H.J. Heinz Co.

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H.J. Heinz Co.

founded: 1869

Contact Information:

headquarters: 600 grant st.
pittsburgh, pa 15219 phone: (412)456-5700 fax: (412)456-6128

OVERVIEW

H.J. Heinz Company is one of the world's leading producers of processed food products and nutritional services. The company's products include tuna, baby foods, pet foods, beans, ketchup and condiments, dietary foods, frozen foods, and soup. Anchored by Heinz Ketchup, which is used in 4 out of 5 American restaurants and accounts for 47 percent of its market, Heinz brands such as Star-Kist tuna, Ore-Ida frozen potatoes, 9-Lives cat food, and Skippy peanut butter are among the best known in the United States. In 1997, the company produced more than 4,000 varieties of products that were distributed in more than 200 countries and territories around the world. The company's two strongest global brands are Heinz and Weight Watchers.

Heinz's food service division, which sells products to eating establishments and hotels, was the company's leading division as of 1998, producing supplies of ketchup and single-serving packages of condiments, jellies, and syrups. Heinz was also the leading at-home brand of ketchup, accounting for close to 50 percent of the U.S. market in 1997 and close to 19 percent of Heinz's total sales. Heinz also controlled 87 percent of the private label soup market and had leading positions in U.S. markets for frozen potatoes (Ore-Ida brand), tuna (Star-Kist), pet foods (9-Lives and Ken-L Ration); and weight control products (Weight Watchers). Heinz is also a major player in the international baby food market—though less so in North America where it markets infant food under the Heinz and Earth's Best brand names. More than 85 percent of its infant foods are sold outside the United States.

Heinz has a major presence in international markets. Operations outside of North America accounted for more than 40 percent of the company's worldwide sales in 1997. Heinz's best known overseas brands in the mid- to late 1990s were Orlando, Wattie's, Olivine, Farley's, Plasmon, and Guloso.

Although the company's sales continued to climb through the 1990s and Heinz continued to provide a decent return to its investors, its growth was less than spectacular. Intensive competition, a rising U.S. dollar, and decreased advertising were all seen as contributing to Heinz's sluggish growth. In response, the company underwent the most massive restructuring in its history, unloading weaker operations and cutting its work force in an attempt to boost profits. The replacement of long-time CEO Anthony O'Reilly in 1998 by marketing whiz William R. Johnson was expected to rejuvenate the company and prompted a surge in the value of the company's stock.

COMPANY FINANCES

After posting sales growth of well over 10 percent a year in fiscal 1995 and 1996, Heinz's total revenue for fiscal 1997 rose only 2.7 percent, or $244.7 million, to $9.36 billion from $9.11 billion in fiscal 1996. Sales in fiscal 1998, which ended April 30, 1998, totaled $9.21 billion, down 1.6 percent from fiscal 1997. Sales in fiscal 1994 and 1995 totaled $7.05 billion and $8.09 billion, respectively. Net income in fiscal 1998 totaled $801.6 million, up more than 165 percent from $302.0 million in fiscal 1997. Fiscal 1996 net earnings totaled $659.0 million, compared with $591.0 million in fiscal 1995. For fiscal 1994, Heinz posted net income of $603.0 million.

ANALYSTS' OPINIONS

As of 1996, opinions on H.J. Heinz by some market analysts were mixed. A report by Bear, Stearns & Company in December 1996 stated that Heinz had initiated price increases in several product categories but that the strategy had led to a drop in volume sales. "At this point, we stick to our view that the company's aggressive pricing strategy may continue to cause volume deterioration and market share losses. Furthermore, we believe that the company will likely increase promotional spending during the second half of fiscal 1997 in an attempt to stimulate volume and regain lost share." As a result, Bear Stearns expected Heinz profits to be mediocre and said that its share prices might fall.

While noting that Heinz might have trouble reaching its profit goal in 1997, a report by Dean Witter Reynolds in December 1996 said that the company's six operating segments, with the exception of the Weight Watchers business, were performing "reasonably well" and were continuing to expand their international presence.

One strategy Heinz was pursuing in the mid- to late 1990s was to increase profitability by raising product prices and reducing marketing costs (primarily by reducing advertising support for its brands). This strategy received mixed reviews among industry observers. While increasing short-term profits, some analysts stated that it had led to volume declines for Heinz products in certain categories. Also, in an article in Advertising Age, Rance Crain criticized Heinz, saying that it had abandoned the brand advertising that made Star-Kist tuna and 9-Lives cat food famous. "These brands have been reduced to commodities," said Crain. Companies that advertise well boost the value of their products and services, he stated.

The resignation in April 1998 of the man responsible for these tight-fisted measures, CEO Anthony O'Reilly, was welcomed by Wall Street, which immediately following the announcement in December 1997 pushed the company's stock to a 52-week high. Although analysts such as Nomi Ghez of Goldman Sachs in New York were quick to point out that "Tony O'Reilly has done a great job in building the company," most looked forward to seeing what O'Reilly's replacement, William Johnson, would do.

O'Reilly had also been criticized for his tendency to fill the top positions at Heinz with cronies and yes-men. Here, too, Johnson was expected to make changes. "He'll put people in positions and expect them to perform," said Joseph Jordan, an analyst with PNC Institutional Investment Services, in the Pittsburgh Business Times. "Their salaries and incentives will also be at risk if their performance doesn't come through."

HISTORY

In 1856, 12-year-old Henry John Heinz began peddling produce from his family's garden in Sharpsburg, Pennsylvania, to friends and neighbors. In 1869, the 25-year-old entrepreneur formed a partnership with his friend, L.C. Noble, to bottle horseradish in clear glass. Unfortunately, the business went bankrupt in 1875. The next year, however, with the help of his brother John and his cousin Frederick, Heinz created F&J Heinz, a company for which he developed tomato ketchup (1876) and sweet pickles (1880). Henry Heinz gained financial control of the firm in 1888 and changed the name to the H.J. Heinz Company.

Heinz developed a reputation as an advertising and marketing genius. He got the idea for the famous "57 Varieties" slogan in 1896, while riding in a New York streetcar. After seeing a sign for "21 styles of shoes," Heinz conceived the idea for the "57 varieties" trademark, even though his company already had many more products.

Henry Heinz died in 1919, and the business depended on its traditional product lines for the next 50 years, as his son and later his grandson ran the company. In the late 1950s the company began acquiring other food processing firms. In 1958 it purchased a major Dutch food processor, followed by Star-Kist in 1963 (tuna and pet food), Ore-Ida in 1965 (potatoes), and Weight-Watchers in 1978.

In 1979 Anthony J.F. O'Reilly became CEO of Heinz, beginning a period of sustained growth for the company. When Henry Heinz II died in 1987, O'Reilly assumed the additional title of chairman. O'Reilly, with his flamboyant personality, assumed a very public role and became clearly identified with the H.J. Heinz Company. However, in 1997 O'Reilly appeared to clear the way for eventually naming his successor when he said he planned to turn his CEO title over to company president William R. Johnson once the company implemented a restructuring program. By the end of the year, that restructuring program (called "Project Millennia") was well under way and O'Reilly announced his resignation, formally handing over the reins to Johnson in April 1998. Industry-watchers looked forward to the change, expecting Johnson to revive Heinz's marketing operations and institute other beneficial changes.

FAST FACTS: About H.J. Heinz Co.

Ownership: H.J. Heinz Company is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: HNZ

Officers: Anthony J.F. O'Reilly, Chmn., 61, $3,039,015; William R. Johnson, Pres. & CEO, 49, $2,139,820; Paul F. Renne, Exec. VP & CFO, 55; David R. Williams, Exec. VP, 55, $1,101,038

Employees: 40,500 (1998)

Principal Subsidiary Companies: H.J. Heinz Company has a number of operating units focused on six major categories: food service; infant foods; ketchup and condiments; pet food; tuna; and weight control products.

Chief Competitors: Heinz competes with numerous large and small companies around the world. Some of its leading competitors include: Campbell Soup Company; Colgate-Palmolive Company; Del Monte; General Mills; Hormel; Iams; Jenny Craig; Kellogg; RJR Nabisco; Philip Morris Companies; The Quaker Oats Company; Ralcorp; and Sara Lee Corporation.

During the 1990s, Heinz continued to make changes to its core operations. Heinz purchased the pet food division of Quaker Oats Company in 1995 for $725 million. The company also was able to dramatically improve its position in the tuna business, moving from a market share of 30 percent in 1992 to 46 percent in 1997. The growth was produced by an aggressive pricing strategy made possible by extensive cost-cutting on the manufacturing side.

STRATEGY

In the 1990s, H.J. Heinz Company faced challenges such as the changing nature of the retail market and the global economy. Despite these challenges, Heinz's chairman Anthony O'Reilly said in a 1995 article that two guiding principles allowed the company to remain a leader in its product categories: niche leadership and "constant rebirth." By leading in specific product "niches," Heinz was able to maintain its dominant share of the condiments, tuna, weight-loss, and frozen potatoes markets, according to O'Reilly.

"Constant rebirth," according to O'Reilly, involved the continual shifting of management to enable the company to function in a changing environment. Constant re-birth is also made possible through renewal of technology, procurement, pricing, and oversight, he said.

In 1997, Heinz pursued another strategy to improve its profits and make its stock more appealing to investors. In March 1997, Heinz management announced a massive restructuring and reorganization program called "Project Millennia." The plan called for exiting nonstrategic businesses while bolstering core ones, closing or selling 25 of 111 manufacturing plants, cutting 2,500 jobs (from a work force of 43,000), and taking a charge against earnings of $650 million. The plan was expected to generate about $120 million in savings in 1998 and up to $200 million a year once it was fully implemented.

According to the Wall Street Journal, Heinz was among the last large food companies to use restructuring to increase earnings. Sales in the food industry were growing at only 1 percent a year in the mid- to late 1990s, and low inflation made price increases on food products hard to implement, the report noted.

Despite the downsizing, Heinz had ambitious financial goals for the late 1990s. Heinz expected sales of about $9.5 billion in fiscal 1997 (and came close with actual sales of $9.3 billion) and planned to increase annual sales to $14 or $15 billion within five years while maintaining earnings growth of 10 to 12 percent per year.

O'Reilly's theme of "constant rebirth" was most forcefully illustrated in 1998 when he handed over stew-ardship of the company to a dynamic young executive named William Johnson who had built a name for himself in the company's pet food division. Johnson's emphasis on marketing and performance was expected to dramatically change the way Heinz presented itself to the world. Indeed, one of Johnson's first moves was to take the money the company had saved through its restructuring efforts and funnel it into advertising and marketing. Though this was exactly what Project Millennia called for when announced in March 1997, industry-watchers saw it as a bold move, indicative of Johnson's new approach.

INFLUENCES

The 1980s and 1990s were the decades of Anthony O'Reilly, a formidable and flamboyant leader whose impact on Heinz was unmistakable. When O'Reilly took over Heinz in 1979, he produced immediate returns of nearly 30 percent and continued to produce an average annual return of 22 percent over the next two decades. But as Heinz floundered in the mid-1990s, stockholders and analysts began to blame O'Reilly and the pressure mounted for him to step down as CEO. He did so in 1998, leaving behind a company valued at nearly $20 billion. It had been worth less than $1 billion when he took control in 1979.

CHRONOLOGY: Key Dates for H.J. Heinz Co.

1869:: 25-year-old, Henry Heinz forms a partnership with L.C. Noble to bottle horseradish
1875:: Horseradish business goes bankrupt
1876:: F & J Heinz Company is started with the help of Henry's brother and cousin; tomato ketchup is its first product
1888:: Henry Heinz gains financial control of the firm and changes its name to the H.J. Heinz Company
1919:: Henry Heinz dies and his son takes over
1958:: The company begins acquiring other food processing firms with its purchase of a major Dutch food processor
1979:: Anthony J.F. O'Reilly becomes CEO of Heinz
1987:: Henry Heinz II dies and O'Reilly assumes title of chairman
1998:: O'Reilly resigns and William R. Johnson takes over as chairman

Though long a producer of infant food, it wasn't until 1994, when it acquired U.K. infant food manufacturer Farley's, that Heinz ran into the infant food marketing controversy. Farley's operations were cited in a 1994 report by the International Baby Food Action Network (IBFAN) for inadequate labeling and improper promotional practices in violation of infant formula marketing guidelines set up by the World Health Organization and UNICEF.

CURRENT TRENDS

One trend in which Heinz was apparently not participating in during the mid-1990s was the development of "low-flatulence" beans. Colin Leakey of Girton, England, the son of anthropologist Louis Leakey, succeeded in developing a bean that would not induce flatulence in people who consumed it. However, as of 1997 the bean had not yet caught on, according to press reports.

"While we are interested to understand more about this development," Steve Marinker, a spokesman for the British unit of H.J. Heinz Company, was quoted as saying, "the reality is that beans as a high-fiber product have an effect on the digestive systems that is no greater or no less than any other high-fiber product." As a major producer of baked beans, H.J. Heinz would be a natural candidate for processing and marketing the low-flatulence beans.

PRODUCTS

One new product introduced by Heinz in 1997 wasn't really a new product at all, but rather a creatively repackaged one. In 1996 Heinz sponsored a national contest for children, asking them to create new labels for some of its ketchup bottles.

To publicize the contest, Heinz placed ads in magazines with the headline: "Hey kids, wanna be famous?" and sent posters to school art classes. About 60,000 children sent entries to Heinz. Three labels designed by children were chosen.

The contest started in June 1996 and was accompanied by a $450,000 grant from Heinz to the National Endowment for the Arts for children's art programs. One reason behind the Heinz contest was the importance of children as consumers of the company's products. Children between 4 and 12 spend more than $17 billion per year on their own and directly influence another $172 billion that other people spend, according to one estimate.

CORPORATE CITIZENSHIP

Heinz has contributed to many different charitable and community activities over the years. In 1996, the H.J. Heinz Company Foundation donated $5.6 million to about 900 organizations and announced that it would donate $450,000 to the National Endowment for the Arts (NEA) over a three-year period. The money was to be used specifically to save children's art programs and was the largest single donation the NEA had received since its budget was slashed by the Republican Congress. Meanwhile, Heinz U.S.A. raised money for children's hospitals through its baby food label saving program.

On the environmental front, Heinz has adopted a worldwide policy of refusing to buy tuna caught using gill nets or drift nets or "through the intentional encirclement of dolphin by purse seine nets."

GLOBAL PRESENCE

Heinz was a pioneer in the globalization of its business, exporting products to every continent before 1900. By 1905 Heinz was manufacturing food products in the United Kingdom. In 1996 Heinz generated more than 40 percent of its sales outside the United States. In that same year, Heinz controlled about 90 percent of the jarred baby food business in Australia, Canada, Italy, and New Zealand, and its baked beans were the market leader in the United Kingdom.

Heinz focused more intently on international expansion in the 1980s and 1990s. A key 1980s acquisition was Marie Elisabeth Produtos Alimentares S.A. of Portugal. Heinz also established international subsidiaries, including units in Botswana and Belgium. In 1992 Heinz purchased Wattie's Limited, New Zealand's largest food processing company.

In late 1997 Heinz continued to build its overseas network, acquiring John West Foods Limited in Europe, a majority interest in Pudliszki S.A., one of Poland's top food processors, as well as some other small companies.