoundland, ODECO’s semisubmersible Ocean Ranger sank. Eighty-four people were on board and all were lost.

Although margins, particularly for refined products, narrowed in the early 1980s, Murphy remained highlyPage 286  |  Top of Articleprofitable. In 1983 the company began pumping oil from the Gaviota field off the north coast of Spain. The same year, it reorganized as a holding company, creating Murphy Oil USA, Inc., to oversee domestic oil interests and selling its Canadian marketing division, consisting of 100 owned or leased SPUR stations, a dealer network, and three product terminals.

RIDING OIL INDUSTRY CYCLICALITY

In 1984 Charles H. Murphy Jr., while retaining his role as the company’s chairperson, turned the positions of CEO and president over to Robert J. Sweeney, an engineering physicist with a long career at Murphy. Sweeney faced an industry in which overcapacity and conservation had begun to pressure crude prices, and, consequently, refining and drilling margins. For example, as crude prices fell from $34 a barrel to $27 a barrel, there were periods in which the cost of products refined at company facilities were $2 higher than the same products on the spot cargo market.

In the fourth quarter of 1985, crude prices fell into the $15 to $20 range. Given reasonable returns for much of the year, Sweeney was able to salvage profits of $79.7 million, but in 1986 continued low prices forced him to take drastic economic measures. He slashed exploration budgets, terminated scientist positions, reduced support personnel by 15 percent, and let hundreds go at ODECO. Overall, he laid off over 1,600 employees, almost 30 percent of the company’s total. Despite these efforts, the company lost $194.7 million, in what Sweeney in his annual report called “a terrible year.”

Prices began to rise again in 1987, and all of the company’s sectors rebounded except for ODECO, which suffered in a generally poor drilling climate. Because ODECO’s capital costs were very high, underutilization of rigs meant heavy losses. In 1987 ODECO lost $61 million and at one point during the year was using only 29 percent of capacity. Excluding ODECO’s figures, Murphy made $18 million that year; taking ODECO’s losses into account, the company lost $44 million.

During these low years, management retained its credibility with stockholders by maintaining a $1 per share dividend. Moreover, Sweeney did make some moves toward growth. He used company land holdings to enter the real estate business in Little Rock, Arkansas, where the company was building homes and a PGA-quality golf course. In 1986 he bought ten drilling rigs, reasoning that a shakeup was underway and that ODECO might profit from being one of the few surviving firms. In 1987 he bought out the 23 percent minority interest inMurphy Oil Company, Ltd., Murphy’s London-based subsidiary. That year the company also replaced its oil and gas reserves on an energy equivalent basis.

In 1988 Jack W. McNutt succeeded Sweeney as CEO. Like Sweeney, McNutt presided over a basically profitable company whose drilling subsidiary was what the Arkansas Gazette called the “monkey” on its back. ODECO was one of the nation’s top three drilling companies, but like the industry as a whole, it had overbuilt and was carrying too many underutilized rigs.

During his first year, McNutt tried to gain more leverage in ODECO by buying out its minority owners. Although unsuccessful in this endeavor, Murphy reported a net income of $39 million in 1988, the first profit in three years. By 1990 the company had made a major rebound. Because of higher prices induced by Iraq’s invasion of Kuwait, sale of the Sub Sea International (ODECO’s diving segment), and divestment of a share of its interest in Ninian Field, Murphy reported net income of $114 million, the best overall result since 1983.

The year 1990 was also marked by an industrywide trend toward increased production of natural gas, a fuel whose environmental benefits many believed would prove valuable to utility and automotive companies in the future. At Murphy this trend was evidenced by record production and by the fact that for the first time natural gas production exceeded liquid hydrocarbon production on an energy equivalent basis.

In 1991 McNutt finally disposed of Murphy’s ODECO problem. After several unsuccessful attempts, he acquired the minority interest in ODECO through a tax-free exchange of shares and then sold ODECO for $372 million to Diamond M Corp., a contract drilling subsidiary of Loews Corporation. Although the deal was not actually consummated until January 30, 1992, it was reported in 1991 as an $83.9 million charge against earnings and resulted in a loss for the year of $11.2 million. The company gained a much stronger balance sheet as a result, however. Part of the proceeds was used to pay debt down to just $24 million by the end of 1992, leaving Murphy in a cash-rich position, with a little more than $300 million on hand.

LATE-CENTURY UPSTREAM INVESTMENTS AND RESTRUCTURING

In the mid-1990s Murphy Oil chose to invest this money in its exploration and production operations (the upstream side of the oil industry) rather than in refining and marketing (the downstream side). The company’s upstream strategy was to purchase interests, largely non-operated, in high-risk, high-potential, very large global exploration ventures, balancing this with investment in lower risk prospects in the Gulf of Mexico and western Canada. In 1993, then, Murphy expanded its interests in North Sea production operations through the purchase of an 11.3 percent stake in the “T-Block” (a venture between Italy’s AGIN, the field’s operator, British Gas PLC, PetroFina S.A. of Belgium, and others) for about $145 million. Murphy also bought a 6.5 percent stake in the Hibernia field, which was located off Newfoundland and was a potential 615 million barrel find. Also in 1993, the company purchased from the province of Alberta a 5 percent interest, equivalent to 100 million barrels, in Syncrude, an oil shale project in the northern reaches of the province. Moreover, in late 1994 it acquired a 10.7 percent stake in the Terra Nova field, which had the potential of producing 400 million barrels and was located 20 miles southeast of Hibernia. Murphy Oil was also targeting several other areas for exploration, including fields in Peru, Ecuador, and China. By the end of 1994 the company had increased its proven reserves to 327.6 million barrels, a significant jump from the year-end 1992 figure of 187 million barrels.

Other key developments in 1994 involved the company’s management. In October of that year, R. Madison Murphy, who had been serving as CFO, was named to the largely ceremonial post of chairman, replacing his father. That same month, McNutt was replaced as president and CEO by Claiborne P. Deming, a cousin of Madison who had been chief operating officer. Almost immediately, Murphy Oil became more visible to the press and the investment community, reflecting the influence of Deming. Under Charles Murphy Jr.’s leadership, the company had kept a very low profile for a public company.

Deming proceeded with several major restructuring moves. In 1995 the company reported a net loss of $118.6 million that was entirely attributed to write-downs of previously overvalued assets. In August 1996 Deming sold 48 U.S. onshore oil and gas fields to a group of institutional investors for more than $47 million. At year-end 1996, in a move aimed at refocusing the company on its core petroleum operations, Murphy Oil spun off to its shareholders Deltic Farm & Timber, its farm, timber, and real estate subsidiary, which was reincorporated as Deltic Timber Corporation.

Deming also attempted to revive the company’s long struggling downstream activities. In November 1996Murphy Oil entered into an agreement to merge its U.K. refining and marketing interests with those of Chevron Corporation and France’s Elf Aquitaine S.A. It withdrew from the merger in early 1997, however, choosing to go it alone in the difficult U.K. retailing environment. Murphy subsequently entered into an alliance with U.K. convenience chain Costcutter, whereby Costcutter stores were added to existing Murphy gas stations. The ensuing increase in volume helped turn the U.K. downstream operations from loss-making to profitable.Murphy Oil followed a similar strategy in the United States, where it joined with Wal-Mart Stores, Inc., to test the addition of gasoline stations to the retail giant’s stores. The test proved so successful that Murphy had 145 stations operating on Wal-Mart parking lots by the end of 1999, with plans laid to more than double the amount by the end of 2000. The Wal-Mart program began in the Southeast, using gasoline from Murphy’s Meraux, Louisiana, refinery, then expanded to the Upper Midwest, where the stations were serviced from the refinery in Superior, Wisconsin. Murphy Oil’s commitment to its partnership with Wal-Mart was underscored by the announcement in August 1999 of the sale of 60 company-owned SPUR gas stations.

Meanwhile, an oil glut forced down the price of a barrel of crude by late 1998 to about $11, the lowest price in history with inflation factored in; just one year earlier, the price had been about $23. The oil glut was caused by a number of factors, principally the Asian economic crisis and the sharp decline in oil consumption engendered by it, and the virtual collapse of OPEC, which was unable to curb production by its own members. The low prices were the principal factor in a 20 percent decline in revenues for Murphy Oil in 1998, from the $2.13 billion figure of 1997 to $1.69 billion. The company also took a $57.6 million after-tax charge to write down the value of some of its properties, leading to a net loss for the year of $14.4 million. With oil prices bouncing back up in 1999, this appeared to be only a temporary setback. In late 1999 the company announced capital expenditures totaling $457 million for 2000, an 18 percent increase over 1999, with the bulk of the funds going toward exploration in the Gulf of Mexico, development of the Terra Nova field, and expansion of the Wal-Mart retailing program.

MALAYSIAN DISCOVERIES TAKE CENTER STAGE

Murphy Oil began the 21st century on a strong note, netting profits of nearly $300 million in 2000 on revenues of $4.64 billion, which was aided in part by rising natural gas prices. On the upstream side, the company made two significant finds in the deepwater Gulf of Mexico in 2001 that added a combined 79 million barrels of oil to the firm’s reserves. Early the following year, production began at the Terra Nova field. The bigger news of 2002, however, was Murphy’s major find in the deepwater Kikeh field located in the company’s 4.1-million-acre concession off the northwest tip of Malaysia. The discovery, after around $150 million in capital expenditures off the coast of Malaysia, enabled Murphy to increase its estimate of the oil reserves it had discovered off Malaysia to between 400 million and 700 million barrels of oil.

The overall results for 2002 were disappointing as net income plunged nearly two-thirds largely because of lower crude oil and natural gas prices at the beginning of the year and weak refining and marketing margins throughout the year. Despite the downstream difficulties, Murphy continued its aggressive expansion of its alliance with Wal-Mart. The company had been opening more than 100 Murphy USA gas stations in the parking areas of Wal-Mart stores each year, and in the fourth quarter of 2002 the 500th such outlet was built. The growing demand for gasoline from these stations led to an expansion of the Meraux refinery’s capacity from 100,000 to 125,000 barrels per day, a project completed late in 2003. During 2003, an additional 117 Murphy USA stations were opened, enabling the company to secure a 1 percent share of national retail fuel sales.

After making additional finds in Malaysia, Murphy Oil announced that its exploration and production activities would be concentrated primarily on its developments in Malaysia and the deepwater Gulf of Mexico. A number of upstream assets elsewhere were therefore divested. Most significantly, in the spring of 2004 Murphy sold the bulk of its western Canadian conventional oil and gas assets for net proceeds of roughly $583 million. The company nevertheless retained a number of assets outside its two core areas, and in early 2005 Murphy announced a discovery off the coast of the Republic of Congo that had the potential to produce more than 100 million barrels of oil. In the meantime, a 22 percent increase in oil and gas production, coupled with strong crude oil and natural gas prices, propelled the company to record heights in 2004—net income of $701.3 million on revenues of $8.36 billion. Also aiding the results was a profitable year for Murphy’s downstream operations, which operated in the black for the first time since 2001.

DAMAGE TO MERAUX REFINERY FROM HURRICANE KATRINA

The devastating effects of Hurricane Katrina along the Gulf Coast in August 2005 included damage to the Meraux refinery, located in the heavily flooded St. Bernard Parish. The floodwaters dislodged one of the refinery’s storage tanks, leading to a spill of nearly 1.5 million gallons of crude oil. In addition to other settlements, Murphy in September 2006 agreed to pay $330 million to settle a class-action lawsuit filed by individuals whose homes and businesses had been inundated by floodwaters carrying the spilled oil. Final court approval of this agreement was reached in January 2007. The Meraux refinery remained closed for about nine months following the hurricane’s impact, finally opening in mid-2006 after a cleanup and repair effort that cost Murphy nearly $200 million. The company’s insurance covered much of the costs of the class-action settlement and a portion of the refinery repair expenses.

An important upstream development occurred in August 2007 when production started at the Kikeh field in Malaysia. This start-up helped push Murphy’s average crude oil and natural gas production up to an average of more than 113,000 barrels per day during the fourth quarter of 2007, a 36 percent increase over the previous year. The company expected its production over the following few years to nearly double to an average of more than 200,000 barrels per day due not only to the Kikeh field but also to other developments anticipated to start up in 2008 and 2009. These included natural gas production from the Tupper area in western Canada and the Sarawak project in offshore Malaysia and crude oil production from the Azurite Marine field off the coast of the Republic of Congo and the Thunder Hawk field in the Gulf of Mexico. Revenues were thus expected to soar even higher after having leaped 29 percent in 2007 to $18.44 billion, an advance stemming not only from the increase in production but also from record-high oil prices. Net income for 2007 totaled $766.5 million, up 19 percent from the 2006 total.

Murphy Oil’s refining and marketing operations generated record profits of $205.7 million in 2007. At the end of the year, the company was operating nearly 1,000 Murphy USA stations. During the year, Murphy purchased from Wal-Mart the real estate underlying most of these stations. Over in the United Kingdom, Murphy had been a minority partner in a refinery in Milford Haven, Wales, for more than 26 years. In December 2007 the company acquired full control of this refinery, which had a capacity of 108,000 barrels per day. The Milford Haven facility supported Murphy Oil’s network of nearly 400 U.K. gas stations, most of which operated under the MURCO brand. Murphy owned about 160 of these stations, the rest of which were branded dealers.

COMPANY PERSPECTIVES

Murphy’s strategy in the past has emphasized organic production growth and reserve additions through high-risk, but focused exploration. This strategy has served us well. However, given the increased cost of drilling and increasing difficulty of accessing plays, we will broaden our thinking to include different ways to capture opportunities that meaningfully add value. We are not completely changing what we do; however, we simply realize that as a Company we have to adapt to changed circumstances. We will continue our grass roots exploration but in a measured, focused way and will intensify our execution across all areas of our operations.

KEY DATES

1944:

Charles H. Murphy Sr. and associates form C.H. Murphy & Company.

1950:

Company is incorporated as Murphy Corporation.

1956:

Company is taken public on the New York Stock Exchange.

1958:

First refinery, located in Superior, Wisconsin, is purchased.

1960:

First service stations are acquired through acquisition of Spur Oil Co.

1961:

Murphy acquires its second refinery, located in Meraux, Louisiana.

1964:

Company is reorganized as Murphy Oil Corporation; farm and timber interests are placed into a wholly owned subsidiary, Deltic Farm & Timber Co., Inc.

1973:

OPEC oil embargo leads to increased revenues and profits for the company.

1980:

Revenues surpass $2 billion for the first time.

1983:

Murphy Oil is reorganized as a holding company; Murphy Oil USA, Inc., is created to oversee domestic oil interests and Canadian marketing division is sold.

1986:

Low crude prices lead to the layoff of 30 percent of the Murphy workforce and an annual loss of $194.7 million.

1996:

Company launches alliance with Wal-Mart Stores, Inc., under which Murphy gas stations are added to the retailer’s store properties; Deltic Farm & Timber is spun off to company shareholders.

2002:

Murphy Oil announces its first major discovery in offshore Malaysia.

2005:

Hurricane Katrina damages Murphy’s Meraux refinery, leading to a major crude oil spill; the refinery remains shut down for around nine months.

2007:

Murphy starts up production at the Kikeh field in Malaysia.

Gamesotp Corp.

Public Company
Incorporated: 2001
Employees: 17,000
Sales: $9.55 billion (2012)
Stock Exchanges: New York
Ticker Symbol: GME
NAICS: 443142 Electronics Stores

Based in Grapevine, Texas, GameStop Corp. is the largest U.S. retailer of video game and personal computer (PC) entertainment software. The company operates approximately 6,600 retail stores in the United States and about 15 other countries. In addition to new and used software, GameStop’s stores sell new and used video game equipment, as well as such accessories as controllers, memory cards, and other add-ons, along with iPods, iPhones, and iPads. GameStop also operates an electronic commerce website, publishes Game Informer magazine, maintains the http://www.Kongregate.com browser-based game site, and owns Spawn Labs, a streaming technology company. Listed on the New York Stock Exchange, GameStop is a Fortune 500 and Standard & Poor’s 500 company.

EARLY YEARS OF BABBAGE’S

GameStop has a lineage that includes several retailing names now relegated to the historical graveyard. One of the key predecessors was Babbage’s, Inc., named for Charles Babbage, the 19th-century British mathematician generally credited with inventing the first major forerunner of a computer. Babbage’s traces its roots to two Harvard Business School classmates, James B. McCurry and Gary M. Kusin. At Harvard during the mid-1970s, McCurry and Kusin discussed going into business together but went in separate directions after graduation.

McCurry became a consultant for Bain & Company’s San Francisco office, while Kusin became a Dallas-based general merchandise manager for the Sanger-Harris division of Federated Department Stores. In 1982 McCurry approached Kusin with a business proposal to establish a chain of software stores that would capitalize on the burgeoning computer and home video game industries. His idea was based on the expectation that increasing consumer interest in computer equipment and games would make the specialty store the ideal marketing outlet.

BACKING FROM ROSS PEROT

Kusin, who had been watching such specialty stores gradually take over department store business, liked the idea, and, at the end of the year, both men quit their jobs and began seeking startup financing for a software business. McCurry and Kusin’s business plan met with little interest among venture capitalists until February 1983, when businessman H. Ross Perot, who knew Kusin’s family in Texarkana, offered to provide a $3 million credit line in exchange for one-third ownership in the company.

Perot also advised the entrepreneurs to shelve their plan for immediately opening 20 stores in favor of establishing one outlet, which they would manage themselves until they knew the business inside and out. McCurry and Kusin took Perot’s money and advice, and on Memorial Day 1983, they opened the first Babbage’s store in a Dallas regional mall. McCurry, the company’s chairperson, managed the company’s finances, while Kusin, the company’s president, acquired software products from local distributors. Both partners took turns opening and closing the store and seeing to other administrative details.

During this time, McCurry and Kusin tested their business strategy, which involved four key provisions: a constantly updated mix of products, a competitive pricing system, a flexible store design with sections devoted to various computer and entertainment system platforms and software categories, and an enthusiastic, noncommissioned sales staff that would not intimidate customers with technical jargon. Two months after opening the first Babbage’s store, McCurry and Kusin met their sales projections and hired their first full-time employee, Mary Evans, who later became vice president of stores. Between Labor Day and Thanksgiving of 1983, Evans helped open and manage four more Dallas-area stores.

ADAPTING PRODUCT LINES

Babbage’s set a precedent of selling entertainment software for the most popular computer and video game systems. At the time, the dominant home video game system was the Atari 2600, which featured four-color graphics. Eventually Atari was superseded by Nintendo and Sega of America systems, and Babbage’s redirected its product line accordingly. In 1984, Babbage’s first full year of operations, the company lost $560,000 on sales of $3 million. Two years later, it broke even after generating nearly $10 million in revenues from an expanded chain of 23 stores, financed through the private sales of company stock.

In 1987 Babbage’s added another 35 stores and began selling software for the then-dominant, eight-bit Nintendo Entertainment System with 16-color graphics. For fiscal 1987, the company earned $1.16 million on sales of $29 million. In July 1988 Babbage’s took its software specialty store concept public, offering 30 percent of the company’s equity for $20 million, or $13 a share. Following the public offering, Perot tendered his stake in the company, and Babbage’s continued accelerating its expansion drive with the proceeds of stock sales, opening 50 new stores that year to give the company 108 retail outlets.

This expansion resulted in rising sales, and in 1988 Babbage’s annual revenues doubled to $58 million, while earnings shot up 136 percent to $2.7 million. In 1989 Babbage’s began losing business because of severe allocations of video games. Struck by a string of losses in the first three quarters of the year, the company responded by reducing prices on leading computer software titles and adding new cartridge-based video games to its line.

Moreover, in the fall, Babbage’s helped introduce the new 16-bit, 64-color Sega Genesis entertainment system, which quickly changed the landscape of the video game industry. With its superior capabilities, Sega Genesis generated a renewed interest in home video game systems. Rising sales of entertainment systems and software contributed to a strong 1989 holiday sales season for Babbage’s, as the company managed a $2.3 million profit on annual sales that increased 62 percent to $95 million.

RISING REVENUES

Fifty-three new stores opened in 1989, bringing the company’s total to 160. A barrage of new low-profit-margin products pushed the company’s earnings and its stock’s trading value down. By early 1990 Babbage’s stock, which had debuted at $13, had plummeted to less than $5. Babbage’s responded to its financial troubles by scaling back the company’s expansion program, opening only 19 stores in 1990, and focusing on cost-control measures and improved inventory turnover. Moreover, a new computerized point-of-sale inventory system was established, tracking sales and inventory after each business day and automatically generating orders for shipment from the company’s Dallas warehouse the following morning.

Powered by a surge in video game systems and software, including Sega’s 16-bit Genesis and Nintendo’s

handheld Game Boy player, the company’s revenues rose 39 percent to $132.8 million in 1990 as earnings increased to $4.1 million. Opal P. Ferraro, who joined Baggage’s in 1986 as controller, was named chief financial officer in 1991. Two years later, Ferraro joined McCurry and Kusin as the only other company officer on Babbage’s board of directors.

With the company in improved financial shape, Babbage’s boosted its number of stores from 178 to 204 and reported 1991 earnings of $5.58 million on sales of $168.3 million. In 1992 Babbage’s added more than 40 new stores and began selling a CD-ROM peripheral attachment for the Sega 16-bit system that allowed interaction with digitized video footage. Sparked by a price war in the computer industry, sales of IBM-compatible software and 16-bit video systems and software rose substantially. The company’s stock value increased accordingly, climbing to more than $24 per share. The company’s earnings also increased 21 percent to $6.78 million, and sales jumped 24 percent to $209.1 million.

INTRODUCTION OF 32-BIT SYSTEMS

In the fall of 1993 Babbage’s began selling Panasonic’s 32-bit game system, which operated through compact discs. This new technology threatened to render the 16-bit systems obsolete, and Babbage’s experienced rapid declines in its sales of video game systems and software during the Christmas season. The average Babbage’s store posted 5 percent lower sales than a year earlier. Realizing that the market for 16-bit technology had matured, Babbage’s slashed prices on hundreds of video game titles early the following year in an effort to unload its inventory of the increasingly dated software.

In 1993 Babbage’s opened 56 new stores. The company, however, generated only a 12 percent increase in sales, and, for the first time since 1989, increased revenues did not translate into higher earnings for the company. Earnings fell 36 percent to $4.3 million that year as entertainment software continued to constitute about two-thirds of Babbage’s business. Education and productivity software, along with computer supplies and accessories, cumulatively accounted for the remaining third.

SOFTWARE ETC. MERGER: 1994

Babbage’s entered 1994 with a 300-store chain and plans to open between 30 and 40 more stores that year. As a result of holiday season price reductions, Babbage’s stores had substantially reduced their inventory. The company was in a stronger financial position, however, as it had no long-term debt and maintained a cash surplus of $10.5 million. Babbage’s entered the mid-1990s facing increasing competition from other software specialty stores, mass merchandisers (such as Wal-Mart Stores, Inc.), computer centers and superstores, electronics stores (particularly Best Buy Co., Inc., and Circuit City Stores, Inc.), toy stores, and mail-order outlets, many of which were larger operations and had greater resources at their disposal.

In order to better position itself within this increasingly competitive environment, Babbage’s elected to merge with another specialty software retailer, Software Etc. Stores, Inc. The company began in 1984 as a division of B. Dalton Bookseller Inc., then owned by Dayton Hudson Corporation. That year, B. Dalton began adding Software Etc. “stores-within-a-store” to its bookstores. Late in 1986, however, Dayton Hudson sold B. Dalton to Barnes & Noble, Inc. (B&N), Leonard Riggio and Dutch retailer Vendex International N.V. Riggio, the chairman and founder of B&N, played a key role in separating Software Etc. from B. Dalton. Software Etc. began operating as Software Etc. Stores, Inc., in 1987.

LEAVING B. DALTON

A gradual physical separation began as well, as Software Etc. units moved out of B. Dalton bookstores and into their own, largely mall-based, stand-alone stores. The chain was also expanded to nearly 200 units by the end of 1988, and its product mix was altered, away from entertainment software toward higher-end PC and Mac software applications. Software Etc. then broadened its product line in 1990, once again selling video game software.

The company’s timing was excellent as it was able to ride the latest crest in the video game sector in the early 1990s, registering 20 to 30 percent annual increases in same-store sales, meaning sales at stores open at least one year. Revenues for the fiscal year ending in October 1991 reached $152 million, up $35 million from the previous year. Early in 1992, operating about 230 stores in 37 states and the District of Columbia, Software Etc. Stores completed an initial public offering (IPO) of 2.3 million shares of common stock at $11 per share.

NEOSTAR IN CHARGE

By the completion of the merger with Babbage’s in December 1994, Software Etc. was operating about 380 stores and had annual revenues of about $240 million. Babbage’s had about 335 stores and revenues of $230 million. There was little overlap between the two chains as the two operated stores in fewer than 50 of the same malls. Combined, the chains fielded stores in more than half of the 1,200 malls in the Unites States, making it the largest consumer software specialty retailer in the country. The deal was structured as a stock swap in which both Babbage’s and Software Etc. shareholders received shares in a newly formed holding company, NeoStar Retail Group, Inc. Babbage’s, Inc., and Software Etc. Stores, Inc., became subsidiaries of Neo-Star, and each chain retained its separate identity.

Riggio was named chairman of NeoStar’s executive committee; Babbage’s chairman, McCurry, became board chairman and CEO of NeoStar; and Kusin, president of Babbage’s, and Daniel DeMatteo, president of Software Etc., continued in those same roles. In February 1995, however, Kusin left the company, and DeMatteo was named president and COO of NeoStar. Headquarters for NeoStar were established in Dallas, where Babbage’s had been based.

INCREASING COMPETITION

The 1995 introductions of a new generation of video game systems, the Sega Saturn and Sony PlayStation, both 32-bit systems, failed to provide the boost to Neo-Star that the previous new waves of hardware had given to the company’s predecessors. One key reason was competition. Previously, Babbage’s and Software Etc. stores were two of the few places where the latest systems and games were available early on. By the mid-1990s mass-market retailers such as Wal-Mart, Best Buy, Target, and Toys “R” Us, Inc., had stepped strongly into the market.

As a result, sales began declining, and NeoStar managed to post only a minuscule profit of $120,000 for the fiscal year ending in January 1996 on sales of $513.5 million. In the first quarter of the following year, same-store sales fell 9 percent and the loss of $8.3 million was more than double that of the previous year. This prompted management and organizational changes. DeMatteo resigned and McCurry took on the additional post of president.

NeoStar’s three retail units (the third one operating leased software departments within B&N bookstores) were combined into one organization, and Alan C. Bush was brought onboard as its head. Bush was the former president of Tandy Corporation’s Computer City division. Soon thereafter, in July 1996, B&N took over management of the software departments at its stores.

RIGGIO AND THE B&N ERA

Not able to stem the decline in sales nor to secure enough financing to stock its shelves for the coming holiday season, NeoStar filed for Chapter 11 bankruptcy protection in September 1996. Board member Thomas G. Plaskett was named chairman and charged with leading the reorganization, while McCurry continued to handle day-to-day operations as CEO and president. Plaskett had gained a reputation as a turnaround expert from his failed but valiant attempt to rescue Pan Am Corp. in the late 1980s and early 1990s and from his success at saving Greyhound Lines, Inc., in the mid-1990s.

In October 1996 NeoStar announced it would close 42 of its stores, all of which were located near other company stores. When the company could not secure the additional financing it needed in order to reorganize, the stores were placed up for sale. Finally, in November, a group of investors led by Riggio bought the chains for $58.5 million, beating out a rival bid from Electronics Boutique Holdings Corp., Babbage’s and Software Etc.’s biggest competitor.

Riggio created a new holding company called Babbage’s Etc. LLC, which took over the operation of 467 Babbage’s and Software Etc. outlets. The remaining 200 or so stores were shut down. Riggio served as chairman, and he brought R. Richard “Dick” Fontaine back onboard as CEO. Fontaine had been the chief executive of Software Etc. during the late 1980s and early 1990s.

Likewise, DeMatteo returned as president and chief operating officer. The two chains began keeping a similar mix of video game and software titles, with an increasing emphasis on the former. Improved operational strategies and the introduction of a new 64-bit Nintendo system helped Babbage’s Etc. return to double-digit growth in the late 1990s.

GAMESTOP LAUNCHED: 1999

By 1999 Babbage’s Etc. had recovered sufficiently to begin growing again. Plans were set for opening 50 new stores that year, and a significant portion of this growth was aimed at expanding the company into the field of strip malls. A new name, GameStop, was selected for the 20 new strip mall outlets. In addition, this brand was selected for an expanded e-commerce website, http://thegamestop.com , which was later shortened tohttp://gamestop.com . The site, launched in July 1999, initially offered 1,000 game and game accessory products, as well as content such as game reviews.

In October 1999, shortly after the launch of GameStop and the website, Riggio and company sold Babbage’s Etc. to B&N for $215 million. Although some analysts raised their eyebrows at the price B&N paid for Babbage’s, more than three times what Riggio’s group had paid for it three years earlier, a spate of new game systems augured well for the timing. Sega’s Dreamcast and Nintendo’s handheld Game Boy Color machines were released in the latter months of 1999 and Sony’s 128-bit PlayStation 2 system made a spectacular debut in the fall of 2000.

B&N wasted little time bolstering its new subsidiary. In the spring of 2000 it entered into a bidding war with Electronic Boutique Holdings over Funco, Inc., operator of about 400 FuncoLand video and computer games stores, mainly located in strip malls, with revenues for the fiscal year ending in March 1999 of $206.7 million. B&N emerged victorious, completing a $161.5 million acquisition of Eden Prairie, Minnesota-based Funco in June 2000.

BABBAGE’S BECOMES SUBSIDIARY

The deal was noteworthy both for the significant boost it gave to Babbage’s nascent move into strip mall centers and for FuncoLand’s major business in used video games. About 40 percent of its revenues came from the sale of used games, which were bought from customers and then resold with a much higher markup than what was typical for new games. Funco also published Game Informer, one of the industry’s leading multi-platform video game magazines. In the structure of this latest deal, B&N acquired Funco, and Babbage’s Etc. became a wholly owned subsidiary of Funco.

In December 2000 Funco changed its name to GameStop, Inc., marking the beginning of what would be a gradual shift to the GameStop name. As GameStop increased its store count past the 1,000-unit mark during 2001, it received a lift from several more new game system releases. These included Nintendo’s Game Boy Advance, which debuted during the summer, and Microsoft Corporation’s long-awaited Xbox console and Nintendo’s GameCube system, both launched in November. The industry was clearly on another uptrend as the number of installed video game systems in the United States jumped from 26 million in 2000 to 65.1 million in 2002. The time seemed right for B&N to partially cash in on its foray into gaming, and GameStop Corp. was incorporated in August 2001 in anticipation of an IPO.

TAKEN PUBLIC: 2002

The first attempt at an IPO failed. B&N had intended to take GameStop public on the NASDAQ in the fall of 2001, but an adverse IPO market thwarted that attempt. Instead, GameStop Corp. was listed on the New York Stock Exchange in February 2002 through the sale of 20.8 million shares at $18 per share. Just prior to the listing, B&N transferred all of its interest in GameStop, Inc., to GameStop Corp. Following the IPO, B&N retained a controlling 67 percent interest in GameStop.

Under the continued leadership of Fontaine as chairman and CEO, and DeMatteo as president and COO,GameStop expanded smartly in 2002 and 2003, opening 210 and 300 new stores, respectively. During this period the company rebranded more and more of its stores under the GameStop name, until by 2004 nearly all of the units used that name. Two-thirds of the stores were located in strip malls, which most consumers considered more convenient than enclosed shopping malls.

POSTING IMPRESSIVE PROFITS

The company had its best year ever in 2003, posting record sales of $1.58 billion and record profits of $63.5 million. Perhaps most impressive, GameStop was profitable every quarter. In all of its various past incarnations, it had made money only during the last, holidays-inclusive quarter. GameStop also ventured overseas during 2003, spending $3.3 million to acquire a controlling interest in Gamesworld Group Ltd., which ran 16 electronic games stores in Ireland. The rapidly expanding company was quickly outgrowing its headquarters, and in the spring of 2005 the company moved into larger facilities in Grapevine.

Late in the year, GameStop gained its full independence from B&N. In October it spent $111.5 million to buy back 6.1 million shares of its stock from B&N. One month later, B&N distributed its remaining 59 percentGameStop stake to B&N shareholders as a tax-free dividend.

As a newly independent company, GameStop sought to expand its retail footprint. In October 2005 it acquired Electronics Boutique Holdings Corp. (whose stores operated as EB Games), increasing the number of retail outlets to more than 3,200 in the United States and about 600 worldwide. GameStop grew organically over the next two years and in 2008 expanded its presence in Europe by acquiring Micromania, France’s largest video game retailer with more than 300 stores. With nearly 5,900 stores, GameStop had become, without question, the world’s largest video game retailer.

DIGITAL STRATEGY ADOPTED

Its leading position notwithstanding, GameStop faced continued challenges, due primarily to changes in the gaming world. In 2001 the sale of PC physical games began to taper off, causing GameStop executives to assume that customers were simply growing less interested in PC games. It eventually became evident that interest was as strong as ever but PC download sales were siphoning off in-store sales. To adapt to this new reality, GameStop launched a digital growth strategy in 2009.

The first significant step taken by GameStop in the pursuit of its revised approach was the November 2009 acquisition of Jolt Online Games, an Ireland-based publisher of free-to-play titles. Next, in July 2010,GameStop acquired Kongregate, a flash-based game portal offering free-to-play social media games. Another important development in 2010 was the launch of the GameStop PowerUp Rewards loyalty program. The information gathered about its customers through the program allowed GameStop to refine its marketing strategy.

Rather than wide-scale advertising campaigns, GameStop was able to make more effective use of its marketing dollars through direct campaigns. The company began informing loyalty program members about a new game knowing full well they were the mostly likely customers for the title. In the spring of 2011, GameStopcompleted a major acquisition that fleshed out its digital strategy.

GAMESTOP IMPULSE LAUNCHED

The purchase of Impulse Inc. provided GameStop with a digital distribution platform that allowed users to easily search a library of more than 1,100 games and download them to Internet-connected devices. In July 2011GameStop Impulse was launched as GameStop’s digital distribution platform. Customers could purchase, download, install games, and manage their digital purchases at home. People without credit cards, or those using gift cards or in-store credit, could visit a GameStop store to have downloads and installations done for them.

Another important acquisition in 2011 involved Spawn Labs, a streaming technology company that brought patented technology and technology talent to beef up GameStop’s research and development group. It also created new digital game products and services.

In keeping with its dedication to mobile-device gaming, GameStop in 2011 began accepting trades of pre-owned iPods, iPhones, and iPads. In addition, about 200 GameStop stores began to sell tablet computers that came preloaded with several digital games designed for tablet play. With annual sales of more than $9.5 billion,GameStop was a multichannel video game retailer positioning itself for ongoing dominance in the years ahead.

KEY DATES

1983:

James B. McCurry and Gary M. Kusin found Babbage’s, Inc., and open the first Babbage’s software store in a Dallas regional mall.

1988:

Babbage’s is taken public.

1989:

The company opens 53 new stores, bringing the total to 160.

1999:

New strip mall-based chain, GameStop, is launched.

2000:

Funco changes its name to GameStop, Inc.

2001:

GameStop Corp. is incorporated in anticipation of an initial public offering.

2005:

Electronics Boutique Holdings Corp. is acquired.

2008:

The company acquires Micromania, France’s largest video game retailer.

2009:

GameStop initiates digital strategy.

2011:

The company acquires streaming technology company Spawn Labs.

Charles Schwab & Co.

Public Company
Incorporated: 1974 as Charles Schwab & Co., Inc.
Employees: 13,800
Total Assets: $143.64 billion (2013)
Stock Exchanges: New York
Ticker Symbol: SCHW
NAICS: 523110 Investment Banking and Securities Dealing; 523120 Securities Brokerage; 523920 Portfolio Management; 523930 Investment Advice

The Charles Schwab Corporation is a brokerage and banking company that gained fame as a discount broker. Schwab operates more than 300 branches in 45 states that offer investment advice and services. The company serves more than 9 million active brokerage accounts and manages $2.29 trillion in client assets. Through Charles Schwab Bank, the company serves more than 920,000 banking accounts.

CHARLES SCHWAB, ENTREPRENEUR: 1971

Charles Schwab, the company’s founder, had received an MBA degree from Stanford University and had been working for a small California investment adviser when, in 1971, he founded his own company, First Commander Corp. He and two partners created a stock mutual fund that soon had $20 million in assets. They ran into trouble with securities regulators, however, when it was learned that they had failed to register the fund. This error temporarily forced Schwab out of business, but he soon reopened a small money-management firm, Charles Schwab & Co., Inc., in San Francisco, which he incorporated in 1974.

On May 1, 1975, the U.S. Congress deregulated the stock brokerage industry by taking away the power of the New York Stock Exchange to determine the commission rates charged by its members. This opened the door to discount brokers, who took orders to buy and sell securities but did not offer advice or conduct research the way larger, established brokers such as Merrill Lynch did. This presented an opportunity to win individual investors well enough versed in the stock market not to need the advice offered by established brokers. Schwab quickly took advantage of deregulation, opening a small San Francisco brokerage, financed primarily with borrowed money, and buying a seat on the New York Stock Exchange.

The new discount brokers, whose commissions might be only 30 percent of the rates before deregulation, were scorned by the old-line brokerages. During his first few years as a discount broker, Schwab had to contend with bad publicity generated by the older firms, some of whom threatened to break their leases if landlords allowed Schwab to rent offices in the same building.

Schwab fought back by buying newspaper ads featuring his photograph and asking customers to contact him personally, helping to build the firm’s credibility. Possibly the most important early decision made by Schwab was to open branch offices around the United States. He reasoned that even investors not needing advice would prefer doing business through a local office instead of a toll-free telephone number. The move won customers and helped differentiate Schwab from the large number of discount firms appearing after deregulation.

Over the next few years Schwab did several things to pull away from the pack. The company offered innovative new services including the ability to place orders 24 hours a day. It bought advanced computer systems to deal quickly with huge volumes of orders and continued its heavy advertising, seeking to project an upscale image. Top executives were given expensive foreign cars, and an interior design staff was commissioned to help showcase certain new branches. Some industry analysts maintained that with these measures Schwab helped bring discount brokering into the mainstream of financial institutions.

ACQUISITION BY BANKAMERICA: 1983

The firm’s rapid expansion was costly, however. Partly as a result of high operating costs and partly because sales were dependent on the sentiments of small investors, profits were erratic. Schwab sometimes turned to employees and larger customers to raise money for further expansion. By 1980 Schwab was by far the largest discounter in the country. That year, to fund further growth, Schwab decided to take the company public. The offering was called off, however, when some problems caused by the attempted conversion to a new computer system proved an embarrassment to the company. Raising sufficient capital in private became more difficult, partly because of the erratic earnings. Finally, in 1983, Schwab arranged for San Francisco’s BankAmerica Corporation to acquire the company for $55 million in BankAmerica stock. BankAmerica also agreed to supply Schwab with capital. The bank loaned Schwab $50 million over the next three years, but Schwab remained one of the most highly leveraged brokerages.

The sale to BankAmerica may have provided needed capital, but it also fettered the company with banking regulations. Schwab wanted to offer new, proprietary lines of investments including Charles Schwab mutual funds. Federal law at the time, however, forbid banks and their subsidiaries from underwriting such securities. Although Schwab initially sought to challenge the law, as its wording contained some ambiguities, BankAmerica did not want to irritate banking regulators. Tensions between Schwab and its parent were further exacerbated when BankAmerica’s stock price began falling, making Schwab’s stake in the corporation worth less.

Schwab introduced the Mutual Fund Marketplace in 1984 with an initial investment of $5 million. The Marketplace allowed customers to invest in 250 separate mutual funds and switch between them using Schwab as the bookkeeper. All of a customer’s mutual fund accounts were put on a single monthly statement. The company’s profile was further raised in 1984 when Schwab’s book How to Be Your Own Stockbroker was published. In it Schwab presented himself as a populist fighting against Wall Street stockbrokers in the name of the average investor. He contended that there is an inherent conflict of interest when a firm owns stock in inventory, writes favorable research recommendations on those stocks, and has commissioned salespeople sell those stocks to the public. At the same time, Schwab’s company was moving into elegant new headquarters in downtown San Francisco.

In 1985 Schwab had 90 branches and 1.2 million customers, generating $202 million in revenue. Although it was far larger than its leading discount competitors, it was small compared with the largest retail brokerages, which had over 300 branches. The firm was growing in other ways, however. It offered personal computer software, called the Equalizer, that allowed investors to place orders via computer as well as to call up stock information and obtain research reports.

INDEPENDENCE AND PUBLIC DEBUT: 1987

In 1987 Charles Schwab and a group of investors bought the company back from BankAmerica for $280 million. Seven weeks later, he announced plans to take the company public. The buyback had resulted in a debt of $200 million, and the initial public offering (IPO)

was partly designed to eliminate some of this debt. It was also intended to raise money for further expansion. Schwab wanted to increase the number of branches to 120, including offices in Europe. The September 1987 IPO created a new holding company, The Charles Schwab Corporation, with Charles Schwab & Co., Inc., as its principal operating subsidiary.

The discount brokerage business had grown intensely competitive. Discounters handled a significant amount of retail equity trades by 1987, but hundreds of firms had entered the field, including banks, savings and loans, and mutual fund companies. Since Schwab was clearly the player to beat in discounting, competitors’ advertisements specifically offered rates lower than Schwab’s. Nevertheless, at this time Schwab had 1.6 million customers, about five times as many as its nearest competitor, Quick & Reilly Group. In 1987 the firm had sales of $465 million and profits of $26 million, twice the industry’s average profit margin. To achieve this success, Schwab was spending about $15 million a year on advertising.

Schwab was already doing well with its expanded product line. Mutual Fund Marketplace had attracted $1.07 billion in client assets by year-end 1986. The company was also offering individual retirement accounts (IRAs), certificates of deposit, money-market accounts, and Schwab One cash-management accounts. Despite these successes, Schwab was badly hurt by the stock market crash of October 1987. By mid-1988, trading volume had fallen to about 10,400 trades a day, a 40 percent drop from the months before the crash. Schwab cut costs to maintain profitability, reducing managerial salaries anywhere from 5 to 20 percent and laying off employees.Charles Schwab cut his own pay by 20 percent for six months and put branch expansion plans on hold. The firm also raised its trading commission by 10 percent, so that it needed only 8,000 trades a day to break even, down from 12,000 trades. Even with the cost-cutting, the firm’s 1988 earnings plummeted 70 percent to $7.4 million on sales of $392 million.

RAPID EXPANSION RESUMES: 1989

By 1989 Schwab was expanding again. The company bought Chicago-based Rose & Co. for $34 million from Chase Manhattan. As the fifth-largest discount broker in the United States, Rose & Co. brought Schwab 200,000 new customers at a cost of about $70 each. With the purchase, Schwab controlled about 40 percent of the discount market, although discounters made only 8 percent of all retail commissions. Over the long run, Schwab realized its best strategy was to win customers from the full-service brokers. To help create more independent stock investors, it pioneered a service called TeleBroker that let customers place stock orders and get price quotes from any touch-tone telephone 24 hours a day. It also released a new version of the Equalizer. The software had already sold 30,000 copies at $169 each since its introduction.

Individual investors returned to the stock market in 1989, and the firm’s income surged to $553 million, with profits of $18.9 million. Income was further helped by an increase in client assets, from $16.8 billion in 1987 to $25 billion in early 1990. Commissions accounted for 70 percent of revenue, down from 85 percent in 1987.

Throughout the 1980s, Schwab updated its Mutual Fund Marketplace to allow customers to switch their investments from fund to fund by telephone. Customers paid a commission ranging from.6 percent to.08 percent, with a minimum fee of $29. Analysts were generally positive, pointing out that the amount of interest lost from having a check in the mail would pay for most of the service’s commission fees. In 1991 Schwab entered a new and lucrative market with the acquisition of Mayer & Schweitzer, an over-the-counter stock market maker.

Meanwhile, Schwab was opening branch offices at a furious pace, launching 17 in 1992 alone, and doubling the amount of money it spent on advertising. Schwab’s aggressive stance helped raise its share of the discount market to 46 percent as the company attracted more than 40,000 new accounts a month. In 1992 Schwab acquired its first corporate jet, spending $12 million on a model with enough fuel capacity to reach London, where it was opening its first European branch. These additional costs helped drag down third-quarter earnings in 1992 when stock trading temporarily tapered off. The dip was a reminder that the company was still highly dependent on commissions and caused its stock to drop 20 percent.

Schwab cut advertising by 20 percent and took other steps to slow cost increases. The company converted a greater share of new branch offices into bare-bones operations with only one broker. Schwab already paid its 2,500 brokers less than other discounters, an average of $31,000 a year, compared with $50,000 at Fidelity Brokerage Services and $36,000 at Quick & Reilly.

ONESOURCE SPURS GROWTH: 1992

The firm also continued searching for ways to become less dependent on commissions. The introduction in July 1992 of the Mutual Fund OneSource, a program allowing investors to trade mutual funds (more than 200 in all) from eight outside fund companies, without paying any transaction fees, attracted more than $500 million in assets within two months and over $4 billion by July 1993. It was the most successful first-year pilot of any new service in Schwab’s history. The fund companies paid Schwab a small percentage fee, typically 0.25 to 0.35 percent, of the fund assets held in Schwab accounts.

During 1992 Schwab customers opened 560,000 new accounts at its 175 branch offices, while assets in customer accounts grew 38 percent to $65.6 billion. Revenue soared to $909 million, with record profits of $81 million. As a result of these successes, Schwab opened 20 more branch offices in 1993, opened an office in London (its first in Europe), and introduced several proprietary mutual funds, including Schwab International Index Fund and Schwab Small-Cap Index Fund.

As the 1990s continued, the OneSource program became wildly successful. By 1997 investors could choose among more than 1,400 mutual funds and had poured $80 billion into the funds through the program. OneSource, aided by the long bull market, helped Schwab grow at an amazing rate in the 1990s. From 1992 through 1997, revenues increased at a 25 percent compounded annual rate, while customer assets increased 40 percent per year, from $65.6 billion to $353.7 billion. Also fueling this growth was the emergence of Internet trading as Schwab rapidly gained the number one position among online brokerage services. By May 1997 the firm claimed 700,000 of the 1.5 million active, online brokerage accounts in the United States. It also moved into the top five among all U.S. brokerages.

CHALLENGES: 1997–98

Schwab’s explosive growth, which saw customer accounts increase from 2 million in 1992 to 4.8 million in 1997, was accompanied by several technological snafus, prompting some company clients to conclude that Schwab was growing too fast. For instance, in the summer of 1997 two computer-related outages temporarily left thousands of Schwab clients without access to their accounts. In addition, some clients were mistakenly sent the statements of other clients. Schwab officials contended that these were isolated incidents and not indicative of out-of-control growth.

The company also had to contend with the aging of the baby boom generation, the members of which were somewhat belatedly planning for retirement. Schwab set up a retirement plan services unit offering 401(k) and other retirement plans. Aging investors also tended to want more advice before deciding where to put their money. In response, Schwab bolstered its ability to deliver investment advice to clients. The company developed written investment kits, provided access to a wide range of research reports, earnings forecasts, and news stories on its website, and offered the opportunity to meet in person with representatives at company branches. Another new and highly sought-after service added by Schwab in 1997 was access to IPOs at the offering price. The firm entered into alliances with Credit Suisse First Boston Corporation, J.P. Morgan & Co., and Hambrecht & Quist Group to gain access to IPOs led by these companies.

On January 1, 1998, David S. Pottruck became president and co-CEO of Charles Schwab Corporation, withCharles Schwab remaining chairman and sharing the co-CEO title. This unusual arrangement seemed to indicate that Pottruck, age 49 at the time, was in line to succeed the 60-year-old Schwab, though the company founder had made no retirement plans. Just a month or so earlier, Timothy F. McCarthy was named president and chief operating officer of Charles Schwab & Co., giving him day-to-day responsibility for the management of the brokerage unit, with Pottruck controlling overall administration, finance, technology, and corporate strategy.

TRYING TIMES AND POTTRUCK TAKES CHARGE: 2000–03

The new century started out with a bang. Schwab paid $3 billion for the 149-year-old U.S. Trust Corporation. The wealth advisory company, looking toward the retirement of insiders, had been positioning itself for change. Schwab, meanwhile, wanted to expand its services to investors with very high net worth. When the Gramm- Leach-Bliley Act, which allowed financial institutions crossover businesses, passed in 1999, the way was eased for a merger between the pair.

A bust followed the bang, however. Schwab soon was reeling from a dramatic drop-off in online trading precipitated by the tech stock collapse and deepened by the September 11, 2001, terrorist attacks and the Enron bankruptcy in December.

To avoid layoffs, Schwab eliminated bonuses, cut executive pay, promoted unpaid sabbaticals and days off, and encouraged part-time or job-share positions. Yet those and other efforts failed to stem the tide of pink slips to come. During 2001, daily average trades dropped by roughly a third. Yearly revenue fell 25 percent to $4.35 billion and net income was off by 72 percent to $199 million.

While Schwab had a strong track record bringing new ventures into the financial market, some of its endeavors had of late been less successful. In 1999 Schwab led a consortium to establish Epoch Partners Inc. to underwrite tech IPOs, but it stalled with the tech stock meltdown and Schwab sold its stake in the venture in 2001 to Goldman Sachs. Two other endeavors, wireless-trading service PocketBroker and online-service CyberTrader, had yet to find their stride.

The merger with U.S. Trust (UST) had not yet lived up to expectations, due, in part, to the market downturn. Private banking assets had generally declined, with UST’s average assets falling more precipitously than its competitors. Another fly in UST’s ointment was a $10 million fine for violation of money-laundering rules, a judgment handed down after the merger with Schwab. Moreover, a melding of clients between Schwab and UST had yet to manifest itself, as Schwab investment advisers balked at the idea. Late in 2002 Schwab instituted a change of leadership and direction at UST.

Schwab relinquished his position as co-CEO in 2003, leaving Pottruck in charge. Schwab, who controlled 25 percent of the company and continued as chairman, attributed the decision to step down to a current wave of concern regarding corporate governance.

CHARLES SCHWAB BANK OPENS: 2003

Changes were taking place abroad as well. Charles Schwab Europe, the firm’s pound-denominated brokerage in the United Kingdom, was sold to Barclays PLC. The dollar-denominated business continued to offer trades on U.S. exchanges and in U.S. investment products. The company’s Canadian brokerage operation had been sold in 2002 and joint ventures in Japan and Australia exited in the final quarter of 2001. The rise, then fall, of the markets prompted Schwab to enter, then exit, online international markets.

In a move to bring in new revenue, Charles Schwab Bank opened in 2003. The bank planned to focus on mortgages, tapping into the red-hot market. Long-term interest rates were at their lowest levels in more than four decades. Operating primarily online, by phone, and mail, the bank also would offer checking, savings, and certificates of deposit accounts.

During the latter half of 2003, Schwab joined the growing list of financial companies targeted for investigation by Eliot Spitzer, New York’s attorney general, and the Securities and Exchange Commission (SEC). Schwab faced allegations regarding market timing by a fund family operated by UST and illegal late trading in the Schwab Mutual Fund Marketplace. The tarnishing of its trustworthiness, a trait crucial to the brand, hit Schwab stock harder than other financial operations under investigation. Brokerage stock overall had been climbing as the market recovered.

For much of its history, Schwab had been aided by bull market conditions that drew a broader range of investors into the arena. When the bear market took hold, both revenue and stock price suffered. Revenue of $5.8 billion in 2000 fell to $4.1 billion in 2002. Stock as high as $50.16 per share in April 1999, traded in the $11 per share range in 2003. A quarter of its employees had been axed. Survivors of the cuts lost bonuses, which made up a good deal of compensation, and their 401(k) matches.

SCHWAB RETURNS AS CEO: 2004

In July 2004, the board asked Pottruck to resign. Schwab returned as CEO. The firm’s new mission was to win back retail customers and reestablish its discount brokerage status. Some industry watchers expected Schwab to divest noncore, unprofitable businesses such as Schwab Capital Markets. Sale of the upscale UST also was the subject of speculation. Efforts to add multimillionaire clients and sell advisory services to less well-heeled investors produced lackluster results. In addition, while Schwab was moving into new areas, E*Trade Financial Corporation and Ameritrade, offering less expensive trades, eroded Schwab’s core market share. Schwab did sell Schwab Capital Markets in 2004, to USB AG. The firm also settled the SEC’s mutual fund late trade investigation by agreeing to pay a $350,000 fine.

In an effort to retain clients and entice new ones Schwab had been cutting fees. The latest cuts included elimination of the annual service fee on accounts of less than $25,000 and the order-handling fee on equity trades. Cuts in fees, an aggressive nationwide ad campaign, and severance costs at UST ate into fourthquarter earnings in 2005. Another sour note was hit when the New York Stock Exchange fined Schwab $1 million in regard to violations involving disbursement of customer assets. Schwab succeeded in posting record income for the year, at $725 million, up from $286 million in 2004. Total client assets reached a new peak, $1.2 trillion. Both net income and earnings per share surpassed previous records set in 2000.

POSITIVE RESULTS AT THE WORST OF TIMES: 2007–14

Catastrophic developments rocked the financial community during the second half of the decade, causing the collapse of massive financial institutions and economic conditions that rivaled the severity of the Great Depression. The subprime mortgage crisis was at the center of the disaster, causing the failure of myriad businesses. Schwab was not one of those businesses. “We don’t construct products like collateralized debt obligations and we don’t make any sort of subprime loans,” Schwab’s president and COO, Walter Bettinger, said in the November 5, 2007, issue Investor’s Business Daily. “We’re in a very different business model.”

Instead of closing offices and laying off employees, Schwab made more positive moves, flourishing under the guidance of its founder. After returning to his role as CEO, Charles Schwab increased his firm’s investment advice business and added new products while trimming expenses. He also divested UST, conceding that the expected synergies of acquiring the business had never been realized. In mid-2007 UST was sold to Bank of America for $3.3 billion, becoming U.S. Trust, Bank of America Private Wealth Management.

One year after disposing of UST, Schwab passed the reins of command to his successor. In mid-2008, Bettinger was named CEO of the firm. At the age of 22, Bettinger founded The Hampton Company, a provider of retirement plan services to corporate clientele. His company was acquired by Schwab in 1995, marking the beginning of his association with the firm. Bettinger served in various capacities during the 13-year period preceding his appointment as CEO, including leading Charles Schwab Trust Company and serving as president of Schwab Investor Services.

Bettinger exchanged the duties of COO for those of CEO just as the global financial crisis was reaching the peak of its severity. Under his leadership, the firm excelled, trouncing its rivals. Between 2009 and 2012, Schwab increased its client assets by $530 billion. The amount was $200 billion more than the total added by all four of Schwab’s closest, publicly traded competitors. Further, between 2011 and 2014, Schwab’s stock soared 150 percent in value, cementing Bettinger’s reputation as a shrewd and effective leader.

KEY DATES

1974:

Charles Schwab & Co. is incorporated; end of fixed rate commissions the following year favors discount brokers.

1980:

Public offering is sidetracked by technology problems.

1983:

BankAmerica buys firm.

1987:

Management buyback, followed by public offering, creates new holding company.

1992:

Company finds instant success with Mutual Fund OneSource.

2004:

Company works to regain traditional customers.

2008:

Walter Bettinger is named CEO.

2014:

Schwab celebrates its 40th anniversary.

Textron, Inc.:

Public Company
Incorporated: 1923 as Special Yarns Corporation
Employees: 40,000
Sales: $11.49 billion (2006)
Stock Exchanges: New York
Ticker Symbol: TXT
NAIC: 336411 Aircraft Manufacturing; 336112 Light Truck and Utility Vehicle Manufacturing; 336399 All Other Motor Vehicle Parts Manufacturing

Textron Inc. is a global conglomerate overseeing four main business segments: Bell; Cessna; Finance; and Industrial. Through its subsidiaries, the company manufactures Bell helicopters, Cessna aircraft, golf carts, turf care products, pumps, tools, and gears, and also provides financial services, defense systems, and wire and cable installation systems. Cessna, the largest aviation company in the world based on unit sales, manufactures Citation business jets, Caravan single-engine turboprops, and Cessna single-engine piston aircraft. This unit shored up 36 percent of Textron’s revenues in 2006. The company’s second largest unit—Bell—secured 30 percent of revenues in 2006. Over 12,000 Bell helicopters hover in 120 countries across the globe. Textron’s Industrial segment includes E-Z-GO, one of the largest manufacturers of golf carts and off-road utility vehicles in the world. The company’s Finance operations provide services in aviation finance, asset-based lending, distribution finance, golf and resort finance, and structured capital. Textron began a major restructuring in 2001, transforming itself from an unwieldy conglomerate into what it calls an integrated networked enterprise.

BIRTH OF A CONGLOMERATE

The man behind the success of Textron, Royal Little, graduated from Harvard University in 1919. He then sought practical business experience as an unpaid apprentice at a textile mill before working for the Franklin Rayon Yarn Dyeing Corporation. There, he recognized the drawbacks of producing a product in a business vulnerable to volatile market cycles. As far back as the 1920s, Little advocated diversification as a means to insulate a company from occasional slumps in certain lines of business. Specifically, Little advocated “nonrelated” diversification, that is, simultaneous operation of totally unrelated businesses. The system had to be unrelated so that heavy losses in one business would not affect the profitability of related industries.

Little founded the Special Yarns Corporation in Boston, Massachusetts, in 1928. With first year revenues of $75,000, these were modest beginnings for the world’s first conglomerate. By World War II, the company had been renamed the Atlantic Rayon Corporation. The textile business boomed during the war, but by 1943, Little was already looking to the civilian market. At this time, the company changed its name to Textron. The name comes from “textiles” and the “-tron” suffix of synthetic fabrics such as Lustron. (It is hard to imagine a global conglomerate named “Señorita Creations,” but that was the advertising agency’s first choice.)

Revenues reached $67.8 million in 1949. Neither Little nor his company, however, was in a position to implement a general diversification until 1952. Little later recalled in his book How to Lose $100,000,000 and Other Valuable Advice that a banker refused to back his acquisitions until he proved that he could run a textile business. Little successfully completed a hostile takeover of American Woolen in 1955 in what Fortunemagazine called “the stormiest merger yet.” Little’s policy for successful takeover bids was to “be sure to pick a company whose board of directors isn’t smart enough” to fight back with a counter-takeover.

In 1956 Royal Little hired a Providence banker, Rupert Thompson, to oversee what he admitted were his irrepressible impulses to acquire more companies. Thompson made sure that Textron’s acquisitions were “balanced,” or sufficiently spread out so that a depression in any one market would not severely affect the company as a whole. Based on this strategy, Little and Thompson established what has (arguably) been declared the world’s first conglomerate. Notable acquisitions in the 1950s included Homelite, Camcar, and CWC.

GOING AIRBORNE IN 1960

Textron entered the aerospace industry in 1960 when it purchased the Bell Aircraft company. Bell was best known for its helicopters, but first gained wide recognition shortly after World War II when it built the XP-59 Airacomet, which was the first American jet aircraft. During the war, Bell was a major supplier of aircraft parts to the Army Air Corps. Its founder, Lawrence D. Bell, worked as an engineer for Glenn Martin and later for Donald Douglas. Under the protection of Textron’s financial umbrella, the Bell division was able to invest more money into longer-term research and development of helicopters and their new specialty, rockets.

Royal Little retired from Textron in 1962 and relinquished his seat on the board of directors. Thompson maintained a strict policy toward Textron’s various divisions. The company would sell a particular division at the first sign of adverse performance. Such was the case for Textron’s last textile holding in 1963; Amerotron was sold when it “failed to perform.”

Rupert Thompson was described as having combined Alfred Sloan’s management strategy for General Motors and Little’s strategy of growth through acquisition. Textron maintained a consistency for meeting production and financial targets, demanding a 20 percent return on equity after taxes for the company’s various divisions. Thompson was the manager of a company that, perhaps, was better described as an asset portfolio, or “management concept.”

Rupert Thompson left Textron in 1968 after he was diagnosed with cancer. The man he appointed to take his place was the company’s president, G. William Miller. The company Miller took over was a welldiversified manufacturer of tools, industrial machines, consumer goods, plastics, appliances and, of course, helicopters.

Only months after he assumed the leadership of Textron, Miller attempted a takeover of United Fruit. When the attempt was thwarted Textron returned to less ambitious acquisitions of small firms, particularly zipper and fastener manufacturers. By 1971 Textron was ready for another ambitious takeover, this time of the Kendall Company, which would have placed Textron in the healthcare business. The attempted takeover of Kendall failed when another company outbid Textron.

Miller’s most ambitious takeover attempt came shortly afterward when he tried to engineer a 45 percent controlling interest in the larger but nearly bankrupt Lockheed Corporation. Lockheed resisted the bid and later brought pressure from Wall Street upon Miller to abandon the takeover.

Miller’s attempt to enter into the oil and gas business was cut short when he left the company in 1977 to take a position with the Carter administration as Federal Reserve chairman, and then later as secretary of the Treasury. One of Miller’s best qualities was his insightful recognition of the fact that the United States was rapidly transforming itself into a service-oriented economy. He brought Textron into financial services by acquiring insurance and other financial service companies.

A NEW STRATEGY

The man who replaced Miller was Joseph Collinson. Collinson’s tenure was short-lived; he retired from the company in 1979. He was succeeded by Bob Straetz as chairman and Beverly Dolan as president. (Dolan had started E-Z-Go, the golf cart manufacturer, in his garage. He joined Textron when it bought the company in 1960.) The new men in charge were quicker to sell divisions that were performing poorly. One of the first to be sold was Polaris, the snowmobile manufacturer.

Straetz and Dolan later divested Textron of divisions not related to aerospace or technology. In effect, Textronwas being reconverted into an operating company. They professed impatience with subsidiaries that did not “perform” and promised to “dump” them without a grace period. Straetz told Fortune magazine, “Some of that concept of non-related diversification still exists, but we’re trying to make Textron a more focused company.” The company operated principally around Bell Aerospace, which accounted for about one-quarter of Textron’s sales.

Bell’s UH-1 Huey helicopter was used extensively during the American involvement in the Vietnam war. After Vietnam, Textron cultivated a strong market for Bell helicopters in Iran. This $875 million market was lost, however, with the fall of the shah. From this turn of events, Straetz and Dolan learned the importance of maintaining a diverse group of customers. They tried next to establish a lucrative commercial market for Bell.

Bell produced a number of light helicopters, characterized by their dragonfly appearance. It competed with Boeing’s Vertol and, particularly, with the Sikorsky division of United Technologies. Sikorsky manufactured larger, heavy-duty helicopters, but competed intensely with Bell in the medium-sized section of the market. Typical of many Pentagon contracts, Sikorsky and Bell were teamed to jointly develop a VTOL, or vertical takeoff and landing airplane.

Bell was the division most responsible for Textron’s identity as an aerospace company. That identity was preserved by the continuing success of Bell. Whereas Bell’s products were of good quality, however, a unique management structure also must be credited for the general success of the division and its parent.

Unlike in most other firms, an unusual amount of authority was vested with Textron’s vice-presidents. A vice-president was thereby enabled to specialize in a certain area of the operation with the full authority of his office behind him. This also encouraged good communication within the top management echelon and allowed the president and chief executive officer to concentrate on more general matters, such as acquisitions and divestitures. Many American corporations have admitted to copying this style of management.

In 1984 Textron was the object of a hostile takeover bid by Chicago Pacific Corporation. It was the third unsolicited bid for Textron, which had become a target because of its large debt. Chicago Pacific was one-sixth the size of Textron. It had emerged from bankruptcy only months before the bid, selling all its railroad capital, including engines, track, and traffic rights. The company had a large amount of cash and was embarking on an acquisition program. Textron, however, mounted a defense that rather easily foiled the takeover bid.

Shortly thereafter, Dolan completed Textron’s $3 billion acquisition of Avco. Avco was formerly the Aviation Corporation of the Americas, one of the three large aeronautic combines of the 1930s and the company that launched Pan Am and American Airlines. Over the years Avco gradually sold most of its aircraft interests until, by 1985, it was primarily a financial institution centered around the insurance business. (It did continue to manufacture sections of large military aircraft, however.) Avco was threatened by a takeover from a smaller company when Textron, Avco’s preferred suitor, made its own bid. With the success of the Avco acquisition, Dolan replaced Bob Straetz as chief executive officer.

In 1985 Textron surprised its stockholders by offering to sell its main operating division, Bell Aerospace. Upon closer inspection the stockholders voted in favor of the proposed sale, but it marked a serious change in Textron’s stated intention to convert itself from a conglomerate into an operating company. The sale of Bell was intended to raise stockholders’ return on equity and eliminate the corporate debt that made it an attractive takeover target.

The sale was postponed following an improvement in the company’s financial position. Bell ultimately was retained and reorganized into two operating units: Bell Aerospace, which continued to handle the aeronautic business; and Textron Marine Systems, for marine projects.

STILL FLYING AFTER THE COLD WAR

By the late 1980s, the hounds of peace could be heard over the Steppes. The end of the Cold War hurt defense company stocks, and as one analyst explained in Forbes, conglomerates generally suffered according to their lowest common denominator. At the time, Textron’s 32 operating companies made up three groups: aerospace, commercial products, and financial services. In the last category, the company’s Paul Revere Insurance helped lift Textron’s balance sheet. Still, aerospace, with 1988 sales of $3.6 billion, remained the largest division (the other two had sales of less than $2 billion each).

Textron had high hopes in the $25 billion V-22 tiltrotor aircraft program. Developed by Bell and Boeing for the U.S. Marine Corps, the fusion of helicopter and fixed-wing aircraft was expensive to fly. Faced with few possible users in the United States, the company resorted to asking Japan and West Germany for funding for a civilian variant. Fortunately, the market for civilian helicopters was up, and Avco Corporation, now the Aerostructures division, had entered the booming airliner market, making wings for Airbus. Textron’s automotive businesses also were generally lucrative.

One strategic priority was regaining an overseas presence, lost with the sale of Ex-Cell-O Corporation’s machine tool businesses in the mid-1980s. In 1989, however, U.S. regulators blocked Textron’s $250 million purchase of Avdel, a British manufacturer of industrial fasteners. Textron was able to make progress through a manufacturing venture in the Netherlands with Ford and a helicopter distribution arrangement in Japan (Mitsui).Textron had revenues of $7.4 billion in 1989.

Textron acquired Cessna Aircraft from General Dynamics for $605 million in early 1992. The company had made 6,500 small planes a year in its heyday, but this business had been crippled by an industrywide wave of airplane crash lawsuits. When Textron bought it, Cessna was devoted to manufacturing its popular line of Citation business jets. Legislation in 1994 to limit manufacturers’ liability on planes more than 18 years old, however, made making single-engine, propellerdriven aircraft feasible again, and the company resumed production on the small trainers that made it famous. Cessna’s revenues were $783 million in 1993.

Revenues reached $8.3 billion in 1992. Aerospace contributed more than a third of the company’s profits, in spite of the reliance on military contracts. The financial segment accounted for 43 percent of income; commercial, 20 percent. James F. Hardymon became CEO in 1992 after joining Textron as president and chief operating officer three years earlier. (He had previously held those two positions at Emerson Electric.)

Textron bought Acustar, Chrysler’s plastics operations, for $139 million in 1993. The same year, it sold the public a 16.7 percent stake in Paul Revere Insurance, the star of Textron’s financial services portfolio. The unit suffered heavy disability claims in 1994, which led Hardymon to consider selling the remainder of the company. Homelite, a maker of lawn care equipment, was divested in 1994, as was piston aircraft engine manufacturer Lycoming. These sales took in $495 million. After several years, Textron finally was able to gain control of Avdel. In the mid-1990s, the fastener and automotive businesses were merged into Textron Fastening Systems and Textron Automotive Company, respectively. In late 1994, Bell did win a $2.5 billion contract to make just six V-22 aircraft for the U.S. military, although a V-22 crash soured the Pentagon on a full-scale production contract.

Hardymon retired in July 1998, succeeded by Lewis B. Campbell. Like his predecessor, Campbell had grown up in the rural South and studied engineering before working in sales, marketing, and management positions. Campbell formed his career at General Motors, rather than Emerson Electric, like Hardymon. He joined Textronin 1992 and became president and chief operating officer within two years. Campbell also became board chairman in February 1999.

By the late 1990s, more than 30 percent of Textron’s revenues came from abroad. The company posted record results in 1999 as revenues increased 20 percent. Textron acquired 18 businesses and entered two joint ventures while selling Avco Financial Services for $2.9 billion. A fatal crash of a Marine V-22 Osprey in April 2000, however, raised doubts about the viability of the program.

A LEANER TEXTRON IN THE NEW MILLENNIUM

Under the leadership of Campbell, Textron embarked on a major restructuring effort during the early years of the new millennium. The company had acquired 59 businesses from 1997 to 2000 and while sales and profits rose, the company’s 12 percent return on capital was lower than other major conglomerates. The company’s share price hit a high of $97 in May 1999 but was hovering around $58 in early 2001. At the same time, a slowing economy and the terrorist attacks of September 11, 2001, had taken a toll on demand in the industrial and aviation markets. With skyrocketing costs and burgeoning employee levels, Textron was in dire need of retooling. As such, Campbell launched a major restructuring effort on January 17, 2001, designed to transform the unwieldy conglomerate into what the company called an integrated networked enterprise. A May 2006Business Week article outlined some of Textron’s initiatives, reporting, “In an attempt to erase the burdensome legacy of thousands of acquisitions, more than 1,500 different payroll systems were whittled down to three, 52 healthcare plans came down to one, and more than 100 data centers were consolidated to just a handful.”

The company also began a divestiture program which included the $1.3 billion sale of its automotive trim business to Collins & Aikman. Overall, Textron tightened financial controls over its divisions, streamlined operations, closed plants, cut jobs, and replaced Bell’s chairman and CEO. In 2006 the company sold its fastening-systems division for $630 million.

Throughout the restructuring process, the company remained focused on strengthening the operations at its four main business segments: Bell, Cessna, Industrial, and Finance. Its dedication to new product and service development was evident: nearly 25 percent of company sales in 2005 stemmed from products and services launched since its restructuring in 2001. During 2005, Textron gained approval for the Bell Boeing V-22 Osprey tilt-rotor and also secured several lucrative contracts with the U.S. Army. The company made several key acquisitions in 2006 including Overwatch Systems Inc., Innovative Survivability Technologies Inc., and Electrolux Financial Corp.’s dealer inventory finance unit.

With sales and profits on the rise, Campbell’s efforts appeared to pay off. Indeed, the company’s return on invested capital—a key indicator of financial health—hit 13.2 percent in 2005 and then 16.8 percent in 2006. The company’s stock price, which had fallen to a low of $26 per share in March 2003, was once again hovering near $99 per share by June 2006, and at $107 per share by May 2007. During 2006, Cessna delivered over 300 jets for only the third time in its history and Bell Helicopter’s deliveries increased by 30 percent over the previous year. With a clear strategy in place and a major restructuring effort under its belt, Textron’s future looked bright.

KEY DATES

1928:

Raymond Little starts Special Yarns Corporation in Boston.

1952:

Little starts Textron’s cross-country buying spree.

1960:

Bell Aircraft is acquired.

1963:

Textron sells its last textile holding.

1985:

Textron acquires Avco for $3 billion.

1992:

Cessna is bought, two years before aviation liability reform legislation enacted.

1999:

Textron sees record profits; sells Avco Financial Services for $3 billion.

2001:

Textron’s Automotive Trim business is sold as part of a major restructuring effort.

2006:

The company acquires Overwatch Systems Inc. and Innovative Survivability Technologies Inc.; sells its fastening-systems division for $630 million.