BRICs and beyond: Heinz's Chinese frozen food exit paves way for growth
Heinz exits Chinese frozen sector
The news that Heinz plans to sell its Chinese frozen food business may have raised a few eyebrows. In an environment where food multinationals are seemingly always on the look out for M&A opportunities in dynamic emerging markets, led by China, it is not often that you hear of international firms offloading assets. However, Heinz was coming up against a number of challenges in the category and a more focused, streamlined Heinz in China could be better-placed to drive profitable growth. Katy Askew reports.
It emerged yesterday (25 February) that Heinz plans to sell its Long Feng frozen food business in China. In a filing with the Shenzhen stock exchange, Chinese frozen food manufacturer Sanquan Foods Co. revealed it has entered into an agreement of intent to acquire Heinz's frozen food assets in the market. While the framework for the deal is still under negotiation, Sanquan said it expects the transaction to close in the next four months.
On initial inspection, this move may seem somewhat surprising. With a market share of 3.3% and sales totalling approximately US$27m in the first nine months of the fiscal year to end-December, the frozen food brand represents a decent foothold in a high growth category in one of the world's most rapidly expanding economies.
Indeed, the frozen food category in China is expected to benefit from increasing consumer demand and the growing household penetration of refrigeration equipment. According to figures from Euromonitor International, Chinese frozen food sales are forecast a compound annual growth rate of around 9% in value-terms and 10% in volume terms over the next five years. And, while frozen is one of the smaller categories in the Chinese food market, in 2012 frozen food sales totalled a not-insignificant CNY46bn.
However, the frozen category also presents a number of challenges, Torsten Stocker, head of Greater China consumer and retail practice at consulting firm Monitor-Deloitte, tells just-food.
"There are a number of key challenges in the frozen food business in China," he suggests. "[Including] the lack of an established cold chain distribution infrastructure and the need to invest in building that."
Significantly, Stocker says that although the underlying demographic drivers to facilitate growth of the category - such as urbanisation, a growing middle-class and a growing need for convenience - are in place, Chinese consumers still need to be "educated" on the benefits that frozen food has to offer.
"It is still a new concept and to get consumers to move from trial to regular/ habitual consumption, takes time and investment," he suggests.
According to local reports, Heinz's Long Feng business racked up losses totalling $27m in the third quarter alone. It is possible that Heinz had been unable to build up significant scale to make the business profitable - an issue that would likely require additional resources to address.
Given these structural and organisational challenges, it seems that Heinz is unwilling to put further investment behind building its frozen food offering and the Chinese frozen food category as a whole, particularly when it is targeting expansion of its core businesses in the market.
A spokesperson for the group tells just-food that the US ketchup maker's move to divest Long Feng is in-line with the firm's strategy to focus on its core condiments, sauces and baby food businesses in emerging markets.
The decision to divest Long Fong reflects our strategic focus on driving growth in ketchup, condiments and sauces and infant/nutrition in emerging markets, including China," a spokesperson for Heinz told just-food. "The transaction is also consistent with our global strategy to de-emphasise non-core frozen food businesses outside the US."
Nevertheless, the spokesperson emphasised that Heinz remains committed to expanding its Chinese operations. "Heinz remains strongly committed to accelerating our continued growth in China, where our businesses are well positioned for the future, led by Foodstar and its growing line of Master soy sauce, and Heinz baby food."
According to Euromonitor senior food analyst Ildiko Szalai, Heinz's drive to expand its core business could mean it lacks the "focus" to "turn these operations round".
In streamlining its Chinese operations and concentrating its resources behind identified growth areas, Heinz is positioning itself to further expand in the market, with the possibility of further M&A on the horizon, Szalai suggests.
"Heinz has a few long-standing ambitions that probably it could do with a significant scale. Either through bolt-on acquisitions on top of what they already have, or to push into new categories and markets through significant scale acquisitions," Szalai predicts. She adds that, following the acquisition of the US ketchup maker by a group of private investors led by Warren Buffett, "now they may have the financial boost to do that".
For its part, if the acquisition closes, Sanquan would extend its leading market share position and building scale to drive profitability. Currently, Sanquan commands 10.9% of the market. This compared to Henan Synear Food Holdings' 5.7%, Shandong Zhucheng Foreign Trade Group and Shandong Liuhe Group's 4% and General Mills' 3.5% share. Upon completion of the transaction, Sanquan's share would jump to 14.2% of frozen food sales.
Szalai believes it is unlikely the acquisition would lead to a step-change in the competitive environment. However, she does suggest that the exit of a multinational from a space already dominated by local players highlights the home field advantage that Chinese firms have in this sector.
"The frozen food category is dominated by local players, who have the advantage when it comes to local tastes, manufacturing, cuisine, distribution, fast changing trends and tastes," she concludes.
Given these challenges and the need to back expansion of its core interests in China, the strategic rationale behind Heinz's exit from Chinese frozen foods seems more compelling.
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