H.J. Heinz Company - Case Study Example

H.J. Heinz Company: A Case Study I. Company Background H.J. Heinz Company (Heinz) traces its roots in 1869 in Sharpsburg, Pennsylvania, USA. Its founder Henry Heinz began is business by selling horseradish which was delivered to grocers using a horse-drawn wagon. In 1972, Heinz had reached the billion-dollar mark in sales and became a leader in nutrition and wellness revolution. Over time, the company’s product line was lengthened and broadened due to product development and acquisitions. Two core businesses comprised the entire product line of the company: meal enhancers which include ketchup, condiments, and sauces; and meal and snacks comprised of frozen and shelf stable meals and snacks, food service frozen products, and infant feeding. The trend of acquiring companies began in the 1958 with the acquisition of a food processor in Netherlands. The merger with Del Monte Foods, Inc. in 2002 is regarded by the company as a “historic transaction” which is “designed to make Heinz a more focused company able to invest more effectively on its strongest brands.” It should be noted that through this development, Heinz’s slower selling products were integrated with the operation of Del Monte Foods II. Current Performance The performance of Heinz after the merger with Del Monte can be analyzed by the looking at situation of its major product lines, attractiveness in its major markets, and financial accounts. Looking at the scenario presented in the case, one can deduce that Heinz two core businesses experiences hold strong positions in their respective markets. Heinz, being known for ketchup, its global flagship brand holds more than 50% of the total sales in the United States and accounts for 34% of the wider global market. Heinz is also currently establishing a growing presence on the grill and in the kitchen. On the meal and snacks business, the company has gained a strong foothold in its food service and frozen products. In terms of quantitative analysis, Heinz is posting slow growth in its product segments. It should be noted that sales growth in the fiscal year 2003 was 8.2% while that of 2004 is only a meager 2.2%. Sales somehow rebounded during October 2004 with 5.4% mount yet it never managed to return to the 2002-2003 level. The cost-cutting initiative of Heinz never seemed to display a long-term effect as revealed by its gross margin. In fact, gross margin’s increase or decrease is traced into other factors like pricing decisions and mounting product costs. Currently, the major market of Heinz is Europe which accounts for 39% of its total revenue and almost half (42.6%) of its profits. Lagging behind are the North American Consumer products (24.5% of sales and 31.5 of profits), Asia Pacific (15% of sales and 9.7% in profits), and other operating entities which includes Africa, India, Latin America, Middle East and other (4.5% of sales and 2% of profits). From these facts, we can see that Heinz is highly profitable in Europe and North America as the percentage of profits generated from these operations are higher than their share in total revenue. This also implies the relatively higher efficiency of these business units in managing costs. Asia Pacific and other operating entities report the contrary. III. SWOT Analysis SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is one of the most widely utilized business models in assessing the current position of a business entity. This analysis is an integration of the results of other tools like the PESTEL analysis, industry analysis, and internal analysis. Strengths. Heinz undoubtedly holds a large share and a major player in the global market. This can be attributed to the company’s strengths which are identified as the high quality of its products, strong brand equity and pursuit for product improvement. Customers derived value from Heinz’s wide range of high quality products. A good indicator of this is its strong foothold in the food service and frozen products as well as currently developing a strong presence in the grill and kitchen category. The popularity of Heinz as a provider of staples in the households around the globe is a potent indicator of its strong brand equity. As stated above, its flagship brand, ketchup, holds more than one third of the world market. Among the popular brands of Heinz are: Wattles which is the strongest brand in New Zealand; Ore-Ida potatoes; Boston Market Homestyle Meals; and Weight Watchers. Another strength is Heinz’s dedication on product improvement and innovation which gains positive response from customers. An illustration of this is the launching of the E-Z Squirt ketchup bottle which the company attributes to the 5% increase of market share in the United Kingdom. Weaknesses. One of the most apparent weaknesses of Heinz is its inability to implement an efficient cost management in order to boost its profitability. As discussed in the analysis of its financial status, the company fails to boost its gross margin amidst its cost cutting efforts. The sluggish growth in revenue is a negative indicator of its performance. Heinz is highly leveraged as it uses debt to finance its operations, especially its numerous acquisitions. The company’s debt to equity ratio of 3.63 is twice the industry average and implies a 78-22 resource structure in favor of creditors. Financing the company’s operations with debt indicates a Heinz higher exposure to risk. It should be noted that compared to equity, debt is a riskier financing alternative. Stakeholders also express wariness in the current state of Heinz. The S&P downgraded the company’s short and long term debt ratings. Also, investors are putting lower valuation in the Heinz’s stocks which is reflected in the declining price of the firm’s stock. Opportunities. A lot of external factors are seen to present opportunities for Heinz. The US food service industry is expected to experience rapid growth as the country’s economy improve and US families increase the amount their consumption for food consumed outside the home. This will also translate to the rise of fast food chains which will trigger the demand for products especially single-serving packet and bulk ketchup and condiment such as barbecue sauce, soy sauce, steak sauce, and others. As Heinz is the largest prepared food supplier in the region, it is expected that it will be most affected with this development. Strong growth in global food service is also forecasted by industry analyst. This growth is seen to be more spelled out in Europe and Asia Pacific which are major markets of Heinz. Heinz’s frozen and prepared products are also expected to kick off in the United States due to company’s efforts in quality improvement and convenient packaging. Pursuing innovative ideas in promoting product quality and convenience are seen to become a trend in this segment as customers positively respond to these. Threats. As with any business entity, Heinz is also beset by external threats. Among the threats faced by Heinz are the more intense rivalry among competitors, cost pressures, and new dietary guidelines. Since the beginning of 2001, the processed food industry experienced aggressive consolidation among its players. This eliminated incapable firms in the industry, thus leaving the strongest competitors which aggressively battles for market share. The rivalry is further intensified by the maturity of the market which implies the declining growth in the overall demand. Thus, competition is usually focused on cannibalizing market share through price wars. Heinz, among with other players, is concerned with cost pressures in the processed food industry. Mounting costs in commodity, pension, and fuel squeeze company’s margin as well as make customers more price conscious. In addition, input prices are strongly tied to economic factors like export demand and weather conditions. Companies are expected to implement tighter cost cutting measures to efficiently manage cost and offer more attractively price products. Heinz shelf-stable product segment is currently threatened by a new dietary guideline to be put in place by the Department of Agriculture. This cautions consumers about the negative effects of trans fats which are commonly found in the aforementioned products. IV. Strategic Posture The strategic posture of Heinz can be best ascertained by looking at its decision in the four areas namely, primary competitive strategy, competitive role, priority strategic initiative, and vertical coordination strategy. Primary Competitive Strategy. Heinz banks on quality/feature advantage as its primary competitive strategy. As discussed above, Heinz becomes competitive in the global market because it offers superior quality products and continues to develop products which bring convenience and satisfaction to customers. Competitive Role. As the company is comprised of several business units selling different product, it takes several competitive role. In the ketchup segment, the company is a market leader. However, it can also be identified as a follower as it imports different innovations from other market leaders. One such example is its adoption of the microwavable Soup Cups which is originally designed by Australian firms. Priority Strategic Initiative. It is irrefutable that Heinz has been pursuing retrenchment as a priority strategic initiative. The merger with Del Monte is a result of this spin-off due to the firm’s emphasis on focusing in its core business. One of the key initiatives of Heinz’s as stated in its new strategy states that it will “remove the ‘clutter’ both by focusing on core businesses and products and by creating a simplified business structure.” Vertical Coordination Strategy. Heinz is an equity-based alliance as it is owned by various stockholders with a managing organization separate from the owners. V. Recommendations After a thorough analysis on the current scenario faced by Heinz, this report will offer recommendations to improve its operational performance. Heinz should continue its effort to reduce its scope and focus on its core businesses. As competition in the global industry is being intensified by external factors, it is necessary that the company ensures its profitability by spinning-off less profitable ventures. The company should also intensify its effort in cutting cost by revamping and introducing a more efficient value chain. Heinz should reevaluate the way it manufactures its products and determine the specific processes which drives cost. Knowing what drives cost is a step toward minimizing these costs without affecting the value derived by the customer. Considering that other costs are due to external factors and are beyond the control of the firm, it is important the firm take measures in implementing a system to efficiently manage cost within its control. It is also recommended that Heinz also focus on innovating products or product features which promotes more convenience to customers. If the company cannot battle head on with its competitors with price wars, Heinz should emphasize the unique features of its products to be able to ask for higher prices. It should be noted that customers positively respond with these improvements. The company should seek to lower its debt to equity ratio as this sends negative repercussion in its image. Heinz should take measures in improving its credit worthiness and assure investors of its profitability. Read More