Among the casual shoppers in Aisle 3 of the Tom Thumb supermarket one recent Thursday morning, Louis V. Gerstner Jr. stands out. He is wearing a suit. He is accompanied by a young executive with a clipboard. And he is thinking of spending, say, $200 million.
Gerstner, chief executive officer of RJR Nabisco Holdings Inc., is scouting for small, food-company acquisition candidates. Bread, cakes, cereals, spices and a dozen other categories all draw a look.When Gerstner is intrigued by what he sees on the shelf, he lingers a moment to engage his strategy chief, Stephen Wilson, in rapid-fire dialogue about profit margins and market share. When Gerstner is unimpressed, he walks on, forcing Wilson to abandon all talk of that acquisition idea, flip ahead in his notes and start afresh.
This is the new RJR: A no-nonsense, impatient company where top-level strategy meetings are sometimes held on the linoleum aisles of supermarkets. Bureaucracy, flamboyant spending and intra-company rivalries are out. Teamwork, urgency and a Japanese-style fixation on quality are in.
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RJR Nabisco might not be quite as much fun or as innovative as a few years ago, when it had far more debt and the freewheeling F. Ross Johnson ran the show. He was willing to spend billions on new plant technology and a smokeless cigarette that flamed out. And in legendary style, Johnson put sports celebrities on the payroll for big bucks and little work and built up a fleet of 11 corporate jets known as the RJR Air Force.
But competitors, analysts and customers all say that today's RJR is a lot more efficient. Propelling all these changes is the 49-year-old Gerstner, a one-time McKinsey & Co. management consultant and the former president of American Express Co. Selected in early 1989 to run RJR Nabisco by its major shareholder, the buy-out firm of Kohlberg Kravis Roberts & Co., Gerstner instantly got broad authority.
``We're financial people,' says KKR partner Henry Kravis. ``Lou makes the long-run operating decisions.'
Much more than most new guys, Gerstner finds himself at a company whose ups and downs have become a subject of national fascination. The 1988 takeover battle for RJR produced countless headlines and a best-selling book. The company's new stock, recently listed on the New York Stock Exchange, regularly is among the most actively traded. Gerstner's $2.9 million salary, and his bountiful package of RJR stock and options (worth $58 million at current prices) raise the question: Is he worth it?
For the moment, the financial markets' answer is yes. RJR's stock already has surged about 50 percent to $11 a share. Operating profit rose 31 percent last year, to $3.43 billion. While the company posted a net loss of $480 million for 1990 because of big interest bills, its giant LBO debt is being paid down ahead of schedule. Just this week, the company formulated plans to retire yet another $1.5 billion of its junk bonds. Analysts expect RJR Nabisco to be back in the black either this year or next.
Gerstner's style - a mixture of charm and cajoling, broad strategic thoughts and sudden intrusions into the nitty-gritty of business - holds lessons for almost any new stranger.
Not There Yet\ But after two years at RJR, he can't claim to be a hero yet. The company's biggest money-maker, the Winston cigarette, has been losing market share for years. And RJR's debt burden doesn't allow it to make the kind of big acquisitions in the food business being made by its major rival, Philip Morris Inc. What's more, the company's free-spending bureaucratic culture has been so ingrained that Gerstner won't be rid of it anytime soon. Reshaping RJR, he told managers in a closed-door briefing last fall, ``is like crossing the Sahara. It just goes on and on and on.'
When Gerstner took over RJR in March 1989, its executive suite was desolate. A host of top managers had quit in the wake of the failed bid for the company by Johnson, who lost out to KKR. Since then, Gerstner has filled these slots with his kind of people, bringing in a general counsel from American Express and a chief administrative officer from H.J. Heinz, and hiring as his head of tobacco operations a former RJR hand who had left during the mid-1980s for a post at Citicorp. Gone are the pranks and profanity that caused the company's old Atlanta executive offices to be known as The Fraternity. People now start work at 8 a.m., show an occasional sparkle of dry wit, and otherwise favor such a serious, collegial tone that executives now suggest that headquarters be known as The Seminary.
In two stages in 1989 and 1990, Gerstner moved RJR's headquarters out of Atlanta to four floors of unremarkable rented space in a midtown Manhattan bank building. Small signs of penny-pinching can be found. Paneling is mahogany where visitors might notice, stained hardwood where they won't. Busy hallways are lined with cheap industrial green carpeting. Walls are covered with rayon.
Gone are the elaborate printed reports operating divisions once sent to headquarters, such as one immense briefing ensemble that Gerstner derisively calls ``the rainbow.' It came in red, green and blue binders, telling the CEO everything that had happened the previous month. ``If I'm doing my job, I'm talking to division managers all the time,' Gerstner says. ``I know what's in that book weeks before all the numbers are typed in.'
Such headquarters triumphs are small stuff, though, in the overall sweep of RJR. Even after some buyout-related divestitures, the company's sales exceed $13 billion a year, and its vast work force sprawls throughout the U.S., Latin America, Canada and Western Europe. Drawing on his McKinsey training, Gerstner spent much of his first year learning RJR Nabisco's business from the bottom up. He logged 250,000 miles visiting bakeries from Chicago to Beijing, attending salesmen's conferences and eating dinner with low-level managers.
Starting early last year, Gerstner pulled back and tried to develop a broad strategy for the company. The R.J. Reynolds tobacco business was hugely profitable but losing market share. The food company was a financial success, but showed more in-fighting and complacency than Gerstner wanted.
CEO's Message\ In speech after speech, Gerstner aired his strategic thoughts to groups of employees: Cut bureaucracy. Act with a sense of urgency. Emphasize quality and teamwork. He printed up pale gray cards with eight such points and mailed them to all 64,000 employees. Partly because of the boss's personality and partly because of RJR's debt load, the Gerstner agenda, at least for now, includes no big risk, no big innovations. It centers on running the current operations to maximum efficiency.
The full program isn't clicking yet. In Winston-Salem, for example, domestic tobacco chief James Johnston says he is disappointed at progress in changing his unit's corporate culture. Johnston, the 44-year-old Gerstner hire from Citicorp who once ran Reynolds's Japanese operations, says he is eager to stir up creative problem-solving among all his employees. But he says many employees still seem most comfortable awaiting directives from their boss, answering with a snappy ``Yes, sir,' and then going off to do a task whether they believe in it or not.
The clearest collision between the strategies espoused by Messrs. Gerstner and Johnston and the time-honored practices at Reynolds is to be found with Winston. America's No. 1 brand until 1974, Winston finished last year with an 8.8 percent market share, a 1.9-point drop since the company's leveraged buyout and a huge distance behind Marlboro's industry-leading 26 percent.
The new managers have cut the Reynolds work force by 2,300 employees, in RJR's only major job reduction, a move executives say was related to shrinking cigarette demand and not the LBO debt. Reynolds, which had been known as one of North Carolina's most reliable employers, offered a minimum of eight months' pay, an unusually large severance package, to laid-off tobacco workers. Reynolds' biggest round of tobacco layoffs, in August 1989, was seen as a jolt in Winston-Salem at the time. But current and former workers say anxieties about RJR's new direction subsided after a few months.
While making job cutbacks, Reynolds executives have plowed nearly half of the $115 million in annual labor-cost savings back into trying to make Winston a better cigarette.
Better Smoke\ In the past year, RJR has spent $30 million on better tobacco blends for Winston, bought brighter wrapping paper for cigarettes and smoothed out the edges of cigarette cartons. It has packed more tobacco into each Winston so that the ``puff count' - a measure of how long a cigarette takes to be fully smoked - has risen 10 percent.
Whether consumers care is an open question. Some marketing experts regard the quality campaign as just a holding action, designed to slow the desertion from Winston but not really win new smokers. Johnston talks only about stabilizing the brand rather than making a major run at Marlboro. In the past 10 years, marketers have tried and failed with a lot of ideas for Winston, from slogans like ``Big Red' and ``Real taste' to $1 million giveaways with cigarette packages.
Salomon Brothers Inc. analyst Diana Temple estimates that even in Winston's condition, its contribution to RJR's operating earnings - or profit before interest, taxes and amortization - is $700 million a year. That's nearly as much as the entire Nabisco food company contributes.
Says Gerstner: ``Winston is very important for us to fix.'
RJR is in much better shape on the food side, which requires, and wants, less redirection from Gerstner. The food division has raised operating profit about 50 percent since the buyout and held market share with brands that include Oreo and Chips Ahoy! cookies, Premium and Ritz crackers, Fleischmann's margarine and Grey Poupon mustard.
Light Touch\ Gerstner has stepped carefully with Nabisco. He began a recent Dallas speech to Nabisco sales managers by saying: ``I'll go anywhere to be with salesmen.' He praised the cookie operation as a ``tower of strength' and added: ``When I joined the company, I heard within 20 minutes that you guys were really good. It's true.'
Yet once he wins people's trust, Gerstner begins goading, prodding. When Dallas sales manager Wayne Yowell proudly mentioned that Nabisco's local market share had risen 1.7 percentage points in the past year, to 49.7 percent, Gerstner quickly asked if that figure will top 50 percent this year.
``That's our goal,' Yowell said, slightly taken aback. ``But it gets harder once you get near 50 percent.'
``No, it doesn't,' Gerstner calmly replied. ``It gets easier. Think how little the next guy has.'
Some Resistance\ Again and again these days, Gerstner talks of his belief that Nabisco can pull further ahead of the competition if it steps up its use of ``information technology,' a strategy that draws heavily on his American Express experience. Computers and data bases, he argues, can tell Nabisco a lot about what kinds of consumers buy its products, how to win their attention and how to focus marketing. Recently, RJR hired McKinsey consultants for a six-month study of ways this might reshape Nabisco's business.
Nabisco executives are intrigued, but a little skeptical. Among them, ideas like electronic substitutes for ``cents-off' coupons, which appeal to Gerstner, evoke shudders. They worry that such easy-to-use coupons may just cut into profits without winning extra customers.
In marketing, too, Nabisco's executives have strong ideas about what works. A clear example came last summer when top management reviewed a potential new Fig Newton commercial. In the ad, an English boy named Randolph is upbraided by his mom for eating cookies in bed.
``It's not a cookie, Mother,' Randolph replies, ``It's a Fig Newton.'
Gerstner, who doesn't think that children should sass their parents, found the ad distasteful. He tried to talk Nabisco executives out of airing it, to no avail.
The child may be a brat, says John Greeniaus, Nabisco's chief executive, ``but he's sold a log of Fig Newtons for us.'
Whatever the minor jockeying between Nabisco and headquarters, Gerstner appears to be making major headway in getting the company's two big operating units, tobacco and food, to work together for the first time since they were joined in a 1985 merger. A few years ago, the tobacco operations were ``the enemy,' recalls Nabisco's Greeniaus. Tobacco and food executives competed for marketing and capital-spending dollars and maligned each others' projects.
Now, Nabisco shares its expertise in 800 phone numbers with Reynolds executives who want to set up a toll-free line for Winston customers. Reynolds, in turn, has let Nabisco tap into sophisticated coupon-analysts models to figure out how many cents off are needed to win customers for new cereal brands.
The way the buyout of RJR was structured, Greeniaus and Johnston each control 1.5 million shares of RJR. Each man's stake is worth $16.5 million today, and a lot more if the stock continues its rise. Little wonder that Greeniaus says: ``It's not a question of climbing the old corporate ladder. It's a question of having our equity be worth something.'
Two years after taking on huge debt and going private in the leveraged buyout, RJR is doing its best to position itself to investors as a ``normal' company. The public owns about 18 percent of RJR's fully diluted stock, and will own a further 7 percent if RJR completes a 75-million-share equity offering it announced Wednesday. RJR management owns about 5 percent; KKR's investment partnerships own 59 percent; and various convertible securities and warrants account for the rest of the stock. Debt has been cut to $17 billion from more than $25 billion.
Because of the remaining debt, however, acquisitions are a problem. When Gerstner and Wilson scouted targets in the Texas grocery store, their spending limit was less than $1 billion and their likely timetable was two or three years in the future.
``I don't think we're close to having a framework yet (for acquisitions) that has me comfortable,' Gerstner concedes. ``But we've got time to do it.'
RJR also spends more cautiously in upgrading its factories. Gerstner, his lieutenants - and especially his KKR shareholders - insist that's for the best. In its pre-buyout days, RJR Nabisco was so awash in cash that it planned to spend $2.4 billion on two entirely new bakeries, each known as Cookieville. Among the planned features was a computerized system to pluck minor ingredients like onion flavor out of storage bins, convey them 100 feet across a warehouse area and dump them into giant mixing vats for crackers. But that $10 million feature would have replaced only one worker and one forklift truck.
Cookieville got canceled right after the buyout. In its place, Nabisco is spending about $1.4 billion over the next seven years for much more modest upgrades of its bakeries. New, wider ovens will be installed. But there won't be any optical sensors or mechanical arms to pluck out the occasional defective Oreo; two workers in hair nets will still do that.
A former Nabisco executive says the Cookieville project might have lowered Nabisco's operating costs considerably over time. Gerstner and KKR's Kravis aren't convinced.
This is a great example of smarter capital spending in a buyout, Kravis says. ``When management has its own money at risk, people don't just spend it for the sake of spending.'
Like most chief executives of financially successful leveraged buyouts, Gerstner sits on a paper fortune from stock that he bought at cheap prices in the early days of the buyout. Yet he stubbornly refuses to count himself a winner.
``The way I look at it, I'm $6.5 million in the hole,' he says, referring to the cash he spent for RJR stock in 1989. ``That money is spent. Gone. I haven't received one dollar back.'
Under agreements with the company, he can't sell any of his RJR stock until 1994.
``In no way do I feel financially secure,' Gerstner says.
