For a few Dollars more

Rebecca McKillican is used to working with the world’s biggest companies; her previous job was with McKinsey, the blue-chip management consultancy. But when she joined Kohlberg Kravis Roberts’ operational improvement team KKR Capstone in 2007, she was hoping to get the kind of experience that went beyond crunching numbers and building models. She wanted to “roll up sleeves” with company management and “actually affect and implement change”.

She got her wish. On her first day at KKR Capstone, she was put on assignment with discount retailer Dollar General, which KKR had recently acquired for $7.3 billion. McKillican would spend the next 18 months working with Dollar General’s management and two other KKR Capstone team members on reviewing all consumable products sold at Dollar General and improving the company’s private brand product offering. By the end of the assignment, she knew far more than she ever needed to know about own-brand paper towels.


KKR is relatively unusual among private equity firms in having an in-house operations team (others to have adopted this approach include TPG Capital and Cerberus Capital Management). The decision to set it up can be traced back to the mid to late 1990s, when KKR made some costly mistakes – including losing a total of $1 billion (alongside Hicks Muse) on Regal Cinemas. 

KKR’s leaders, George Roberts and Henry Kravis, decided it was time to create an in-house team dedicated to improving the operations of companies the firm acquired. It had experimented with a less formal operational improvements group in the late 1980s, but the team had left in 1992 to run Safeway, long considered KKR’s best investment. So in 2000, KKR hired Dean Nelson, an executive at the Boston Consulting Group, to form the KKR Capstone team.

“Toward the end of the [1990s], Henry and George became particularly sensitive to the way the industry was going – it was getting more competitive, with many more firms about to invest a lot more capital,” Nelson tells Private Equity International during a recent interview, recalling his early days at the firm.

The first task for the team Nelson put together was to work out exactly how they were going to operate. “One thing we figured out early on was if we wait until there’s an issue, we’ve waited too long,” Nelson says. “There’s a lot of value in getting the investment off on the right foot.

“When a deal is done, the management team is energised, they’ve put money into the deal, they’re excited. They’re looking for change, they’re looking for ways to have an impact and create value,” he says.

The group created a 100-day plan template – still in use today – to help them determine exactly what they were going to do within a business in those crucial first few months post-acquisition.

“Basically, let’s get involved in those first 100 days, make sure the management teams are getting the help they need to create the value they’re looking for,” Nelson explains.

Over time, KKR Capstone has also started getting involved earlier in the process; often it will now be brought in at the pre-closing due diligence stage. The KKR Capstone team also runs educational workshops for KKR portfolio companies on best practices.

As a consequence of this ever-expanding remit, the team has also expanded in size – from a few executives initially to its current headcount of 55 around the world; about half the team is based in the US, and half in Europe and Asia.  


Employees of an acquired company sometimes assume KKR Capstone’s purpose is to go into KKR’s portfolio companies and slash costs. In fact, its role is usually to take charge of specific initiatives designed to drive top- and bottom-line growth.

Take Dollar General. McKillican’s task was to support Dollar General as they organised and developed the company’s generic product offerings. Retailers like Wal-Mart and Target provide their own in-house products that sell for slightly less than national brands. Dollar General had some generic brands, but nobody at the company was responsible for oversight of that side of the business and there was little consistency across categories.

McKillican, alongside the Dollar General merchant team, began by spending long hours identifying every private brand product Dollar General sold, and developed a system to tag them and monitor their sales. “We literally had to find them all and then work with IT and put them into the system so we could start to track them,” she says. “By the end, we knew those products inside and out.”

Using the information from this system, McKillican and company executives would then spend time in Wal-Mart, Target and other competitors to determine what private brand items they were selling, at what prices and where Dollar General had opportunity to take market share with their private brand items.

Part of the process of building up the private brand product line included developing entirely new products, McKillican tells Private Equity International during a recent interview at KKR headquarters in New York. The team would identify areas where they felt they could improve Dollar General’s share of wallet – for example, in the cereal category, by offering a generic “raisin bran” type cereal. McKillican and the team would work with suppliers to come up with the product specifications including the size of the packaging and quality. They would get the sample product they envisioned and evaluate it against other brands to determine if Dollar General should be selling it. 

McKillican recalls once spending an entire day reviewing 25 different kinds of cereal, after which: “Dollar General went out and changed the cereal assortment in all 8,500 stores. We got the new items on the shelf and every week we would evaluate the progress of the sales”, McKillican says.

Dog food became another of her unexpected areas of expertise. The KKR Capstone team, working alongside management, also revitalised the company’s private brand pet food line, re-branding one specific item known as, “Chunks and Bones”, which included outdated packaging art, into “Everpet”, with its picture of a dog in full flight (and was thus more healthy looking).

Dollar General also established quality standards for the private brand products. “We really worked on improving and standardising the quality so when customers bought our private brand products, they knew what quality they were getting. That is very important in building your private brands,” McKillican says.

By the time KKR Capstone had finished its work at Dollar General, the company had added 400 net new private brand items to its shelves.

Effecting rapid change on this scale is never easy, of course. Nelson freely admits that his team is not always viewed in the friendliest light when it first moves into a company that KKR has just acquired. At times, there is a general feeling of “anxiety, suspicion and concern”, he says. Initial concerns from company management are usually along the lines of: “These people are here to do my job and monitor or manage me”, which is not the case, Nelson says. “I think what people find out is that we’re a resource to get some initiatives done,” he says.

As a rule, the team expects to “break through” the anxiety of company managers by about eight weeks into working at the company. 

“Any time you’re in a private equity situation, there’s always a bit of anxiety,” Rick Dreiling, Dollar General’s chief executive officer, told PEI. “The [KKR Capstone team] was able to alleviate a lot of fears by involving the management team. Every decision that was made was made by KKR Capstone and Dollar General working together.”

The nature of the work means KKR Capstone expects to extract its executives from a company only after a period of time – usually 12 to 24 months.

“The biggest fights we have now are not getting resources in, but getting resources out,” says Nelson. “Management teams see [our executives] are relatively inexpensive set of resources that are aligned with them, helping them get things done.”

KKR Capstone also expects the initiatives it launches at portfolio companies to remain in place after its executives leave the companies, as was the case at Dollar General.

“The initiatives they brought in were so executable and so understood by everybody that we were able to take the ball and run with them [after the KKR Capstone executives were gone],” Dreiling says.

Of course, the 100-day plan doesn’t always work. Sometimes the KKR Capstone team has to revisit a portfolio company it has already worked with to help drive more operational improvements. This is not “ideal”, Nelson says, but sometimes necessary.


What’s clear is that this is very much a hands-on operation; KKR Capstone executives are expected to delve into every nook and cranny of the company to help KKR squeeze out some extra value.

For instance, one of McKillican and the team's greatest successes at Dollar General was a new six pack of paper towels priced at $5. Dollar General had previously never offered its own private brand six-roll paper towel product. The team, in reviewing national paper towel brands, identified a national brand six-roll paper towel product that sold for $8 – an expensive price for Dollar General stores.

McKillican and the team thought there had to be an opportunity to take some of that volume and shift it into a private brand. “So we created a six-roll national brand equivalent paper towel that retails for five dollars. It was one of our best, if not the best, private brand item from a revenue standpoint, and from the $5 price point,” McKillican says. “The volume was tremendous as well. We had trouble keeping it on the shelf.”

Being able to see customers purchasing products like the package of paper towel rolls that she and the team put onto the shelves is the reason McKillican got out of consulting and into private equity. “This is so much more powerful – to actually see the impact and the results of what we work on,” she enthuses.

The fact that she can get so excited about own-brand paper towels is an indication of just how involved KKR Capstone gets on these projects…  


KKR Capstone now has a global remit, as highlighted by the work it recently completed on KKR’s portfolio company, China Modern Dairy, which is one of the country’s largest operators of large-scale dairy farms in the country. The company is primarily involved in raising dairy cows and selling raw milk.

KKR invested a total of about $150 million of equity in the dairy company in 2008, after a huge scandal rocked the country involving tainted milk that made some Chinese sick. KKR sent in the KKR Capstone team, including new hire Xiaoyu Xia, to bring international best practices to the company.

Working with management, Xiaoyu Xia and the KKR Capstone team worked on everything from board-level strategy to operational processes. The team helped negotiate purchasing contracts with processors to buy the raw milk produced at the dairies. They also worked with company management to increase the quality and production of raw milk, including growing the company’s herds of cows and increasing the milk production of each individual cow.

One of KKR’s most significant challenges with the diary was improving risk management. The KKR Capstone team got into the smallest details of the dairies’ operations, including the quality of the animal’s feed and the types of people and vehicles allowed near the herds.

“The quality of the cows’ feed determines the quality of the milk they produce, Xiaoyu Xia says. “We helped to ensure there was a quality control process in place to ensure that the cows were fed the best quality feed to help them produce milk safely and efficiently.”

After KKR Capstone’s improvements, Modern Dairy’s cows were producing at a rate at least 40 percent higher than the average farm in China, and with much better quality, Xiaoyu Xia says. “The quality of the milk from Modern Dairy is far better than that of other daily producers in China and even exceed the standards in Europe and the US in terms of higher protein levels and lower bacteria counts.”

In late 2010, KKR and China-focused CDH Investments, also an investor in Modern Dairy, raised HK$3.5 billion (€338.8 million; $450.8 million) from an initial public offering on the Hong Kong Stock Exchange. The KKR Capstone team has slowly transitioned out of the company and Xiaoyu Xia checks in with management during monthly review sessions.