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By Dave Fusaro, Editor in Chief | 11/29/2011
Many companies have turning points. Maybe it's an acquisition, an audacious new product launch or visionary leader. For H.J. Heinz Co., it was the strategic decision to reshape and refocus its global portfolio, especially targeting highly populated emerging markets.
One of the most notable – and somewhat risky – acquisitions under that strategy occurred in Indonesia in 1999. "It was a big risk, a $70 million investment, a lot of money for that time," Chairman, President and CEO William Johnson says of the majority stake in ABC Central Food, a maker of soy and chili sauces, as well as ketchup.
"Indonesia was undergoing a radical change to democracy at the time, there was a high level of risk, and there was quite a debate in our board. But we bought into the business, and that business today is over $400 million in sales," he says. "It's paid for itself a couple times over. It gave us confidence that we could wend our way through the challenges local markets present through a combination of our capabilities and the right local talent."
Confidence in its ability to run foreign ventures is no longer a question at Heinz – actually, it hasn't been for most of the company's 142-year history. Heinz operates a number of businesses and 81 plants around the world for consumers in 200 countries on six continents. This is no longer the ketchup and pickle company from sleepy Pittsburgh. Nearly two-thirds of Heinz's $10.7 billion in sales are from outside the U.S., and more than 20 percent come from emerging markets, more than double their contribution in fiscal 2005.
As a result, Heinz calls itself "the most global U.S. food company." While that's an interesting part of the story, Heinz has many other claims to fame. Led by the Heinz brand, which itself has $4 billion in sales, the company's top 15 brands generate 70 percent of its revenue; 50 brands hold No. 1 or No. 2 positions in more than 50 countries on six continents. Even here in North America, some leading brands may not be recognized as owned by Heinz, including Ore-Ida, Classico pasta sauces and brands that it manufactures under license, such as T.G.I. Friday's frozen meals and snacks and Weight Watchers Smart Ones.
Heinz focuses on three categories: ketchup & sauces, meals & snacks and infant/nutrition, a fast-growing category that is being fueled by growing sales in emerging markets such as China and Latin America.
In addition to the $10.7 billion in sales, Heinz, which closed its fiscal 2011 on April 27, reported $990 million in net income. It has delivered a total shareholder return of more than 46 percent over its past five fiscal years, three times that of the S&P 500, and increased its dividend by 80 percent since fiscal 2004.
Not bad for a company coming out of a recession. For all those reasons, and many more that will become apparent in the next 19 pages, we're pleased to name H.J. Heinz Co. our seventh Processor of the Year.
Global from the start
This much global exposure, especially in emerging markets, looks very modern and maybe audacious, but it's something Heinz has been doing nearly since its founding. Henry John Heinz had been making horseradish since 1869 and ketchup since 1876. In 1886, he received his first order from overseas, from Fortnum & Mason, then a famous London store. English sales continued to grow, ironically at a time when the business was stagnating in the States, and H.J. opened his first overseas office in London in 1896.
"The world is our field," H.J. is reported to have told his employees.
His son, Howard, expanded into Australia in 1935. H.J. "Jack" Heinz, the founder's grandson, became the company's third CEO in 1941 and stepped up global expansion after the war, launching operations in the Netherlands, Venezuela, Japan, Italy and Portugal.
At the time, Heinz was making ketchup, pickles, soup, beans, condiments and sauces. In 1959, Heinz opened what then was the largest food processing plant in Europe, a factory in Kitt Green, England, to make baked beans and soup.
A number of key acquisitions followed: StarKist seafood, 9Lives pet food and Italian infant/nutrition company Plasmon, all in 1963; Ore-Ida in 1965; and Weight Watchers International in 1978. But global growth, especially, was stepped up in the 1980s and 1990s, with expansions into Africa, Eastern Europe, China and the Pacific Rim.
If there is increased interest now in Asia/Pacific, it may be because Johnson, as a corporate vice president, was overseeing the Heinz business there 1993-1996. "As I spent time over there, it dawned on me the opportunities: the number of people, the development of their markets, the growth of the middle class, the infrastructure. It all suggested to me there would be significant potential for those who were lightfooted enough to get into those markets early."
And he made sure Heinz was one of the pioneers.
Emerging markets "have become a critical component of our growth," Johnson continues. "Most of our acquisitions in the past several years have been in emerging markets, the most recent being Quero in Brazil [a $325 million sales maker of tomato sauces, vegetables and ketchup] and Foodstar in China [a $150 million maker of soy sauce and other condiments]. Our emerging markets focus should lead [that segment] to about 30 percent of our sales by 2016, and I think sooner than that because of both organic growth and acquisition opportunities."
The acquisition of Quero gave Heinz its first major business in Brazil, the world's fifth-most populated country with 200 million consumers, and the Foodstar transaction expanded the company's presence in China, which represents a significant growth opportunity because it has 1.3 billion consumers and the world's second-largest economy.
Heinz has two key philosophies for foreign markets. One is "buy and build," which means it acquires strong brands and companies and then invests in them – for manufacturing, product development and distribution of other Heinz brands.
The other philosophy is what Johnson calls the Four A's:
Without neglecting the home turf
There is enormous excitement (and the previous thousand or so words of this story) on foreign opportunities for Heinz. But North America remains the company's biggest market. With $4.7 billion in sales, "North American Heinz is not going away," says Scott O'Hara, an executive vice president and president/CEO of Heinz North America. "It's still our biggest and most profitable market, and largely provides the fuel to support our investments in emerging markets.
"Our strategy at Heinz North America is the same as the corporate strategy: to maximize the value in our region, to expand the core business," he says. However, he does it with a slightly different deck of cards.
For starters, Heinz North America plays primarily in only two of the three core businesses, ketchup & sauces and meals & snacks. Not in infant/nutrition, although there remains an infant/nutrition business in Canada. Things might have been different had Heinz acquired the Beech-Nut baby food business in 2001 (Heinz withdrew its offer after a U.S. Court of Appeals temporarily blocked the proposed combination of the nation's No. 2 and No. 3 baby-food makers on antitrust grounds). Heinz also is a big factor in U.S. foodservice, to the tune of $1.4 billion.
While O'Hara's unit largely is limited to organic growth, he presides over brands that hold significant market shares, customer affinity and potential for innovation within their categories.
Five megabrands – Heinz, Ore-Ida, Smart Ones, T.G.I. Friday's and Classico – represent 75 percent of Heinz North America's business. "Even though those are mature brands and categories, we have innovation under way in all five," he says.
Ore-Ida has come a long way from bags of frozen French fries – and appears to have a promising road ahead as the brand gets into frozen potato casseroles and sweet potatoes. Smart Ones appeals to the growing (pun intended) weight-conscious segment and claims to be a solid No. 2 brand in the segment. T.G.I. Friday's mines the seemingly endless array of appetizers inspired by the restaurant chain, but also offers Complete Skillet Meals (for two) and just launched single-serve bagged and tray dinners. Classico has stepped out of the red pasta sauce category with a line of alfredo and pizza sauces.
Don't forget the eponymous Heinz brand. Beans were enough of an icon in Britain to be featured on the cover of a 1967 Who album, but they just came to America this fall. As you read this, odds are good you have a bottle of Heinz gravy in your pantry – or just used it over the holidays. Even the venerable ketchup evolves, with organic and "Simply Heinz" versions debuting in recent years. All the 20-oz. ketchups now are in PlantBottle packaging, which is made from up to 30 percent plant material using technology that was developed by Coca-Cola Co. And Dip & Squeeze packets of ketchup just went retail after launching a year ago in quick-serve restaurants.
In Canada, Heinz also competes in chilled foods such as salad dressings, compliments of the Renee's Gourmet Foods acquisition of 2006. That kind of product line could be imported to the U.S. at any time.
"We have a very aggressive innovation plan," says O'Hara. "We're building a three-year R&D pipeline of new products to launch."
Acquisitions and spinoffs
All that acquisitive growth, both foreign and domestic, can't help but unfocus a company. In defining Heinz 2011, just as important as international growth are a number of transformational events for the company.
Johnson lists as a turning point the Ore-Ida acquisition of 1965, probably the company's first acquisition of a top-tier brand, one that was outside of Heinz's comfort zone but one that provided it with a platform for growth. Then a self-assessment in 1995-1996 that overhauled the supply chain and overhead structure.
"In addition to substantially reducing costs, it confirmed our interest in emerging markets and shone a light on categories where the company should focus," Johnson says.
What naturally followed was the portfolio realignment that resulted when businesses representing about $1.8 billion in sales were sold to Del Monte in 2002. Through acquisitions and internal growth, a frozen business gained critical mass. By about 2005, a new and refocused Heinz had taken shape.
That same year, the Heinz Global Innovation and Quality Center – believe it or not, the first central R&D center in the company's history -- opened in suburban Pittsburgh (more on that in the following story). The company is currently building one in Netherlands, and one is planned for China in two years.
Much of the direction of this company has been charted by strong chairmen/CEOs. Heinz has had a history of long-serving and strong leaders at the top, with the same person usually having both those titles.
The company history trumpets R. Burt Gookin, president/CEO 1966-1979, as moving Heinz "to the No. 1 spot in investment appreciation among its U.S. peers." Since then, delivering exceptional financial results has been a Heinz hallmark.
Tony O'Reilly -- Sir Anthony Joseph Francis O'Reilly, Ph.D. -- a native of Ireland and a former rugby star, was at the helm 1979-1998, during a time of acquisitions and global expansion. Regarded as high-profile, flamboyant and worldly, he was the first non-Heinz family member to become chairman.
Johnson joined Heinz in 1982 as general manager of new businesses for Heinz USA. At one point, he was CEO of Heinz Pet Products and then added Star-Kist. He took over as president/CEO in 1998, and was named chairman two years later. He's only the fifth chairman and sixth CEO in Heinz's 142-year history.
While maintaining overall growth, he focused the company on its current core categories and presided over some divestitures, foremost being the StarKist, pet foods, U.S. baby food and private label soup businesses sold to Del Monte Foods in 2002.
In addition to the acquisition in Indonesia, Johnson says another transformational event was the purchase of Russia's Petrosoyuz, a maker of ketchup, condiments and sauces, in 2005. "We had a small baby food business in Russia, and we were trying to bring our ketchup in [from European factories], but all the duties made it too pricey. Petrosoyuz gave us instant infrastructure across Russia's many time zones and expanded our reach. It came with a number of brands, which we eventually successfully rebranded as Heinz. Today we have a quarter-billion-dollar business there, most of it under the Heinz brand. This gave us confidence that [in some situations] we could change the local brand to the Heinz brand."
And today Heinz is the No. 1 brand of ketchup in Russia — as it is in seven of the world's top 10 ketchup markets.
When asked what Heinz still needs to improve upon, Johnson mentioned the transfer of ideas from unit to unit within the company. With as far-flung an empire as Heinz, it's difficult to keep everyone aware of successes and best practices halfway around the globe, to keep everyone connected as one family. "We're light years ahead of where we were a decade or so ago, but we still have a long ways to go," he says.