by Greg Thain
What Have They Been Doing in Recent Years?
2004
With the changes bedded in, the performance of Heinz began to improve. Sales of the remaining parts of the business in 2002 had totalled $7.6 billion, which had grown to $8.4 billion by 2004, with virtually all the growth coming from outside the US, half of it from the UK alone, helped by the earlier acquisition of the market-leading John West tuna brand. The other half of the international growth came mainly from a good acquisition: ABC, the leading soy sauce and juice brand in Indonesia, which was the fourth-most-populous country in the world.
Encouragingly, when looking at performance by category, half of total company growth had come in the core Ketchup, Condiments & Sauces area, helped by the introduction of the upside down ketchup bottle in 14 countries. This powered an 8% annual increase in ketchup volumes. Key emerging trends of health & wellness and Every Day Low Pricing (EDLP) were behind a lot of the company’s activities; health & wellness driving its acquisition policy and EDLP its pricing/promotion strategy. The latter was a key reason why dollar sales were static in the US.
Simplification was still high on the agenda with 20% of SKUs being dropped in the year, on top of 20% that had been discontinued in 2003: these savings juiced an 8% increase in marketing spend. Heinz extended its presence in China with the purchase of frozen food company, Shanghai Longfong Foods.
2005
A top-line sales increase of nearly 6% represented good progress, but was heavily dependent on price increases and favourable exchange rates; volume inched upwards by only 1.9%. Sales of the top fifteen power brands, representing nearly two-thirds of total sales, were up over 7%. Overall company performance was dragged down by the remaining third of the business. Ora-Ida potato brands grew by 10% as the company’s frozen foods category led the way with 13% annual sales growth. The Food Service division was bolstered by the acquisition of Appetisers, makers of high end frozen hors d’oeuvres. Meanwhile, the European businesses seemed becalmed with flat volumes. The company announced a strategic review of its European operations, sold the struggling HAK brand of prepared vegetables and acquired Britain’s iconic HP and Lea & Perrins brands. Looking forwards, more emphasis was going to be placed on Russia, Indonesia, China and India where the company had already established footholds.
Heinz had entered Russia via its baby foods business. It used buckwheat-based products to suit local preferences, and this had helped establish the Heinz brand name. But Russia was also Europe’s second-largest market for ketchup so a joint venture was agreed in the year with Petrosoyuz, Russia’s leading maker of ketchup, mayonnaise, spreads and margarines. The ABC brand in Indonesia was powering ahead, as was the expanding Heinz portfolio in China. In India, Heinz had been manufacturing ketchup there since 2000 but its business was mostly focused on the nutrition brands purchased from Glaxo. Heinz targeted a 50% sales increase from these developing economies in 2006.
2006
2006 was a better year for Heinz as organic volume increased by nearly 4%, driven by the now healthy North American Consumer Products Division and the Asia Pacific region, both delivering volume increases of around 8%. In North America, Ora-Ida (averaging 10% volume growth a year since 2003) and TGI Fridays were the usual suspects; but ketchup was now humming. A succession of innovations over the previous three years had both grown the category and Heinz’s share. There were two basic insights driving the growth. First, that ketchup was a fun product, as shown by the successes of EZ Squirt and coloured ketchups. Then, that, like other fun categories such as confectionery and soft drinks, consumption was elastic if driven by availability. Larger sizes, such as the new Fridge Door Fit bottle, and larger single serve catering packs, were driving increased consumption. Also, in the previous five years Heinz had launched over 25 new varieties of ketchup which accounted for over 40% of their 2006 U.S. ketchup sales. On the back of such growth, the company was able to reduce its retailer investment spend. Infant foods had also finally returned to growth, driven by Plasmon, the fourth-largest brand in Heinz’s portfolio, rolling out new lines of baby yoghurts and cheeses.
The Heinz business had been radically re-engineered over the previous three years: the global SKU count had been more than halved from 35,000 down to 16,500; the US Consumer Products division was rated best in class in trade-spend efficiency; and the Heinz Global Innovation and Development centre in Pittsburgh was churning out record numbers of product innovations - over a hundred were lined up for launch in 2007. Heinz had become much more focused, agile and innovative. It had also made further divestments in Europe, selling off the John West tuna business.
2007
For the first time since the hiving off of the non-core US businesses, Heinz sales returned to the $9 billion level. Yet, growth was less than 1%, amid a pattern of sluggish volume. This was not a great short-term return from a hundred-plus new lines, and a $65 million increase in consumer marketing spend to support them. The North American Foods group was still growing at 2.6% but Food service moved backwards, prompting the two to be merged back together as one unit. Most of the good news was coming from overseas: here the Russia, Indonesia, China, India group, now joined by Poland, delivered 30% of the total company annual sales growth. Indonesia’s ABC brand was now the world’s second-largest brand of soy sauce, distributed to nearly all of Indonesia’s 6,000 inhabited islands by a motorbike distribution fleet. In China, Long Fong was on its way to becoming a $100 million brand helped by a slew of new, upmarket dim sum launches. India’s Complan brand was growing at 20% annually and Poland’s Pudliszki brand had a complete restaging and grew by over 30%. Heinz was also doing well in Australia and Latin America.
Within the categories, the most encouraging trend was the continued growth on global sales of ketchup, up 9%, but Heinz was still suffering from a weak tail of either unbranded or non-Heinz branded lines doing badly, particularly in Europe.
2008
It seemed the investments in marketing and R&D were now paying off as sales jumped 12% - the best performance for fifteen years - to break the $10 billion barrier. There was good news on all fronts. A key driver of growth had been a doubling of the innovation rate from the previous year, Heinz bringing over 200 new lines to market supported by another double-digit increase in consumer marketing. This continued increase in investment and R&D had been made possible by the savings of over $500 million that had flowed from Heinz’s simplification strategy since 2003. The company now had fifteen brands generating sales of over $100 million and the emerging markets business grew by 25%, providing 25% of the annual company sales growth while accounting for 13% of sales.
The joint ventures in Russia and China were now wholly owned, allowing Heinz to proceed at a faster pace. In China, Long Fong sales had doubled since its acquisition, as Heinz took the brand to second- and then third-tier cities, and providing small retailers with freezers to stock the brand. In Russia, now the world’s second-largest market for ketchup, the Heinz brand was now market leader in Moscow and St. Petersburg, providing a springboard to extend its reach.
Strategically, following a top-level task force (set up the previous year) the company re-oriented itself around a consumer-centric health and wellness axis. Of course, Heinz had been in the health and wellness business ever since Henry Heinz sold his first jar of pure horseradish, so it was a consumer trend heading in Heinz’s direction. The company identified four key areas:
· Lifestyle (promoting general health and wellness). The Heinz products in this category, such as organic ketchup, Farmers Market products and low fat options, grew by 11% in 2008, but the company did not see itself as naturally advantaged in this area. Work here was focused on developing low salt, sugar- and fat-free versions of existing brands.
· Children’s Nutrition (Infants, toddlers and children). Here the company was growing faster at over 17%, driven by infant feeding lines in emerging markets. Brands like Complan were targeted as an illness-related dietary supplement for older people in th
e west, but in India as a vitamin-enhanced drink for children. The company was investing in a new R&D centre of excellence for this category in Milan, home of the Plasmon brand.
· Weight Management. (Enabling/promoting weight reduction, maintenance). Here the jewel in the crown was the Weight Watchers brand, now generating annual sales of $800 million. This was growing relentlessly, driven by the Weight Watchers Smart Ones range, which the company was rapidly expanding. Sales in this area had increased 25% the previous year.
· Health Management (Science-influenced foods and beverages). This was really a niche area for the company, mainly based on a couple of gluten-free brands in Italy.
Together, the Heinz brands that fell into these four categories comprised 60% of total sales and were growing at nearly twice the industry rate. The company’s acquisition strategy would be to search for companies advantaged in at least one of these four areas.
2009
As Heinz’s financial year-end falls in April, their 2009 performance was heavily influenced by the difficult trading conditions in 2008 that followed the financial crash. Unlike many consumer goods companies, Heinz was still able to report another sales increase, albeit marginal at just less than 1%. The stronger US dollar hammered reported sales from overseas where the underlying sales trends were still largely positive: Emerging markets sales grew by nearly 16% excluding currency impacts. The company’s greatest marketing success had been its health and wellness-influenced Grown not Made campaign on ketchup. This helped grow global sales by 9%, which in turn contributed to a sales growth of over 13% in the company’s top-15 brands. The company also took advantage of the economic conditions to make three significant acquisitions in the year: Benedicta, a French maker of sauces, mayonnaise and dressings, La Bonne Cuisine in New Zealand, which made chilled dips and hummus and Golden Circle, iconic Australian maker of fruit-based foods and beverages.
The new Heinz was a very recession-resilient business, but management recognised that the economic issues represented a sea-change rather than a blip in consumer buying behaviour. Increasingly frugal and thrifty, value-conscious western shoppers were heading into Club stores and Dollar stores, making them the two fastest-growing sales channels in North America. These channels usually demanded tailor-made packs to hit price points, but Heinz were already very well established in them, having had a strong trade marketing focus as the channels had emerged.
2010
Off essentially flat volumes, Heinz delivered a 5% increase in dollar sales. This showed the strength of their brands in being able to withstand commodity-driven price increases in all its markets, and supported by a substantial increase in consumer marketing spend. Innovations were also still being rolled out at the usual pace, with many healthier options of existing brands hitting the shelves. More of the disadvantaged long tail of products was divested during the year as the company transitioned back to its roots of being a ketchup and condiments company that sold a few other things. Ketchup and sauces was now the largest category in the business, delivering virtually all the annual growth.
The recession seemed to have convinced Heinz that perhaps this wasn’t the time to completely orientate the company around health and wellness segments: value was now the name of the game. Emerging markets continued their growth trajectory for the company, generating 30% of the sales growth and now 15% of total sales. Sales in the company’s Asia/Pacific region topped $2 billion for the first time, a number boosted by the acquisition in the year of China’s Foodstar company, the country’s leading producer of branded soy sauce and bean curd. Heinz’s local focus had realised that they could best introduce their global brands on the back of strong local infrastructures of culturally relevant products, such as soy sauce.
2011
Again off essential flat volumes, Heinz managed to inch its top line ahead by 1.9%. Not bad in recessionary times, but not spectacular either. The year showed the inherent problem in the Heinz portfolio: while progress was made on several of the biggest brands: virtually all the sales growth came in the ketchup and sauces category with Heinz Ketchup growing almost 4% due to innovations such as the PlantBottle - licensed from Coca-Cola - and Heinz Tomato Ketchup with Balsamic Vinegar in the UK, although these were offset by declines elsewhere in the portfolio. The recession was not kind to secondary and tertiary brands, of which Heinz, due to the somewhat scattergun acquisitions during the O’Reilly years, still had more than its fair share. Thus, for every success - TGI Friday’s single-serve entrees, Smart Ones breakfast wraps and Classico Light Alfredo Creamy Sauce - there weredeclines: Boston Market in the US and Honig in The Netherlands. Equally, the Food Service business was hostage to the performance of restaurant foot traffic. But at least the sales growth was coming from the right areas: the big brands - up 3.8% in the year - and emerging markets, where another good year of 12% growth was based on organic growth in the company’s key categories of ketchup, condiments and baby food. Their emerging market profile was bolstered by a major acquisition in Brazil of the manufacturer of Quero, a rapidly-growing brand of tomato-based ketchups, sauces and condiments. This was an acquisition in the right product categories where Heinz has genuine advantage and in the right part of the world.
2012
Now it looked as though Heinz was out of the woods, registering a 9% sales increase to over $11.6 billion. But all this was simply masking the same portfolio issues. All the increase came from a favourable sales mix, increased pricing and favourable currency exchange: volume actually declined slightly. In a similar pattern to the previous few years, the areas of good growth continued to grow – ketchup 10% and ketchup and sauces combined by 14%; some areas broke even – infant/nutrition was booming in emerging markets but struggling in developed; and other areas, such as frozen foods and food service, continued to be weak.
Geographically, Heinz’ performance is also somewhat schizophrenic. In the previous two years, Heinz top-line sales had increased by slightly over $1.1 billion, 95% of this increase coming from markets other than Heinz’s two largest - the USA and UK - which still account for almost half of company sales. By category, Meals and Snacks, which accounts for 38% of total sales, has delivered 16% of the growth in the past two years. Infant Nutrition, 10% of total sales, delivered 6% of the growth. Meanwhile Ketchup and Sauces delivered almost 70% of company growth.
What is Their DNA?
While the company has had a somewhat chequered history, finding itself in virtually every food category in the grocery store at some time or other, we believe the Heinz DNA can be boiled down to three simple components: quality, tomatoes, and global management
Quality
Heinz is one of the world’s best-known food brands, with a reputation for quality second to none. Generations of consumers across the globe have trusted Heinz to feed their precious babies and there can surely be no more compelling demonstration of what it means to trust a company. It is a reputation that simply cannot be bought. Although much of the Heinz portfolio – too much - does not benefit from this (due to the still vast collection of acquired brand names), quality is instilled in their culture and has been since Henry Heinz used clear glass bottles and removed dated product from shelves a century before. In today’s no logo world of cynicism and distrust in the motives of large companies, Heinz stands above the fray. No-one can beat Heinz on trustworthiness.
Tomatoes
It is difficult to think of another food company that has an inbuilt, structural advantage in their core raw ingredient. In other food categories many companies claim to purchase only the finest coffee beans, or cocoa beans, or potatoes, and maybe some do. But no one else purchases as many tomatoes, knows them so well, has a history of constantly developing superior hybrids (Heinz has been breeding them since 1936 and has the world’s largest database) and has such direct relations with its growers (Heinz can trace 90% of its tomatoes back to the field they were grown in). Quite simply, they have better tomatoes, not just in one year by paying top dollar or getti
ng lucky with climate, but every year, embodied by their proprietary HeinzSeed programme. This trait is not a fad or a whim of an itinerant CEO, it flows straight from the veins of the company founder, Henry J. Heinz. It defines the company. If the company can develop a similar expertise to underpin its rapidly growing soy sauce business in emerging markets, then long-term success will be assured.
Global Management
This might seem a strange choice. There are plenty of companies who do well around the world, but no American food companies do it as well as Heinz. Approximately three-quarters of their sales come from outside the USA. They started very early, setting up a UK business over 100 years ago, and have learned over time the fine art of blending global capability with local preferences. Food, more than any other category, is one where consumers differ locally and, with few exceptions, are reluctant to adopt the preferences of others. Heinz managed the transition from a confederation of stand-alone businesses to one managed globally, along category lines, very well. Their packaging and product innovations are rolled out very rapidly around the world, but always to match the taste preferences and brand personas of the local markets. Nobody does it better! In the food business.
Summary
The Heinz history can be split into four basic parts. While family-managed, the three Heinz Chairmen built a ketchup and condiments empire, developing one of the world’s most trusted brand names in the process. Then, the company managed to survive the transition from family-run to manager-run, primarily because of the foresight of the founders in building a highly profitable UK company that was always run by top managerial talent. The third phase was the O’Reilly years, when the company became much broader and much leaner, a better financial performer and with a stock that could be trusted to deliver superior returns. They made some astute acquisitions that caught big waves at the right time, Ora-Ida and Weight-Watchers being two good examples. We believe the company is just entering its fourth phase of getting back to its core of being a ketchup, condiments and sauces company and developing it on a truly global scale.