Heinz has announced its first major push into Brazil, with the acquisition of 80% of local tomato sauce maker Coniexpress. The deal provides Heinz with a significant footprint in the country and fits neatly with the US ketchup giant’s push to grow revenues in emerging markets. Katy Humphries reports.

As sales stagnate in developed markets, Heinz is looking further afield to generate future growth. Heinz insists that demographic drivers, rapid economic development and an increasing demand for western brands, flavours and tastes will all fuel growth in developing economies for years to come. And the US food group intends to foster a strong presence in these expanding regions in order to cash in on growth opportunities.

Management has indicated that the US food group aims to increase the proportion of revenue it generates in developing markets, particularly the BRICs and Indonesia. In February, Heinz raised its medium-term target to grow revenues in emerging markets from the 16% currently generated to 30% of the company’s total sales over the next five years. Previously, Heinz had said that it expects emerging markets to account for 35-40% of group sales in the longer term.

As part of this strategy, Heinz announced earlier this week that it has inked a deal to acquire an 80% stake in its first major Brazilian enterprise, Coniexpress, for an undisclosed sum.

The Brazilian group manufactures vegetable products along with tomato-based sauces, paste, ketchup and condiments under the Quero brand and generated annual sales of approximately US$325m last year. The company is an “excellent fit” with Heinz’s expertise in tomato-based products and Coniexpress’s brands hold market-leading positions in their respective categories, the US company says.

“The addition of Quero would give Heinz a strong local brand that fits nicely with our portfolio and holds number-one and number-two positions in tomato-based categories in Brazil, as well as the leading position in vegetables,” a Heinz spokesman tells just-food.

Indeed, the spokesman reveals that if the deal – which is expected to close in the next few months – goes through it would provide Heinz with a significant first-step into “a key emerging market that our company has been assessing for some time”.

It is easy to see why expanding in Brazil would be one of Heinz’s key priorities. The country boasts 200m consumers and its economy increased by 7.5% in 2010, figures released last week by the Brazilian Institute of Geography and Statistics reveal. The GDP of Latin America’s largest economy reached BRL3.67trn (US$2.21trn) in 2010, and among the countries that have already announced their 2010 GDP results, Brazil had the third-highest growth after China and India.

Looking to the future development of Coniexpress, Heinz president and CEO William Johnson says that Heinz intends to build sales of Quero brand by increasing innovation and marketing. While Quero is “already a leader” in smaller independent retail outlets, Johnson adds that Heinz would leverage its experience with larger supermarkets and commercial outlets to gain increased listings.

Heinz is also likely to focus on improving margins and implementing best practise at Coniexpress’s manufacturing facilities, Argus Research analyst Erin Ashley Smith suggests.

“At first, their focus is likely to be on the local brand: looking at the supply chain, developing manufacturing efficiencies and putting what they know from their worldwide operations about best practise into operation to improve efficiency,” Smith tells just-food.

While Smith suggests that ultimately Heinz could consider using Coniexpress as a launch-pad from which to introduce the Heinz brand, initially she insists that the focus will remain firmly on developing the local brand. “They do have an opportunity to expand and I do think that they will consider bringing in the Heinz brand at some point. But they are very good at not pushing their brands into a market without first adapting it to suit local tastes,” she adds.

Heinz predicts that the acquisition will be “modestly dilutive” to earnings in fiscal 2012 as the company invests in the business to drive growth, but accretive to earnings starting in fiscal 2013.

Nevertheless, Barclays Capital analysts Andrew Lazar and Jane Gelfan warn that although “future growth may be elsewhere and require incremental capital investment” Heinz must remember that “the most attractive returns still come from expanding the base”.

According to Lazar and Gelfan, Heinz management should be mindful not to prioritise investment in emerging markets at the expense of investing in the group’s core business in the US and other developed markets.

“We do not believe management has somehow lost sight of its base business in the developed markets,” they write, “Still, profit growth from the core was not top-line driven in the third quarter [of fiscal 2011], and fourth-quarter plans call for a reduction in marketing while emerging markets investments continue. We’re hopeful that a better balance can be reached in fiscal 2012 to reinforce the notion that even modest growth is possible in the core.”

In spite of such concerns, growth in emerging markets appears central to Heinz’s long-term expansion plans and the ketchup maker seems set on a cause that will see continued investment in overseas expansion – particularly the BRICs and Indonesia.

Indeed, Heinz’s future in emerging markets will be forged through a combination of organic expansion and M&A activity, Johnson revealed at the recent CAGNY investor conference

Addressing analysts and investors, Johnson emphasised that there are a “substantial number” of acquisition opportunities to fuel Heinz’s “build and buy” strategy in developing markets. While he noted that the rising price of potential M&A targets was deterring some competitors from acquisitive growth, he insisted that Heinz’s difficulty was “prioritising” which takeovers to pursue first.

It therefore seems likely that we can expect the news from Pittsburgh to bring details of further international investment as Heinz looks to expand in the BRICs and beyond.