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Internet Mini Case #13

H.J. Heinz Company


Maryanne M. Rouse
H.J. Heinz Company (HNZ) and its subsidiaries manufactured and marketed an extensive line of
processed and minimally processed food and related products throughout the world. The
company’s products were organized into two core businesses: meal enhancers and meals and
snacks. Heinz distributed its products via its own sales force, independent brokers, agents, and
distributors to chain, wholesale, cooperative, and independent grocery accounts; mass merchants
and superstores; pharmacies; club stores; food service distributors; and institutions, including
schools and government agencies.
THE DEL MONTE MERGER
In June 2002, Heinz announced that it would spin off and then merge its slower-selling products
with Del Monte Foods, Inc., in an effort to simplify its business. After positive votes by both
Heinz and Del Monte shareholders and approval by the IRS, the transaction, completed on
December 21, 2002, gave Heinz shareholders approximately 75% of the new, much larger Del
Monte. The product lines/segments shifted to Del Monte included Heinz’s U.S. and Canadian pet
food and pet snacks businesses; U.S. tuna; U.S. private-label soups and gravies, as well as College
Inn soups; and U.S. infant feeding. The affected brands included StarKist, 9 Lives, Kibbles ‘n Bits,
Nature’s Goodness baby food, and College Inn soups. The merger was expected to reduce
Heinz’s annual revenue by approximately 20%, or $1.8 billion, while doubling Del Monte’s size.
Under the terms of the merger, Heinz shareholders received 0.45 share of stock in the new Del
Monte for every share of Heinz stock owned, while Del Monte assumed approximately $1.1
billion of Heinz’s debt (about 21% of Heinz’s total debt). Heinz also announced that it would
reduce its dividend by 33%. (The dividend reduction was expected to free up substantial cash
flow, which Heinz planned to use to pay down debt and underwrite additional marketing.) The
merger was effected in several steps, including the transfer of Heinz assets to a temporary entity,
SKF, which was then merged, along with the existing Del Monte, into a “new Del Monte.” The
complicated deal, referred to as a reverse Morris Trust, resulted in a tax-free transfer because
Heinz shareholders would ultimately own a majority of shares in the new Del Monte.

______________________________________________________________________________
This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida. Copyright ©
2005 by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without the written permission
of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to the publisher, Prentice Hall,
for the books, Strategic Management and Business Policy–10th and 11th Editions (and the International version of
this book) and Cases in Strategic Management and Business Policy–10th and 11th Editions by the copyright
holder, Maryanne M. Rouse. This case was edited for SMBP and Cases in SMBP–11th Edition. The copyright
holder is solely responsible for case content. Any other publication of the case (translation, any form of electronics
or other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless
Maryanne M. Rouse has granted an additional written reprint permission.

In addition to allowing Heinz to sell its sluggish brands on an essentially tax-free basis, the
company noted that the smaller, less-diverse Heinz would become a more flexible, faster-growing
company focused on two strategic food platforms: meal enhancers (ketchup, condiments, sauces)
and meals and snacks (frozen and shelf-stable meals and snacks, food service frozen products, and
infant feeding in non-U.S. markets). The new Heinz would have a global structure, which the

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company believed would enhance its ability to compete outside the United States. Reducing debt
would enable Heinz to better support its core businesses with added investments in product
development and advertising.
Investors reacted coolly to the merger announcement, sending Heinz shares down and resulting in
only modest gains for Del Monte. By year-end 2002, both companies’ stock prices had posted
further declines, reflecting weakness in the broader market. (Some industry observers believed the
merger could be win–win for Heinz shareholders only if there was an end game that involved
selling the slimmer and more attractive Heinz.) By mid-January 2005, however, Heinz’s stock
price had recovered to just under $38, $3 below its 52-week high of $40.67, and Del Monte had
managed to regain some strength, closing at $11.17 on January 13, 2005.
THE NEW GROWTH STRATEGY
Shortly after the completion of the Del Monte merger, Heinz announced an aggressive growth
strategy based on four key initiatives:
 Drive profitable growth through superior products and packaging, everyday price/value,
accelerated innovation, and creative marketing
 Remove the “clutter” both by focusing on core businesses and products and by creating a
simplified business structure
 Reduce costs (especially fixed costs) by creating a more efficient supply chain, improving
cash and working capital management, and making focused capital expenditures
 Measure and recognize performance through a “balanced scorecard” that tied management
compensation to key financial and non-financial performance measures and drivers
As part of the company’s emphasis on core products, Heinz realigned its SBUs into two core
businesses:
 Meal enhancers: This segment comprised key brands from the former Ketchup and
Condiments unit. Although sales in this segment had been driven by ketchup, which had
always been the company’s flagship brand, acquisitions and new product development (Jack
Daniel’s grilling sauces and Mr. Yoshida’s marinades, Classico pasta sauces) had given Heinz a
growing presence both on the grill and in the kitchen. With global ketchup sales in excess of
$1 billion, Heinz had over 50% of the domestic ketchup market and approximately 34% of the
global market. Packaging innovations such as the E-Z Squirt bottle had helped drive Heinz’s
global market share in ketchup up 15%, to 60%. (Heinz had a 75% share in the United
Kingdom; the company claimed that 5 points were directly related to the new bottle.) As U.S.
fast food chains increased in global popularity, Heinz expected strong growth in both single-
serving packet and bulk ketchup and condiment (barbecue sauce, soy sauce, steak sauce, etc.)
sales. However, Heinz ketchup faced challenges from other brand-name ketchups, private-
label ketchups, and salsa. The increased popularity of salsa and other ethnic condiments, as
well as the lower cost structures for private-label brands, were expected to threaten Heinz’s
market share.
 Meals and snacks: This segment brought together branded shelf-stable and frozen meals
and snacks from the previous Soup, Beans, and Pasta Meals and Frozen Foods units as well as
non-U.S. infant feeding and frozen or shelf-stable products for the institutional market.
The company’s growing frozen meal/snack product line included such best-selling U.S. brands as
Ore-Ida potatoes, Boston Market HomeStyle Meals, and Weight Watchers and Smart Ones
entrees and desserts. (Heinz, which had acquired Weight Watchers in 1978, sold the international
weight control segment of that business in 1999 as part of an initiative to focus on core
businesses; however, the company retained the processed food segment.) Popular U.S. snack
brands, including Bagel Bites, T.G.I. Friday’s, Delimex, and Poppers, were being managed as part
of this segment.

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Heinz expected its UK and other non-U.S. brands in this category, such as Weight Watchers from
Heinz and Main Street Bistro entrees and Linda McCartney meat-free meals, to drive growth
outside the United States. For example, Wattie’s was among the most powerful brands in New
Zealand, offering a wide range of meal solutions; and the Honig and HAK brands provided Dutch
consumers a wide variety of dried soups, meals, and vegetables. And, while Heinz included its
U.S. tuna business in the spin-off, it retained such European brands as John West and Petit Navire
and the Australian Greenseas tuna brand.
The company was developing a strong presence in food service frozen products, with varieties
such as Chef Francisco and Quality Chef soups and Alden Merrill frozen desserts. Although
Heinz’s retail private-label soups and gravies and College Inn broths were spun off to Del Monte,
the company hoped to grow market share in both U.S. and global markets via such innovations as
microwaveable Soup Cups—a convenience concept imported from Australia.
Also included in this segment was infant feeding. Although Heinz included its U.S. infant feeding
business in the spin-off to Del Monte, the company retained both its Heinz branded baby foods,
which held top positions in the United Kingdom, Canada, Venezuela, Australia, and China, and
Plasmon, its Italian infant feeding business.
A NEW ORGANIZATIONAL STRUCTURE
In the first quarter of fiscal 2004, Heinz changed its segment reporting to reflect changes in
organizational structure and management:
 North American Consumer Products: This segment manufactured, marketed, and sold
ketchup, condiments, sauces, pasta meals, frozen potatoes, entrees, snacks, and appetizers to
grocery channels in the United States and Canada. North American Consumer Products
accounted for approximately 24.5% of sales and 31.6% of profits in fiscal 2004.
 U.S. Foodservice: This segment manufactured, marketed, and sold branded and private-
label products (including ketchup, condiments, sauces, frozen soups, and desserts) to
commercial and non-commercial food outlets and distributors. U.S. Foodservice accounted
for approximately 17% of sales and 14.1% of profits in fiscal 2004.
 Europe: This segment sold products across categories and channels in Europe; it
accounted for approximately 39% of sales and 42.6% of profits in fiscal 2004.
 Asia/Pacific: This segment included operations across product categories and channels in
New Zealand, Australia, Japan, China, South Korea, Indonesia, Singapore, and Thailand; it
contributed approximately 15% of sales and 9.7% of profits in fiscal 2004.
 Other Operating Entities: This segment sold products across categories and channels in
Africa, India, Latin America, the Middle East, and other geographic areas. This segment
accounted for approximately 4.5% of sales and 2% of profits in fiscal 2004.
FINANCIAL POSITION/PERFORMANCE
In accordance with generally accepted accounting principles, Heinz’s financial statements for prior
years had been restated to reflect the merger (show revenues, expenses, assets, and liabilities,
excluding the entities that were later spun off to Del Monte) and the new segment reporting
structure. On that basis, revenues for fiscal 2004 (fiscal year ended April 28, 2004) of $8.41
billion showed an increase of just under 2.2% over the prior year compared to an 8.2% revenue
increase from 2002 to 2003. However, gross profit performance improved to 36.7% of sales in
2004 compared to 35.4% of sales in 2003. (Despite cost-cutting initiatives, Heinz’s gross profit as
a percentage of sales had decreased from 36.93% in 2001 to 35.4% in 2003.)
Net income for fiscal 2004 reflected discontinued operations of the company’s Northern Europe
bakery business as well as write-downs and reorganization costs; net income for fiscal 2003
reflected both income from discontinued operations ($88.74 million) and the cumulative effect of
a change in accounting principles related to goodwill (-$77,812), and it represented a 6.88%

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return on sales, significantly below 2002’s 10.95% but slightly ahead of 2001’s 6.84%. In a less
positive development, S&P downgraded the company’s long- and short-term debt ratings to
reflect Heinz’s increased financial leverage.
Sales for the six months ended October 27, 2004, increased $216.6 million, or 5.4%, to $4.20
billion. Sales volume increased 1.2% over the same period in the previous fiscal year, while
exchange translations added 4.2% to sales. Acquisitions, net of divestitures, increased sales by
0.5%, while lower pricing decreased sales by 0.5%. Despite cost-cutting initiatives, gross profit as
a percentage of sales decreased to 36.6% from 37.3%, mainly due to lower pricing and increased
product costs in Europe and Latin America. SG&A increased $65.5 million, or 8.3%, to $855.7
million, and increased as a percentage of sales to 20.4% from 19.8% for the six-month period.
Operating income decreased $15.0 million, or 2.1%, to $683.1 million, and decreased as a
percentage of sales to 16.3% from 17.5%. Income from continuing operations for the first six
months of fiscal 2005 (ended on October 27, 2004) was $392.1 million compared to $378.3
million in the same period a year earlier, an increase of 3.6%. On a segment basis, North American
Consumer Products accounted for 25% of sales and 34.5% of operating income; U.S.
Foodservice contributed 17% of sales and 15.7% of operating income; Europe contributed 38%
of sales and 39.2% of operating income; Asia/Pacific contributed 14% of sales and 10.5% of
operating income. (Complete SEC filings are available via a link from the company’s web site
www.heinz.com or www.wsj.com.)

ACQUISITION STRATEGIES
Heinz had pursued global growth via market penetration and product/market development
achieved principally via acquisition. In September 1999, Heinz acquired a 19.5% interest in The
Hain Food Group, Inc., for nearly $100 million, forming a strategic alliance for global production
of natural and organic foods and soy-based beverages. Hain was the leading U.S. natural and
organic foods company, with more than 3,500 products sold under such brands as Health Valley
cereals, bakery products, and soups; Terra Chips snacks; and Westsoy, the largest soy beverage
marketer. As part of the alliance, Heinz was to provide procurement, manufacturing, and logistics
expertise, with Hain providing marketing, sales, and distribution services.
Other recent acquisitions included the Borden Food Corporation’s pasta sauce, dry bouillon, and
soup business; the Linda McCartney and Ethnic Gourmet brands; and Anchor Food Products’
branded retail business, which included the licensing rights to the T.G.I. Friday’s brand of frozen
snacks and the Poppers brand of appetizers. The company also completed its acquisitions of
Delimex, a leading maker of frozen Mexican food products. Heinz had financed its acquisition
strategy principally via debt (in 2004, approximately $5.6 billion), resulting in a total debt to
equity ratio of 3.63, twice the industry average.
In fiscal 1999, the company began a growth and restructuring initiative named “Operation Excel.”
This multiyear program established manufacturing centers of excellence, focused on the product
portfolio, realigned the company’s management teams, and invested in growth initiatives. The
total cost of Operation Excel was estimated at $1.2 billion; pretax savings generated from the
program were estimated to be $70 million in fiscal 2000 and $135 million in fiscal 2001. Cost
savings were projected to grow to approximately $185 million in 2002 and $200 million in fiscal
2003 and thereafter. In the fourth quarter of fiscal 2001, the company announced a restructuring
initiative, named “Streamline,” designed to decrease overhead and other operating costs via such
steps as closure of the company’s tuna operations in Puerto Rico, consolidation of the company’s
North American pet food production, and the divestiture of the company’s U.S. fleet of fishing

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boats.
THE FOOD SERVICE MARKET
Heinz was the largest prepared food supplier (ketchup and condiments, salad dressings, frozen
foods, soup concentrate, etc.) to the U.S. food service market, which comprised restaurants and
other away-from-home eating places. The food service industry, which had seen flat growth as the
U.S. economy stalled in recession, was expected to improve as U.S. economic growth
strengthened and U.S. families increased the proportion of food dollars spent away from home
(slightly over 50% in 2003, up from about 33% in the 1970s). Industry analysts expected strong
growth in global food service demand (especially in Europe and Asia) over the next five years.
Key competitors included Kraft, Unilever, Sara Lee, Campbell Soup Company, and Dole Food
Company, Inc. Because Heinz drew approximately 17% of its revenues from food service
operations (restaurants, stadiums, airports, etc.), the company had suffered more than most
processed food firms from the after-effects of September 11.

PROCESSED FOOD INDUSTRY


As a whole, the packaged food industry outperformed the S&P 500 for the first seven months of
2004, posting a 5.7% versus a 2.1% decline for the broader index. Cost pressures were a key
concern for the industry, primarily from increased commodity, pension, and fuel costs. While many
commodities were below recent highs, they remained above 2003 levels. An additional concern
was the vulnerability of input prices to weather and export demand. However, industry profit
margins were expected to benefit from cost reductions resulting from mergers and acquisitions
and the aggressive restructurings undertaken by most major companies in the previous several
years.
Sales of frozen and prepared foods in the United States had grown significantly over the previous
three years, driven by quality improvements and convenient packaging, factors that promised to
make those products still more attractive in the future. Retailers’ adjustments virtually guaranteed
this: In the previous three years, Wal-Mart and Albertsons had increased their frozen food
departments by 25%–40% throughout their chains.
Key competitors in this industry segment included Kraft, Kellogg Company, ConAgra, General
Mills, Unilever, Dole, and Sara Lee. Eighty percent of total food, drug, and mass merchandiser
sales in the United States went to national brands and, according to one recent study, 46% of
Americans were “national brand loyalists” who gravitated strongly to national brands. However,
brand loyalty was eroding in all age groups. The benchmark annual index from Interbrand, a brand
consultancy, showed 41 of the top brands a year earlier declining in value in 2004.
The industry had experienced aggressive consolidation (13 mergers among publicly traded
packaged food companies since the beginning of 2000), which had eliminated all the obvious
takeover targets. Industry consolidation plus the maturity of the U.S. market for processed foods
(1% growth, low inflation, increasing popularity of generics) made competition for market share
intense and left little latitude for price increases. Continued consolidation in the grocery industry
via the acquisition of niche players and the emergence of superstores and wholesale clubs would
also exert downward pressure on prices.
The Westernization of eating habits, together with rising incomes in developing countries and the
appeal of American brand names abroad, was expected to contribute to increased growth among
U.S. processed food companies; however, new dietary guidelines from the U.S. Department of
Agriculture, which cautioned consumers about the consumption of trans fats, could negatively
impact sales of some shelf-stable products.
Heinz has created a special link for students: www.heinz.com/jsp/students.jsp.

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