H.J. Heinz Company (HNZ)

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See all Bulls Reasons Bulls: Reasons To Buy Refocusing on core brands 0% agree Refocusing on core brands New members of the Board have pushed the company to refocus on 10 core brands, which have grown at a three-year compound average rate of nearly 6%. View or Edit Reason 0 votes 0% agree Growing in emerging markets 0% agree Growing in emerging markets Growth in five key emerging markets – Russia, Indonesia, China, India and Poland, a strategic focus on health and wellness, and a planned 19 percent increase in consumer marketing advertising for fiscal year 2007 should contribute to dramatic growth in the next year. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Rising commodities costs 0% agree Rising commodities costs Food prices in all areas are reaching new record costs. Rising costs means that the company will have to rise the price of its products. In this time of economic uncertainty, consumers are looking for any bargain possible and are certainly not looking to pay more for basic foods, meaning if need be they would cut back on spending. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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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. In 2007, international sales accounted for 52.3% of total revenue,^[3] while the company posted record sales revenue of $9.00 billion and gross profit of $3.39 billion.^[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. In 2007, the price of tomatoes climbed to $68 per ton, up $13 from 2005, and corn prices grew 25%.^[6].

[edit] History

Founded in 1869 by Henry John Heinz, the Pittsburgh, Pennsylvania-based H. J. Heinz company emerged during the youthful days of the food processing industry, before consumers even trusted commercial bottling. Heinz emphasized quality and marketing with its “57 Varieties” slogan, and it soon became the leading producer of condiments in the world. Ironically, the first Heinz product was horseradish; tomato ketchup, Heinz’s most famous condiment, was not introduced until 1875.

[edit] Business Financials

Many of Heinz’s products are prepared from recipes developed in their own research laboratories and experimental kitchens. After are 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 ^[7].

[edit] Segment Information

^[8]

Heinz divides its sales into different segments, based primarily on geographical area.^[9]

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.

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.

^[10]

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. In FY2007, the company saw an increase of sales volume of 6.1% due to growth in nutritional drinks in India, ketchup and baby food in South America, and general sales in South Africa. However, due to economic instability in Zimbabwe, the company was forced to consolidate its operations in the country and wrote off its net investment ^[11]

* Indicates used under license.

[edit] Acquisitions

Heinz is very active when it comes to acquiring many smaller companies. The company has the ability to remove competition as well as expand to other markets/regions. In FY2006 the company spent $1.1 billion in acquisitions of US, UK, Canadian, and Russian companies such as HP Food Limited, Petrosoyuz, Nancy’s Specialty Foods Inc., and Kabobs Inc ^[12].

[edit] Annual Data Information

In FY 2007, sales increased by $358.3 million, 4.1%, to $9.00 billion. Despite having one less selling week compared to FY 2006, the company managed to obtain a volume increase of 0.7%. Growth was strong in North American Consumer Products, Australia, New Zealand, India, China, and Poland but was offset slightly by weak numbers in the U.K. and Russia ^{[13] [14]}. Also, the company's top 15 brands, which account for almost 70% of the company's total revenue, grew by 8.5% ^[15].

^{[16] [17]}

[edit] 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, ^[18] which led to a subsequent rise in the cost of ketchup; Heinz ketchup is about 10% corn syrup. Record corn prices in 2008 have also attributed to decreasing revenue of Heinz in the first three quarters of FY2008.^[19]

• The Declining Value of the Dollar Could Impact Heinz' Revenues

Changes in the strength of the dollar compared to foreign currency could impact the company by increasing both costs and revenue in dollars. Profit would rise if the increase in revenue was greater than the increase in cost. As the strength of the dollar falls, all sales made in foreign currency end up being worth more because the amount of US dollars the company gets per sale increases. On the other hand the cost of foreign inputs (food and other commodities that go into Heinz products) sold in foreign currencies would also increase if the dollar falls. Over half of Heinz's sales are in international markets, the declining value of the dollar could be a significant factor driving revenues up overseas. Specifically the company primarily deals with the British Pound, Euro, Australian dollar, Canadian dollar, and the New Zealand dollar. An example of the falling dollar can be seen in the first couple months of 2008, where the dollar fell to record lows against the Euro ^[20]. Because the company has both assets and liabilities in foreign countries, it has to deal with additional revenues and expenses in foreign currencies. ^[21]. To reduce foreign exchange rate risk, the company has entered forward contracts, option contracts, and cross currency swaps. ^[22]

• Rising Oil Prices Cut into Heinz Margins

Rising energy and fuel costs significantly affect the cost of manufacturing, transporting, and distributing products. High energy prices increase the cost of production in factories and high fuel prices increase the cost of transporting their products to distributors. Effects of oil prices are also seen in the cost of production of the plastic containers in which Heinz sells its ketchup. Oil costs are also incurred by farmers, who in turn increase their prices of crops that the company uses. A continued rise in oil prices will force Heinz to either reduce operating margin or raise product prices higher and risk a decrease in sales.^[23]

• Health & Wellness

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".

[edit] 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).

[edit] Notes

1. ↑ Heinz 2004 Annual Report Year in Review
2. ↑ About Heinz
3. ↑ HNZ 2007 10K, Item 7 pg. 16
4. ↑ HNZ 2007 10K, Item 8 pg. 36
5. ↑ New York Times: "Heinz to Shed Units and Job in an Overhaul" 18 Feb 1999
6. ↑ San Francisco Chronicle: “Heinz Hopes Sweeter Ketchup Tomatoes Reduce Need for Corn Syrup” 4 Oct 2007
7. ↑ HNZ 2007 10K, Item 1 pg. 2
8. ↑ HNZ 2007 10K, Item 7 pg. 12
9. ↑ HNZ 2007 10K, Item 8 pg. 68
10. ↑ HNZ 2007 10K, Item 8 pg. 70
11. ↑ HNZ 2007 10K, Item 6 pg. 17
12. ↑ HNZ 2007 10K, Item 8 pg. 47
13. ↑ HNZ 2007 10K, Item 7 pg. 14
14. ↑ Heinz Company 2007 Annual Report Letter to Investors
15. ↑ HNZ 2007 10K, Item 7 pg. 12
16. ↑ HNZ 2007 10K, Item 8 pg. 36
17. ↑ HNZ 2004 10K, Item 8 pg. 31
18. ↑ New York Times: "Record U.S. Corn Crop..." 11 Aug 2007
19. ↑ HNZ 2007 10K, Item 1a pg. 5
20. ↑ MSNBC: "Dollar HIts New Record Low Vs. Euro" 17 March 2008
21. ↑ HNZ 2007 10K, Item 1a pg. 6
22. ↑ HNZ 2007 10K, Item 7 pg. 25
23. ↑ HNZ 2007 10K, Item 1a pg. 5
24. ↑ HNZ 2007 10K, Item 8 pg. 36
25. ↑ KFT 2007 10K, Item 8 pg. 45
26. ↑ ADM 2007 10K, Item 8
27. ↑ TSN 2007 10K, Item 7a pg. 39
28. ↑ CPB 2007 10K, Item 8 pg. 23
29. ↑ CAG 2007 10K, Item 8 pg. 44