Consumer Products
When Fortune smiles
Norman Wesley has navigated Fortune Brands through difficult economic times and the demands of finicky investors.
By Daniel G. Jacobs
Smart Business Chicago | July 2004
Norman Wesley has reason to be proud.
The chairman and CEO of Fortune Brands, a $6 billion, publicly held holding company, boasts an impressive list of consumer products -- Moen, Master Lock, Jim Beam, DeKuyper, Titlelist, Footjoy, Pinnacle, Swingline, Kensington -- many of them their segment's market leader.
The Fortune Brands strategy is simple: Acquire the best consumer product companies in their industries, then make sure the best people are running them so the parent company can increase shareholder value.
"The common thread is they are growing consumer categories where we have leadership positions," says Wesley. "Ninety percent of our sales come from brands that have a No. 1 or No. 2 market position.
"They tend to be categories that are underpinned by good growth and where innovation is important. We're great believers in growth through innovation. Twenty-five percent of our sales come from products introduced in just the last three years."
Fortune Brands focuses on four product categories: home and hardware, spirits and wine, golf, and office products. And that narrow focus has worked -- Fortune Brands' stock price has increased more than 50 percent in the past year to the mid-$70 range, and Wesley still thinks the shares are undervalued.
"We've made some good acquisitions (most recently, Therma-Tru doors), bought well and have been able to execute well," he says. "That's been reflected in good earnings growth, which has been reflected and appreciated in our stock price."
Growth is important, but managing the company's assets is crucial to success.
"We generate very substantial free cash," Wesley says. "Last year we generated in the range of $430 million of free cash. We have a target to grow our earnings per share by double digits. We can do that by using our free cash to buy back our shares.
"If we're good stewards of capital, then we look to do better than that. And if you look at six out of the last seven years, we've exceeded that target, and we've actually grown by pretty strong double digits. Most people think of double digit as 10 or 11 percent. We've probably compounded at a growth of above 15 percent."
That ability to effectively manage the company's assets and balance sheet helps Wesley navigate Fortune Brands through difficult economic times and often, the demands of finicky investors.
"Particularly on Wall Street, it takes a long time to build your reputation," Wesley says. "We are very careful about telling people what it is we want to do, and then we live to it. We don't surprise them with things that are inconsistent with what we told them before.
"It's a trust we earn and a confidence we get, whether it's with our customers or consumers. Our employees are sort of our shareholders every day. We've been very clear as to what our strategy is; we've had a disciplined approach. Fortunately, that's consistently delivered strong results because we've executed well."
Caretaker of the future
Building shareholder value is the goal of every enterprise. And it's Wesley's job to steer the operation along the proper path, without interfering with the daily operations of the brands, each of which has its own leadership team.
"Boards' roles are oversight, and they should look to management to run the business," Wesley says. "We (Wesley and the brand leaders) need to be clear with our board as to what our strategies are, how we're going to allocate capital, what performance expectations they should have, and they monitor that level of performance. We keep them apprised so we can make good business decisions. We try to educate them enough about our business so that they can be very supportive and provide counsel when we need it."
Wesley joined Fortune Brands in 1984 when the company brought Acco Furniture -- of which he was president and COO at the time -- into the fold. He became CEO of Fortune Brands office products division in 1990, then moved to the home and hardware unit, the company's largest, in 1997. He served as president and COO of the board until December 1999, when he was named chairman and CEO of Fortune Brands.
Leading various divisions may have helped prepare him for the role he holds today, but Wesley says the leadership positions are quite different.
"Everything I do now is through people," he says. "It's a different level. Everything I do on the business side is through the leaders of those businesses, whereas, when I was more involved with the business, I was doing a lot of stuff hands-on. My focus is more making sure we have the right folks in place internally with the right strategies, and externally, making sure we really articulate our story to the investment communities and rating agencies.
"I think I'm better prepared to do what I'm doing because I grew up running businesses. To sit down and talk about a business, you can better understand it if you've done many of the same things. You can add value by saying, 'I've seen this before, I've seen that before, and here are two or three things to think about that maybe you haven't thought about.' So, it's a very natural progression."
Wesley's 20 years of experience with the company has given him insight into the challenges of running each of its brands.
"When I first got involved in leading the company back in 1999, we took a thoughtful look at each of the categories we're in and looked to say, 'Are we spending enough money in growth, to fund future growth? Are there things we can add to the category? If so, what would it cost to do that, and would we like what we had when we got there?'" he says.
"So, we've ... laid out a series of things which we'd like to add that are very complementary to what we have today. We look at the growth, we look at the returns that we think we can get from it, and it's really on those bases that we make decisions on where we'd like to add."
Defending the brand
In business as in sports, the competition is always looking to unseat last year's No. 1, and within its markets, that usually means a Fortune Brands' operation.
"In golf several years ago, we were faced with new competitors -- Nike and Callaway coming into the golf ball business," Wesley says. "We told people it's in the best interest of everyone for us to defend that share. We're going to put some additional money into R&D, product development and into advertising to defend our share, which, in the short run, will either reduce slightly or certainly flatten our growth and profits in golf.
"But in the long run, it will allow us to protect our share and even grow our share. And that is better for the shareholder."
Wesley says the moves paid off, and today, "our shares are up about five points in golf balls. That gives us a much higher share price."
Deciding whether to put more money into a brand is based on numerous factors, Wesley says.
"It wasn't a lot of capital allocation," he says. "It was basically philosophically what we wanted to do with the business and how we were going to defend our share. We were going to step up our level of spending and expenses to defend our business. Strategically, we sit down and review our different categories with our board annually, and talk them through where we see the business, how we performed, what the external markets look like and either revalidate and/or tweak a strategy.
"That's part of the education process. Our board would have been aware of that, but it would have been management coming forth telling the board what we are doing."
Fortune Brands also faced challenges with one of its office products divisions, Acco World Corp. The division delivered a number of unproductive product lines and declining shareholder value. The situation was so bad that Wesley considered divesting the business.
But paring the chaff left Acco more competitive. The company realigned and streamlined its North American operations, focused on its profitable core products, divested or discontinued several product categories and reduced overhead expenses and excess capacity through consolidation.
"We were confident about what we could do to the business," Wesley says. "In the long run, we've had phenomenal growth and profits in that business and have really recovered it. We're always looking for, not the easy out, but what we believe will deliver value. In hindsight, things sometimes look simple. At the front end of a decision, there's judgment about what you can or can't do, your ability to execute, so you make your best informed decision and go with it."
Wesley doesn't dwell on the past. It's his thoughts about the future that drive him forward.
"I feel great," he says. "If you look at our track record, it's been good. If you look at how our shares have appreciated, it's been good, but we sort of like to think are best days are ahead, not behind us."
How to reach: Fortune Brands, (847) 484-4400 or www.fortunebrands.com
