All Would be Well for Sara Lee, but for Those Pesky Costs

This must be a frustrating time for Sara Lee. Its three-year turnaround plan is working, and both sales and market share are on the rise. But so are costs, and that is forcing executives to whittle down product lines and make other cost-cutting moves they likely would rather not make.

One big area of cost-cutting is in marketing and promotions. The decrease in ad spending, announced in June, was met with worry by Wall Street, which thought the cuts were going too far. Sara Lee's ad spending now lags that of its competitors.

So far, though, it doesn't seem to be hurting. Last month, a longtime critic (and former employee) of the company, analyst Timothy Ramey of D.A. Davidson said during an earnings conference call that Sara Lee had just finished "an amazing quarter."

Sales were up by 12 percent over the year-earlier period. Costs, though, continued to climb, and Sara Lee posted a loss (which included some unusual charges.) So far, the company has been able to pass on those cost increases to customers, and its slashing has helped buoy up the bottom line.

On Tuesday, Sara Lee announced it was selling its foodservice sauces and dressings business to Richelieu Foods, which makes private-label products. The company also continues to look for other cost-heavy businesses to sell off, and to lay off employees. Earlier this year, it shed 300 jobs, representing about 1 percent of its North American work force.

All necessary steps -- even the cut in ad spending. But CEO Brenda Barnes, the architect of the turnaround plan who took her position in 2005, must be wondering how well that plan would be working if costs weren't rising so quickly. And she won't stop worrying anytime soon. Commodity costs went up by $300 million in the previous fiscal year, and she expects them to rise by $500 million this year, she told the Wall Street Journal last month. That may shrink a bit if commodity prices continue to deflate as they have been, but don't look for a major decline: the fundamentals that in large measure have been pushing prices up haven't changed.