Leggett & Platt changes strategy with Prime sale
Larry Thomas, Business Editor -- Furniture Today, April 30, 2007
When components producer Leggett & Platt announced recently that it was selling the business unit that makes foam cushioning for furniture and bedding, many observers were surprised to hear the company say the business was "not strategic" to Leggett.
After all, Leggett has its deepest roots in the furniture and bedding industries, and historically, the company has tried to be all things to all producers by snapping up almost every conceivable component supplier. But in a conference call to discuss first-quarter earnings, Leggett executives made it clear this is no longer the case.
President and CEO David Haffner said that despite annual revenues in the $200 million range, Leggett's Prime Foam unit was a small player in what essentially is a commodity market.
"We prefer to be a large player in less of a commodity market," Haffner said. "So certainly, the industry that it goes into is terribly strategic to us and we will never give up the commitment to the industry. But that particular product, we just were a small non-leveraged player."
He explained that small players have little or no pricing leverage, which makes it difficult to get an adequate return on investment — especially since the foam market now has too much capacity.
So, Leggett was faced with a choice. Spend an enormous amount of money buying smaller competitors (and reducing the capacity on the market) so that its foam business was large enough to challenge companies like Foamex, or sell the business at a fair price.
The company chose to exit the business. Haffner said he believes the new owner, Comfort Co., should be able to extract more long-term value from the assets than could Leggett.
"It truly is a change in our thought process," added Karl Glassman, executive vice president and chief operating officer. "A number of years ago, we believed that we would look at our customer base and then try to look at every item they purchase and try to fill that need (except for decorative fabrics.)"
And he acknowledged that such a strategy has become a liability at times.
"Our customer base looks at each one of those (components) as independent, distinct commodities, so having all of those products in our bag became more of a negative than a positive," said Glassman.
Does than mean the company may divest itself of other businesses that are "not strategic?"
Haffner said that's entirely possible, and in answer to one analyst's question, said some future units that are sold "may approximate" the size of Prime Foam — a deal that was the largest divestiture in the company's history.
That's a pretty clear signal that more newsworthy announcements are on the horizon.
