Hits & Misses
Wonder Bread gets its big Hollywood break; HP's cost-cutting whiz; Cendant's messy breakup; and more
(Business 2.0 Magazine) -- [HIT] A Wonder-ful world. When Will Ferrell wrote the script for Talladega Nights: The Ballad of Ricky Bobby, he had an improbable sponsor in mind for his Nascar-racing hero: Wonder Bread. Just as improbably, when Sony Pictures approached Interstate Bakeries about featuring the product in the movie, it didn't ask for any dough - just Interstate's blessing for the use of its brand. Sony (Charts) decided to give away the store rather than ask the bankrupt breadmaker to pony up because the all-American food was such a good fit for the script. But to Interstate, which agreed to promote the movie in grocery aisles, the deal turned out to be manna from heaven: With Talladega reaching No. 1 at the box office, estimates of the value of Wonder's free product placement run as high as $100 million. The marketing may have helped Interstate score some real cash too: Two weeks after the film's release, the company landed $200 million in financing to help it reorganize.
[HIT] If you can't beat 'em, raid 'em. Hewlett-Packard's merger with Compaq sounded good in theory: With the cost savings that would result from combining two struggling PC businesses, HP (Charts) could come close to matching Dell's prices, at which point consumers' preference for buying computers in retail stores would kick in. Former CEO Carly Fiorina couldn't turn that theory into practice, but her replacement, Mark Hurd, found the man who could: chief information officer Randy Mott, who had perfected the art of cutting supply-chain costs in his five-year stint at Dell (Charts). Sure enough, Mott's revamp is paying off, swinging HP's PC unit into the black with a 4 percent operating profit margin. To top it off, HP's gains are coming at the expense of Mott's former employer: Dell's operating margins have been cut in half over the past year, and in the second quarter, HP's PC market share grew four times faster than that of its rival.
[MISS] Breaking up is hard to do. There's a new vogue on Wall Street for "unlocking shareholder value" by splitting up large conglomerates. But as Cendant has learned, this isn't as easy as it sounds. Last October it announced plans to spin off three companies: car-rental outfit Avis Budget, hotel chain Wyndham, and Realogy (Charts), an operator of real estate franchises including Century 21 and Coldwell Banker. In the intervening months, however, Cendant execs have been so busy plotting the split that they seem to have taken their eyes off the businesses themselves. After issuing a series of increasingly gloomy earnings forecasts, in August Cendant's offspring saw their combined market cap slashed by 15 percent, or $2.3 billion, after just two weeks as independent companies.
[HIT] Card sharp. Only a year after buying credit card giant MBNA, Bank of America (Charts) reported that quarterly profit in its plastic business had doubled, to $1.6 billion. The trick to this supercharged growth? B of A refocused MBNA's marketing from direct mail, where landing a new cardholder costs an average of $140, to touting cards in branches, where it spends just $50 per account. As a result of the deal's success, B of A has become both the country's biggest credit card issuer and the largest bank in the world by market capitalization, passing rival Citigroup on both counts.
[MISS] Faded beauty. The new airport security rules couldn't have come at a lousier time for America's airlines, many of which were just returning to profitability after five years of post-9/11 funk. But surprisingly, the news was worse for another industry whose fortunes would seem to have little to do with air travel: the makers of beauty products. The connection is airport shops, where perfume and skin-care companies realize almost twice the profit margins that they get in department stores. Alas, the ban on liquids aboard planes has grounded those sales. Hit particularly hard has been Estée Lauder (Charts), which, according to Morgan Stanley analyst William Pecoriello, brings in as much as 20 percent of its profit from airport stores. Within two weeks, Wall Street had sliced Lauder's share price by 10 percent.To send a letter to the editor about this story, click here.