Q. What regions or countries does the HJ Heinz Company consider to be the most crucial for future growth and expansion, and why?
A. Emerging markets are the new growth frontier for Heinz, where we are focused on accelerating the growth of our brands and businesses in five key markets – Brazil, China, India, Indonesia and Russia – [where there are] more than 3 billion consumers. Emerging markets are attractive because their economies are growing at a faster rate than developed markets, resulting in rising household incomes, millions of new middle-class consumers, increasing urbanisation and the expansion of global retailers and quick-serve restaurant chains.
Heinz is already well positioned in emerging markets and we are aggressively evaluating future growth opportunities in new and existing markets, especially in Asia and Latin America, with a focus on our core category of ketchup, condiments and sauces. In emerging markets [the company] offers Heinz products and excellent local brands that we have acquired under our 'buy-and-build' strategy. Examples include Quero tomato and pasta sauces in Brazil, Master soy sauce in China, Complan nutritional beverages in India and ABC soy and chili sauces in Indonesia.
China, which has already surpassed the US as the world’s biggest market for groceries and is expected to become the largest global economy by 2030, is particularly important. Our acquisition of Foodstar [a manufacturer of soy sauces and fermented bean curd] and Foodstar's Master brand in 2010 gave Heinz a solid growth platform in China’s growing $4bn-plus soy sauce market. Foodstar is exceeding our expectations as we continue to drive marketing and distribution.
Overall, emerging market sales are approaching one-quarter of Heinz total sales versus single digits less than a decade ago. I believe [Heinz] has only scratched the surface of our growth potential in these markets, especially in the ketchup, condiments and sauces [market].
Q. How does Heinz assess future sites for its operations and what factors are the most important during the site selection process?
A. We look at many factors but [Heinz's] success in emerging markets starts with identifying growing businesses: leading local brands [with] strong infrastructure, good manufacturing and distribution capabilities, and strong local management teams.
Our priority is highly populated countries with growing wealth and economies. For example, Heinz acquired the manufacturer of the Quero brand two years ago. This was our first major business in Brazil, the world’s fifth most populous country. This acquisition gave us a great local brand, a skilled local workforce and an automated factory in central Brazil that we are also utilising to manufacture Heinz ketchup and Heinz tomato paste for South American consumers.
Q. The 'doypack' [a sealed plastic bag that is designed to stand upright] is one example of emerging market innovation that Heinz has taken to its US market. Are there any other examples?
A. The 'doypack', or pouch, is the most significant example of reverse innovation flowing from our emerging markets to developed markets. Our businesses in all markets are implementing pouch packaging as it meets a growing consumer desire for value and convenience. The doypack helped Heinz ketchup achieve the number one market share in Russia, the world’s third largest ketchup market, and we continue to expand our use of pouch packaging for products ranging from ketchup in the US to baby food in Australia. I am also intrigued by Tetra packaging, which our Brazilian business is using successfully.
Heinz is leveraging other learnings from our experience in emerging markets, including the importance of affordability through price tiering – offering products in different packaging and sizes to make them affordable for consumers across the economic spectrum. [Heinz's] ABC brand in Indonesia sells small packets of soy sauce for about $0.03 apiece for less affluent consumers and much larger sizes for larger households or wealthier consumers.
We have learned from our emerging market experiences that we can profitably address all segments of the population by not pricing ourselves out of the market. We are offering the 30-gram Heinz ketchup pouch in the US at a suggested retail price of $0.99, which appeals to small households and consumers that are sticking to a budget in this economy. The pouch is expanding in alternate channels such as drug and dollar stores as we continue to offer larger sizes as well.
Q. What is Heinz's expansion strategy in emerging markets, mergers and acquisitions or greenfield investments?
A. Our strategy is to grow emerging market businesses organically and through acquisitions such as Quero in Brazil and Foodstar in China. Under our proven buy-and-build strategy, Heinz typically identifies and evaluates strong local businesses with sales in the range of $50m to $250m. We look for sound commercial propositions, good infrastructure and unique attributes that we can grow into profitable $500m to $1bn businesses over time. We are currently looking at a number of buy-and-build opportunities, especially in Asia, and our goal is to complete several deals in the near future.
In emerging markets, where our businesses are growing rapidly, Heinz is investing to expand sales, marketing and capacity. In China, we have completed the construction of a new factory in Shanghai that we had acquired with Foodstar to increase our soy sauce manufacturing capacity. [We are also] building an additional baby food factory to give us increased capacity. I expect our sales in China to grow to about $400m in the current fiscal year from about $175m before the acquisition of Foodstar. I am still bullish on China, which has untapped potential [in the] ketchup, condiments and sauces segment.
[Heinz's] growth strategy has delivered excellent results. Our sales in emerging markets have more than doubled to $2.4bn over the past five to six years. When I became CEO in 1998, our sales in emerging markets were about $400m. The next year I made the recommendation to our board to enter Indonesia through a transaction that would give Heinz the ABC brand. I believed then, as I do now, that Asia and its key markets represent the future of the packaged foods industry. Today, five of our top 15 brands are from emerging markets, including ABC, and our iconic Heinz brand is a global powerhouse.
Q. What segments of current operations does Heinz see as most promising in the medium term?
A. Globally, I see the ketchup, condiments and sauces segment as the company’s biggest growth opportunity over the next five years, especially in emerging markets, followed by prepared baby food, another fast-growing core segment for us. We expect to focus the lion’s share of our investments on these core categories and the investments will be prioritised based on the opportunity and the potential return.
Heinz continues to grow [its] Ketchup [market] globally, proving that our flagship product is far from mature 137 years after our founder introduced Heinz ketchup in 1876. Heinz is winning where we choose to compete in the ketchup, condiments and sauces market and we have only scratched the surface of this growing $110bn global category. Given our strong brands, market leadership and global scale, Heinz is well positioned in a world where demand for ketchup, condiments and sauces is increasing. In short, this category not only represents the storied past of this great company, but its future as well.
Beyond ketchup, condiments and sauces, our profitable infant and nutrition business grew to more than $1.2bn in the 2012 fiscal year, led by good results in China, India and Latin America. Heinz is the third largest player in the world in wet and dry infant foods and more than 40% of our infant and nutrition sales now come from emerging markets.
Geographically, I expect our emerging markets businesses to continue to deliver substantially higher organic sales growth than developed markets, which remain very important to Heinz and still generate the majority of our profit and cash. Overall, Heinz has a balanced, geographically advantaged portfolio, with two-thirds of our sales outside the US versus 50% a decade ago.
Q. In the past few years, Heinz has expanded exponentially in the Netherlands. Why there?
A. Heinz was first attracted to the Netherlands by several local brands that we acquired more than a decade ago, including [food manufacturer] Honig and [its product line] De Ruijter. Since then, we have increasingly leveraged the country’s proximity to key European markets. In 2012, Heinz created a European supply chain hub in Zeist to centralise functions, manage inventory and drive productivity. It has increased efficiency by bringing together 130 supply chain professionals who were scattered across Europe. Heinz is nearing completion of its new European Innovation Centre in Nijmegen, which will be [Heinz's] largest research and development centre outside the US when it opens officially in April 2013.
Q. A big chunk of operations of Heinz are still in Pittsburgh, but not its manufacturing facilities. Why?
A. Heinz is proud to call Pittsburgh our home. Our company continues to play an important role in the economic landscape of the region with more than 1000 employees at Heinz world headquarters, Heinz North America headquarters and our Innovation Centre. Our Pittsburgh factory was divested in 2002 as part of a transformative transaction that spun off to Del Monteour's North American pet food business and Heinz's US tuna, baby food and private label soups businesses. Heinz remains strongly committed to the city where our founder was born and started this great business in 1869.