netrashetty
Netra Shetty
H. J. Heinz Company (NYSE: HNZ), commonly known as Heinz and famous for its "57 Varieties" slogan and its ketchup, is an American food company with world headquarters in Pittsburgh, Pennsylvania.
Perhaps best known for its ketchup, the H.J. Heinz Company manufactures thousands of food products in plants on six continents and markets these products in more than 200 countries and territories. Heinz ranked first in ketchup in the United States with a market share in excess of 50%. Moreover, its Ore-Ida label held more than 50% of the frozen-potato sector. Overall, the company claims to have 150 number one or number two brands worldwide.
H.J. Heinz Company (NYSE: HNZ) makes processed food products like condiments, sauces, and frozen foods. The company is best known for its namesake brand, Heinz ketchup, which has 60% market share in the US, 70% in Canada, and 78% in the U.K.; [1] the company sells about 650 million bottles of ketchup each year.[2] Heinz' other product lines include condiments and sauces such as salad dressing and soy sauce, frozen food, soups, beans and pasta meals, and infant food. The company's 15 top brands, including the flagship Heinz brand, make up over 70% of total sales.[3] In FY 2010, Heinz had sales of nearly $10.5 billion with a net income of $864.9 million.[4]
Heinz has spent a good part of the last decade restructuring its business, shedding less profitable brands and instead focusing more cash on marketing and product development.[5] The firm's renewed efficiency has been tested by rising commodities prices, which are driving up the costs of making and packaging food - high fructose corn syrup is a key ingredient in almost all Heinz products, and oil is refined to make plastic bottles for sauces and condiments. Due to these rising costs, Heinz introduced price increases across all its products in 2008.[6] However, the company also introduced in 2009 a new marketing campaign highlighting the natural and organic qualities of its foods, especially its ketchup brand.[7]
In June 2010, the company announced that it had signed an agreement to acquire Foodstar, a leading producer of soy sauce and bean curd products in China, from Transpac Industrial Holdings for $165 million. The deal is expected to increase Heinz's sales in China to over $300 million and support the company's drive to generate 25% of its revenues from emerging markets by 2016.[8]
Contents
1 Company Overview
1.1 Quarterly Earnings
1.2 Segment Information
2 Trends and Forces
2.1 Rising Commodities Prices are Forcing Heinz to Make Difficult Choices
2.2 The Rising Value of the Dollar Could Impact Heinz' Revenues
2.3 Consumer Sentiment Shifting Towards Healthier Foods
3 Competitor Analysis
4 Notes
Company Overview
[9]
Many of Heinz’s products are prepared from recipes developed in their own research laboratories and experimental kitchens. After the ingredients are selected, they are shipped off to one of the company’s 68 owned factories or 9 leased factories to be processed. Methods of processing include sterilization, homogenization, chilling, freezing, pickling, drying, freeze drying, baking, and extruding.
In order to obtain a portion of certain raw products such as tomatoes, cucumbers, potatoes, and some other fruits and vegetables, the company makes pre-season futures contracts with farmers, which provides some protection against volatile commodity prices; for example, if the price of tomatoes suddenly skyrockets, Heinz is able to still buy them at the low price agreed upon in the contract. Other products such as dairy, meat, sugar, sweeteners, spices, flour, and other fruits and vegetables are purchased on the open market [10].
The company's core 15 brands accounted for 70% of total sales. Emerging markets currently generate 15% of the company's total sales, however Heinz's goal is to have them generate 25% of earnings by 2016 and up to 40% in the long term.[11]
Quarterly Earnings
Q2 2010
In the second quarter of 2010, Heinz generated revenues of $2.67 billion, an increase of 2.5% from Q2 2009; net income for the quarter decreased by 16% to $231.4 million.[12] Overall volume decreased 4.1% as lower volumes for the US and UK offset increases in emerging markets; it was also counteracted by pricing increases of 4.6%.[13] In Asia/Pacific, sales increased 20.3% as a result of the company's acquisition of a fruit and juice business in Australia and a chilled dip business in New Zealand. Operating Income for the US Foodservice segment grew 15.1% as pricing and increased efficiency offset a volume decrease of 5.6%. A similar trend was seen for North American Consumer Products, the company's largest segment, with operating income increasing 4.9% in the face of a volume decrease of 8%.[14] The company is hoping to drive up volume with new marketing campaigns in nearly every region.[15] For the tenth consecutive year, Heinz ranked first for customer satisfaction among food manufacturers according to the University of Michigan’s American Customer Satisfaction Index.[16]
Q3 2010
In the third quarter of 2010, Heinz generated revenues of $2.68 billion, an increase of 12.7% from the previous year; net income decreased 5.7% to $228.5 million. The primary reason for the lower net income was a 41% increase on marketing in the quarter compared to last year. Operating income for the quarter was $436.5 million.[17] Overall volume increased 1.2%, with volume growth of 7% in emerging markets, 4% growth for US retail, and 9% growth in the UK. These positive numbers though are offset by a 3% drop in revenue, with a 7.3% decrease in volume, for US Foodservice, which continues to suffer as a result of decreased restaurant traffic.[18] The company's 15 top brands had a combined volume and pricing increase in revenue of 5.3%.[19] Sales in Asia increased by 41%, while sales in Europe and North America consumer products increased by 12% and 7% respectively.[20] Net pricing increased revenues by 1.8%, while acquisitions, namely the purchase of Australia's Golden Circle last year, increased revenues by 2.9%[21], and favorable foreign currency exchange rates boosted revenues by 6.9% compared to last year.[22]
Q4 2010
In the fourth quarter of 2010, Heinz generated revenues of $2.72 billion, an increase of 8.3% from the previous year, and net income increased 9.8% to $192 million. Operating income for the quarter was $345 million, an increase of 1.9% from Q4 2009.[23] A 63% increase in marketing expenses translated into a 1.6% increase in total volume and 4% organic sales growth for the company's top 15 brands. Most notably, sales in emerging markets increased 21.1% during the quarter.[24] The company expects Emerging Markets sales to account for 25% of the company's total sales by 2016 and eventually to comprise 35% to 40% in the long term.[25] Global ketchup sales increased 7.7% and brands in China (Long Fong frozen dim sum) and India (Complan and Glucon D nutritional beverages) experienced double digit growth.[26] Sales declined in both the UK and the US foodservice segment, reflecting the economic conditions and fewer restaurant patrons.[27]
Q1 2011
In the first quarter of FY 2011, Heinz generated revenues of $2.48 billion, an increase of 1.6% from Q1 2010; net income increased 13% to $240 million. Operating income for the quarter 9.9% to $406 million.[28] Sales in Emerging Markets drove the company's growth during the quarter, accounting for 18% of total sales. This increase was correlated with a 12% increase in volume in Emerging Markets.[29] Sales for North American Consumer Products grew nearly 5% with a volume increase of 5.3%; the company's flagship ketchup reached its highest level of market share in the past two years and had 80% organic growth worldwide in the quarter.[30] In Europe, sales decreased 7.7% (but unfavorable exchange rates alone accounted for a 7.5% decrease) while volume remained essentially flat for the quarter. Ketchup sales were strong in the region[31]; Heinz is the leading brand in 10 of the top 12 markets and grew its market share in Russia by 40%.[32] In Asia/Pacific, sales increased almost 20%, volume increased by 6.9%, and sales grew significantly in India, Indonesia, and China. Favorable exchange rates increased sales by 9.7% and net pricing increased 2.4%. Sales in the Rest of the World decreased 12.6%, primarily as a result of unfavorable exchange rates (decreased revenues by 36.9%) and Venezuela's currency devaluation in Q3 2010.The US Foodservice division revenues decreased 2.3% since the American restaurant industry is still suffering in the nation's continued weak economy.[33]
Q2 2011
In Heinz's Q2 of FY 2011, revenues were $2.6 billion, a decrease of 1.2% from the previous year; net income for the quarter increased 8.6% to $251.4 million. Operating income for the quarter increased 2% to $416.8 million.[34] The decrease in total sales was the result of a 2.3% decrease caused by unfavorable foreign currency exchange rates, which more than offset volume and net pricing gains of 0.3% and 0.6% respectively. Emerging markets drove the company's gains during the quarter while Heinz's top 15 brands were also able to increase their volume and pricing.[35] Sales for North American Consumer products grew by 1.4% and volume increased 1.6%; the majority of growth was seen in Canada while net pricing decreased 1.4% as a result of ongoing promotions in both the US and Canada.[36] In Europe, currency exchange rates depressed revenues by 5.7% resulting in a 5.2% decrease for total sales. Volume for the quarter grew by 0.7% with positive results from the UK, Italy, and double-digit growth in Russia.[37] Sales in Asia/Pacific grew by 8% with a 2% growth in volume. China and India were the major engines of growth in the region and the region's operating margin increased 3%, even after the company increased its marketing costs by more than 10% during the quarter.[38] Decreased sales of frozen desserts and ongoing declines in restaurant traffic resulted in a nearly 3% decrease in sales for U.S. Foodservice. Volume fell 4.6%, however higher pricing for Heinz Ketchup increased revenues by 1.7%.[39] Sales for the Rest of the World segment decreased more than 19%. Devaluation of the Venezuelan currency in Q3 2010 depressed revenues by 33.4%; net pricing increases, as a result of inflation in Latin America, improved sales by 16.5%. Volume decreased 2.2% during the quarter as weaker sales for baby food and condiments in Latin America were not offset by gains in the Middle East.[40]
Segment Information
North American Consumer Products – includes operations in the United States in Canada, specifically the manufacturing, marketing, and sale of ketchup, condiments, sauces, pasta meals, entrees, and snacks to grocery stores. Other popular company owned brands include Classico, Jack Daniels, Bella Rosa, Weight Watchers, Bagel Bites, Boston Market, T.G.I. Friday’s, Lea & Perrins, and HP. Heinz owns the food and licensing rights for these various brands. Wal-Mart (WMT) is the company's largest customer, accounting for 11% of total sales in 2010.[41]
U.S. Foodservice – similar to the North American Consumer Products segment, but deals with commercial (bars, restaurants, travel/leisure places, vending machines, take-out) and non-commercial (schools, hospitals, prisons, military) food outlets and distributors.
Europe – includes the operations in Europe of products in all categories. Other popular company owned brands include: Orlando, Karvan Cevitam, Weight Watchers*, Brinta, Nipiol, and Plasmon.
Asia/Pacific – includes the operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, and Singapore of products in all categories. Other popular company owned brands include: Tim Piper, Wattie’s, ABC, Bruno, and Winna. In February 2010, the company disclosed plans to begin producing baby food at plants in China and Russia and to grow its child nutrition business in India. Baby food is the company's highest margin product, yet only accounts for 11% of revenue ($1.1 billion); the company is the world fifth largest company in total baby food. China's infant formula market is estimated to be worth $2-$3.7 billion and Heinz already has 3.1% market share (includes 48% share of prepared baby food market). A couple of competitors in China's baby food market may be potential takeover targets, especially as Heinz continues the worldwide trend of consolidation in the baby food market, following Nestle's acquisition of Gerber and Danone's purchase of Numico, both in 2007.[42] In June 2010, the company announced that it had signed an agreement to acquire Foodstar, a leading producer of soy sauce and bean curd products in China, from Transpac Industrial Holdings for $165 million. The deal is expected to increase Heinz's sales in China to over $300 million and support the company's drive to generate 25% of its revenues from emerging markets by 2016. China's retail soy sauce market is estimated to be $2 billion and growing at 7-8% annually.[43]
Rest of World – includes operations in Africa, India, and Latin America of products in all categories. Other popular company brands include: Wellington’s Complan, Glucon D, John West, and Banquete.
Products as Percentage of Total Revenue[44]
Product 2010 2009 2008
Ketchup and Sauces 42% 42% 41%
Meals and Snacks 41% 42% 44%
Infant/Nutrition 11% 11% 11%
Other 6% 4% 4%
Trends and Forces
Rising Commodities Prices are Forcing Heinz to Make Difficult Choices
The ability to obtain raw materials, which include agricultural commodities such as tomatoes, cucumbers, potatoes, flour, at favorable prices is an essential part of the company’s success. Higher commodities prices translate into higher production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing its profit margin. Many variables affect the availability of these commodities, such as government policy and regulation, crop shortages due to disease or pest infestation, adverse weather conditions, or other unforeseen circumstances. For example, in 2007, the price of corn reached a 10 year high in summer 2007, [45] which led to a subsequent rise in the cost of ketchup; Heinz ketchup is about 10% corn syrup. Although the commodities superspike of 2007-2008 has abated, Heinz still must contend with elevated input costs. In 2010, the price of Corn increased by nearly 50% leading some food companies such as General Mills (GIS) and Kellogg Company (K) to raise the price of their products; Heinz has not yet followed suit.[46]
The Rising Value of the Dollar Could Impact Heinz' Revenues
Changes in the strength of the dollar compared to foreign currency could impact the company by decreasing both costs and revenue in dollars. As the strength of the dollar increases, all sales made in foreign currency end up being worth less because the amount of US dollars the company gets per sale decreases. On the other hand the cost of foreign inputs (food and other commodities that go into Heinz products) sold in foreign currencies would decrease with the strengthening dollar. Since more than 60% of Heinz's sales are in international markets, the increasing value of the dollar could be a significant factor driving revenues down overseas.[47] Specifically the company primarily deals with the British Pound, Euro, Australian dollar, Canadian dollar, and the New Zealand dollar. Since 2007, when the dollar was at historically weak levels, the currency has rebounded to stronger levels against all major currencies.[48][3]
Consumer Sentiment Shifting Towards Healthier Foods
As consumers have become more health conscious, they have shown a growing demand for healthier alternatives across all food categories. Riding this wave of consumer sentiment, Heinz introduced a certified organic ketchup "Heinz Organic Ketchup" and "Heinz Light", which are low sugar ketchups, as well as a number of other healthy alternatives. The biggest competitor in the organic ketchup market is a private company which makes "Annie's Organic Ketchup".
Competitor Analysis
Because Heinz makes a wide range of products selling in different markets, the company faces competition from both big companies with a diversified line of products and smaller narrowly-focused companies.
In the market for canned goods and soups, Campbell Soup Company (CPB) and ConAgra Foods (CAG) are Heinz’ direct competitors.
In the Major Diversified Food industry, Heinz competes with Archer-Daniels-Midland Company (ADM) , Kraft Foods (KFT) , and Tyson Foods (TSN).
Heinz vs. Competitors in 2009 (figures in billions)[49]
Company Market Cap Total Revenue Gross Profit Operating Income Net Income
Heinz $15.68 $10.01 $3.57 $1.50 $0.92
Kraft Foods (KFT) $45.80 $40.39 $14.60 $5.52 $3.02
Archer-Daniels-Midland Company (ADM) $21.01 $61.68 $3.84 $2.37 $1.93
Tyson Foods (TSN) $5.84 $26.7 $1.20 $-0.22 $-0.55
Campbell Soup Company (CPB) $12.14 $7.68 $3.15 $1.35 $0.84
ConAgra Foods (CAG) $9.88 $12.08 $3.07 $1.08 $0.73
Perhaps best known for its ketchup, the H.J. Heinz Company manufactures thousands of food products in plants on six continents and markets these products in more than 200 countries and territories. Heinz ranked first in ketchup in the United States with a market share in excess of 50%. Moreover, its Ore-Ida label held more than 50% of the frozen-potato sector. Overall, the company claims to have 150 number one or number two brands worldwide.
H.J. Heinz Company (NYSE: HNZ) makes processed food products like condiments, sauces, and frozen foods. The company is best known for its namesake brand, Heinz ketchup, which has 60% market share in the US, 70% in Canada, and 78% in the U.K.; [1] the company sells about 650 million bottles of ketchup each year.[2] Heinz' other product lines include condiments and sauces such as salad dressing and soy sauce, frozen food, soups, beans and pasta meals, and infant food. The company's 15 top brands, including the flagship Heinz brand, make up over 70% of total sales.[3] In FY 2010, Heinz had sales of nearly $10.5 billion with a net income of $864.9 million.[4]
Heinz has spent a good part of the last decade restructuring its business, shedding less profitable brands and instead focusing more cash on marketing and product development.[5] The firm's renewed efficiency has been tested by rising commodities prices, which are driving up the costs of making and packaging food - high fructose corn syrup is a key ingredient in almost all Heinz products, and oil is refined to make plastic bottles for sauces and condiments. Due to these rising costs, Heinz introduced price increases across all its products in 2008.[6] However, the company also introduced in 2009 a new marketing campaign highlighting the natural and organic qualities of its foods, especially its ketchup brand.[7]
In June 2010, the company announced that it had signed an agreement to acquire Foodstar, a leading producer of soy sauce and bean curd products in China, from Transpac Industrial Holdings for $165 million. The deal is expected to increase Heinz's sales in China to over $300 million and support the company's drive to generate 25% of its revenues from emerging markets by 2016.[8]
Contents
1 Company Overview
1.1 Quarterly Earnings
1.2 Segment Information
2 Trends and Forces
2.1 Rising Commodities Prices are Forcing Heinz to Make Difficult Choices
2.2 The Rising Value of the Dollar Could Impact Heinz' Revenues
2.3 Consumer Sentiment Shifting Towards Healthier Foods
3 Competitor Analysis
4 Notes
Company Overview
[9]
Many of Heinz’s products are prepared from recipes developed in their own research laboratories and experimental kitchens. After the ingredients are selected, they are shipped off to one of the company’s 68 owned factories or 9 leased factories to be processed. Methods of processing include sterilization, homogenization, chilling, freezing, pickling, drying, freeze drying, baking, and extruding.
In order to obtain a portion of certain raw products such as tomatoes, cucumbers, potatoes, and some other fruits and vegetables, the company makes pre-season futures contracts with farmers, which provides some protection against volatile commodity prices; for example, if the price of tomatoes suddenly skyrockets, Heinz is able to still buy them at the low price agreed upon in the contract. Other products such as dairy, meat, sugar, sweeteners, spices, flour, and other fruits and vegetables are purchased on the open market [10].
The company's core 15 brands accounted for 70% of total sales. Emerging markets currently generate 15% of the company's total sales, however Heinz's goal is to have them generate 25% of earnings by 2016 and up to 40% in the long term.[11]
Quarterly Earnings
Q2 2010
In the second quarter of 2010, Heinz generated revenues of $2.67 billion, an increase of 2.5% from Q2 2009; net income for the quarter decreased by 16% to $231.4 million.[12] Overall volume decreased 4.1% as lower volumes for the US and UK offset increases in emerging markets; it was also counteracted by pricing increases of 4.6%.[13] In Asia/Pacific, sales increased 20.3% as a result of the company's acquisition of a fruit and juice business in Australia and a chilled dip business in New Zealand. Operating Income for the US Foodservice segment grew 15.1% as pricing and increased efficiency offset a volume decrease of 5.6%. A similar trend was seen for North American Consumer Products, the company's largest segment, with operating income increasing 4.9% in the face of a volume decrease of 8%.[14] The company is hoping to drive up volume with new marketing campaigns in nearly every region.[15] For the tenth consecutive year, Heinz ranked first for customer satisfaction among food manufacturers according to the University of Michigan’s American Customer Satisfaction Index.[16]
Q3 2010
In the third quarter of 2010, Heinz generated revenues of $2.68 billion, an increase of 12.7% from the previous year; net income decreased 5.7% to $228.5 million. The primary reason for the lower net income was a 41% increase on marketing in the quarter compared to last year. Operating income for the quarter was $436.5 million.[17] Overall volume increased 1.2%, with volume growth of 7% in emerging markets, 4% growth for US retail, and 9% growth in the UK. These positive numbers though are offset by a 3% drop in revenue, with a 7.3% decrease in volume, for US Foodservice, which continues to suffer as a result of decreased restaurant traffic.[18] The company's 15 top brands had a combined volume and pricing increase in revenue of 5.3%.[19] Sales in Asia increased by 41%, while sales in Europe and North America consumer products increased by 12% and 7% respectively.[20] Net pricing increased revenues by 1.8%, while acquisitions, namely the purchase of Australia's Golden Circle last year, increased revenues by 2.9%[21], and favorable foreign currency exchange rates boosted revenues by 6.9% compared to last year.[22]
Q4 2010
In the fourth quarter of 2010, Heinz generated revenues of $2.72 billion, an increase of 8.3% from the previous year, and net income increased 9.8% to $192 million. Operating income for the quarter was $345 million, an increase of 1.9% from Q4 2009.[23] A 63% increase in marketing expenses translated into a 1.6% increase in total volume and 4% organic sales growth for the company's top 15 brands. Most notably, sales in emerging markets increased 21.1% during the quarter.[24] The company expects Emerging Markets sales to account for 25% of the company's total sales by 2016 and eventually to comprise 35% to 40% in the long term.[25] Global ketchup sales increased 7.7% and brands in China (Long Fong frozen dim sum) and India (Complan and Glucon D nutritional beverages) experienced double digit growth.[26] Sales declined in both the UK and the US foodservice segment, reflecting the economic conditions and fewer restaurant patrons.[27]
Q1 2011
In the first quarter of FY 2011, Heinz generated revenues of $2.48 billion, an increase of 1.6% from Q1 2010; net income increased 13% to $240 million. Operating income for the quarter 9.9% to $406 million.[28] Sales in Emerging Markets drove the company's growth during the quarter, accounting for 18% of total sales. This increase was correlated with a 12% increase in volume in Emerging Markets.[29] Sales for North American Consumer Products grew nearly 5% with a volume increase of 5.3%; the company's flagship ketchup reached its highest level of market share in the past two years and had 80% organic growth worldwide in the quarter.[30] In Europe, sales decreased 7.7% (but unfavorable exchange rates alone accounted for a 7.5% decrease) while volume remained essentially flat for the quarter. Ketchup sales were strong in the region[31]; Heinz is the leading brand in 10 of the top 12 markets and grew its market share in Russia by 40%.[32] In Asia/Pacific, sales increased almost 20%, volume increased by 6.9%, and sales grew significantly in India, Indonesia, and China. Favorable exchange rates increased sales by 9.7% and net pricing increased 2.4%. Sales in the Rest of the World decreased 12.6%, primarily as a result of unfavorable exchange rates (decreased revenues by 36.9%) and Venezuela's currency devaluation in Q3 2010.The US Foodservice division revenues decreased 2.3% since the American restaurant industry is still suffering in the nation's continued weak economy.[33]
Q2 2011
In Heinz's Q2 of FY 2011, revenues were $2.6 billion, a decrease of 1.2% from the previous year; net income for the quarter increased 8.6% to $251.4 million. Operating income for the quarter increased 2% to $416.8 million.[34] The decrease in total sales was the result of a 2.3% decrease caused by unfavorable foreign currency exchange rates, which more than offset volume and net pricing gains of 0.3% and 0.6% respectively. Emerging markets drove the company's gains during the quarter while Heinz's top 15 brands were also able to increase their volume and pricing.[35] Sales for North American Consumer products grew by 1.4% and volume increased 1.6%; the majority of growth was seen in Canada while net pricing decreased 1.4% as a result of ongoing promotions in both the US and Canada.[36] In Europe, currency exchange rates depressed revenues by 5.7% resulting in a 5.2% decrease for total sales. Volume for the quarter grew by 0.7% with positive results from the UK, Italy, and double-digit growth in Russia.[37] Sales in Asia/Pacific grew by 8% with a 2% growth in volume. China and India were the major engines of growth in the region and the region's operating margin increased 3%, even after the company increased its marketing costs by more than 10% during the quarter.[38] Decreased sales of frozen desserts and ongoing declines in restaurant traffic resulted in a nearly 3% decrease in sales for U.S. Foodservice. Volume fell 4.6%, however higher pricing for Heinz Ketchup increased revenues by 1.7%.[39] Sales for the Rest of the World segment decreased more than 19%. Devaluation of the Venezuelan currency in Q3 2010 depressed revenues by 33.4%; net pricing increases, as a result of inflation in Latin America, improved sales by 16.5%. Volume decreased 2.2% during the quarter as weaker sales for baby food and condiments in Latin America were not offset by gains in the Middle East.[40]
Segment Information
North American Consumer Products – includes operations in the United States in Canada, specifically the manufacturing, marketing, and sale of ketchup, condiments, sauces, pasta meals, entrees, and snacks to grocery stores. Other popular company owned brands include Classico, Jack Daniels, Bella Rosa, Weight Watchers, Bagel Bites, Boston Market, T.G.I. Friday’s, Lea & Perrins, and HP. Heinz owns the food and licensing rights for these various brands. Wal-Mart (WMT) is the company's largest customer, accounting for 11% of total sales in 2010.[41]
U.S. Foodservice – similar to the North American Consumer Products segment, but deals with commercial (bars, restaurants, travel/leisure places, vending machines, take-out) and non-commercial (schools, hospitals, prisons, military) food outlets and distributors.
Europe – includes the operations in Europe of products in all categories. Other popular company owned brands include: Orlando, Karvan Cevitam, Weight Watchers*, Brinta, Nipiol, and Plasmon.
Asia/Pacific – includes the operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, and Singapore of products in all categories. Other popular company owned brands include: Tim Piper, Wattie’s, ABC, Bruno, and Winna. In February 2010, the company disclosed plans to begin producing baby food at plants in China and Russia and to grow its child nutrition business in India. Baby food is the company's highest margin product, yet only accounts for 11% of revenue ($1.1 billion); the company is the world fifth largest company in total baby food. China's infant formula market is estimated to be worth $2-$3.7 billion and Heinz already has 3.1% market share (includes 48% share of prepared baby food market). A couple of competitors in China's baby food market may be potential takeover targets, especially as Heinz continues the worldwide trend of consolidation in the baby food market, following Nestle's acquisition of Gerber and Danone's purchase of Numico, both in 2007.[42] In June 2010, the company announced that it had signed an agreement to acquire Foodstar, a leading producer of soy sauce and bean curd products in China, from Transpac Industrial Holdings for $165 million. The deal is expected to increase Heinz's sales in China to over $300 million and support the company's drive to generate 25% of its revenues from emerging markets by 2016. China's retail soy sauce market is estimated to be $2 billion and growing at 7-8% annually.[43]
Rest of World – includes operations in Africa, India, and Latin America of products in all categories. Other popular company brands include: Wellington’s Complan, Glucon D, John West, and Banquete.
Products as Percentage of Total Revenue[44]
Product 2010 2009 2008
Ketchup and Sauces 42% 42% 41%
Meals and Snacks 41% 42% 44%
Infant/Nutrition 11% 11% 11%
Other 6% 4% 4%
Trends and Forces
Rising Commodities Prices are Forcing Heinz to Make Difficult Choices
The ability to obtain raw materials, which include agricultural commodities such as tomatoes, cucumbers, potatoes, flour, at favorable prices is an essential part of the company’s success. Higher commodities prices translate into higher production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing its profit margin. Many variables affect the availability of these commodities, such as government policy and regulation, crop shortages due to disease or pest infestation, adverse weather conditions, or other unforeseen circumstances. For example, in 2007, the price of corn reached a 10 year high in summer 2007, [45] which led to a subsequent rise in the cost of ketchup; Heinz ketchup is about 10% corn syrup. Although the commodities superspike of 2007-2008 has abated, Heinz still must contend with elevated input costs. In 2010, the price of Corn increased by nearly 50% leading some food companies such as General Mills (GIS) and Kellogg Company (K) to raise the price of their products; Heinz has not yet followed suit.[46]
The Rising Value of the Dollar Could Impact Heinz' Revenues
Changes in the strength of the dollar compared to foreign currency could impact the company by decreasing both costs and revenue in dollars. As the strength of the dollar increases, all sales made in foreign currency end up being worth less because the amount of US dollars the company gets per sale decreases. On the other hand the cost of foreign inputs (food and other commodities that go into Heinz products) sold in foreign currencies would decrease with the strengthening dollar. Since more than 60% of Heinz's sales are in international markets, the increasing value of the dollar could be a significant factor driving revenues down overseas.[47] Specifically the company primarily deals with the British Pound, Euro, Australian dollar, Canadian dollar, and the New Zealand dollar. Since 2007, when the dollar was at historically weak levels, the currency has rebounded to stronger levels against all major currencies.[48][3]
Consumer Sentiment Shifting Towards Healthier Foods
As consumers have become more health conscious, they have shown a growing demand for healthier alternatives across all food categories. Riding this wave of consumer sentiment, Heinz introduced a certified organic ketchup "Heinz Organic Ketchup" and "Heinz Light", which are low sugar ketchups, as well as a number of other healthy alternatives. The biggest competitor in the organic ketchup market is a private company which makes "Annie's Organic Ketchup".
Competitor Analysis
Because Heinz makes a wide range of products selling in different markets, the company faces competition from both big companies with a diversified line of products and smaller narrowly-focused companies.
In the market for canned goods and soups, Campbell Soup Company (CPB) and ConAgra Foods (CAG) are Heinz’ direct competitors.
In the Major Diversified Food industry, Heinz competes with Archer-Daniels-Midland Company (ADM) , Kraft Foods (KFT) , and Tyson Foods (TSN).
Heinz vs. Competitors in 2009 (figures in billions)[49]
Company Market Cap Total Revenue Gross Profit Operating Income Net Income
Heinz $15.68 $10.01 $3.57 $1.50 $0.92
Kraft Foods (KFT) $45.80 $40.39 $14.60 $5.52 $3.02
Archer-Daniels-Midland Company (ADM) $21.01 $61.68 $3.84 $2.37 $1.93
Tyson Foods (TSN) $5.84 $26.7 $1.20 $-0.22 $-0.55
Campbell Soup Company (CPB) $12.14 $7.68 $3.15 $1.35 $0.84
ConAgra Foods (CAG) $9.88 $12.08 $3.07 $1.08 $0.73