With sales in Heinz’s developed markets stagnating, the US food manufacturer has turned its attentions to developing markets to drive growth.
Speaking at the Morgan Stanley Global Consumer & Retail conference last week, the company’s CFO Art Winkleblack signalled the company’s ambition for 35-40% of the company’s total sales to come from emerging markets in the longer term.
Heinz’s second-quarter results, released on Friday (19 November), showed that the company grew sales in its emerging markets by 10.2% on an organic basis during the three months to 27 October. The growth compared to a 1.4% increase in sales from its North American Consumer Products division and 5.2% in Europe. While growth in emerging markets was impressive, the fact that some 15% of its total sales coming from these regions is even more so.
“In the emerging markets we compete in six countries or regions, each with a business of between US$100-300m in sales,” said Winkleblack.
Winkeblack added that Heinz’s gross profit margins in developing markets is around the company average, but with some categories recording higher margins, it’s not hard to see why the ketchup giant would want to focus its energies on the developing markets.
Morningstar analyst Erin Swanson believes there is still much more room for the manufacturer to grow in the emerging markets. “While Heinz is the most globally diversified US-based packaged food firm, we contend that the firm still maintains significant expansion potential, particularly in fast-growing emerging and developing markets,” said Swanson.
Winkleblack said that the strength of Heinz’s margins in these markets is largely down to the success of its infant nutrition division, both because it is a high-margin business, but also because of the rapidly-growing populations in China and India. Winkleblack said 41m new babies are born in these two countries each year.
Despite Winkleblack claiming a “strong brand value” in China in the infant formula channel, which it entered in April this year, Heinz imports its infant formula range from the UK, as, the Heinz finance chief said there is a “greater trust in imported formula”.
Swanson believes the company’s experience in the global baby food market should serve it well as it expands in infant formula. However, she said: “In our view, Heinz’s experience (which includes more than 100 years in the infant nutrition category) will aid its entry into the Chinese market, but we don’t believe this new product launch will materially impact the firm’s results over the next few years.”
It is, however, unlikely that Heinz will attempt to push forward using a global ‘one size fits all’ strategy.
“We believe food is fundamentally a local business. Few brands and categories transcend all geographies,” said Winkleblack. “The global Heinz brand resonates with consumers in numerous categories such as baby food and ketchup, which continues to open doors for Heinz in geographies such as China. But local tastes and brands are also critically important in these markets and that’s why our strategy is to continue to acquire and develop local brands.”
Winkleblack said Heinz’s strategy is to continue to acquire and develop local brands as it has done with ABC in Indonesia, Complan in India and Master in China, which it recently acquired as part of its Foodstar purchase. When looking to acquire businesses in the emerging markets, Winkleblack said Heinz has a developed a defined strategy, adding it “may be different from some of our peers”.
Heinz, Winkleblack explained, first seeks out bolt-on opportunities, “often identified by our local management teams”. it then works to build a relationship with the owner, then works with them to acquire the company. Winkleblack told analysts that potential category growth and good sales and distribution networks are “key considerations” when Heinz is weighing up an acquisition target.
Following an acquisition, Heinz looks to retain talent and skills from the company as well as bringing in its own executives, often adding marketing funds, financial and supply chain expertise and capital to “accelerate growth”.
Winkleblack described the fine line Heinz tries to walk with acquired companies, working to combine local autonomy with regional and global capabilities to “set the business up for sustained growth”.
The Heinz executive said the company is considering entering “several promising new markets”, which he said have consumers with “lifestyles, tastes and growing incomes” that are “good fits for our product categories”.
Swanson suggested the company would be looking at targets beyond infant nutrition. “Heinz recently acquired Foodstar (a leading manufacturer of soy sauce in China). As a result, we don’t believe the firm is limiting its options for expansion to just infant nutrition. And according to the firm’s recent earnings conference call, numerous acquisition opportunities are available in emerging and developing markets.”
Janney Montgomery Scott analyst Jonathan Feeney thinks the company is likely to grow through familiar categories, saying that likely sectors for bolt on acquisitions would include ketchup, sauces and infant nutrition. He expects the company to target geographies such as the Philippines, Turkey, Vietnam and Brazil.
However, while Heinz preferred to focus its attention on the possibilities emerging markets can offer the business, analysts remain concerned about the continued performance of its operations in developed markets.
“While Heinz plans to introduce innovation and expects a strong performance from emerging markets in the second half of 2011, this is balanced in the US consumer and pockets of weakness in Europe. While Heinz plans to be less aggressive from a deals and allowance standpoint in the second half, which could help price growth, we find it hard to believe this will stimulate volumes to a significant degree and are cautious about near-term volume trends,” said Bernstein analyst Alexia Howard.
However, with Heinz forecasting so much of its growth to come from its developing market operations in coming years, current concerns about the promotional environment and bleak consumer outlook are more likely to seem like a blip on the manufacturer’s radar than anything that is likely to keep it awake at night.
Howard conceded that while she is cautious about Heinz’s near-term outlook, she thinks its product portfolio and long-term profit growth potential are “better than many peers”, with its innovation plans, emerging market expansion and SAP roll-all all “making a lot of sense”.
While developed markets are likely to remain Heinz’s bread and butter, emerging markets look set to become it’s ‘secret sauce’ in coming years.