HJ Heinz Company is currently implementing Operation Excel – a radical restructuring programme designed to realise cost savings of $215 million, the main thrust of which will be in Europe, and to position the company for sustained global growth in its six core food categories. The savings being unlocked by Operation Excel are helping to accelerate investment behind Heinz’s brands while also funding expansion through acquisition, as exemplified by the company’s recent global campaign for Heinz Tomato Ketchup and its acquisition of UB Frozen and Chilled Foods. By Mike Rohan.

Heinz achieved global sales of $9.3 billion last year with its US operations accounting for just over half of the total. The original 57 varieties have now been expanded to more than 5,700 which are sold in more than 200 countries worldwide.

Brand Power

Heinz is arguably the best known and most valuable processed food brand in the world and is increasing its global influence constantly as the company continues to take advantage of the revolution in communications technology. “Twenty years ago, only 15 per cent of the world knew Heinz and its brands. Today, Heinz products are enjoyed by consumers on every inhabited continent,” says chairman Tony O’Reilly, who headed the US food group’s global expansion during this period before handing over the reins to Bill Johnson, the current president and chief executive officer, in April 1998. “By shrinking the world, homogenising its culture and speeding the conveyance of information, technology is expanding tremendously the market opportunities for a global food processor like Heinz,” Tony O’Reilly elaborates.

While Tony O’Reilly has been responsible for spreading the Heinz ‘gospel’ globally, his successor is refining the message to suit modern tastes. Heinz is in the process of being completely overhauled to make it more streamlined, competitive and with a sharper focus as it attempts to improve profits and increase shareholder value.

Operation Excel

Announced last February and involving the closure or sale of between 15 and 20 factories (including seven in Europe), Operation Excel is a four year restructuring programme expected to yield annual cost savings of $215 million by 2002. Operation Excel entails centralising production to create manufacturing centres of excellence specialising in specific product lines which will be supplied to regional rather than national markets.

Resulting in restructuring charges and implementation costs approaching $1.1 billion, Operation Excel is building upon the foundations already prepared by an earlier restructuring – Project Millennia – unveiled at the start of 1997. However, while Project Millennia was chiefly focused on restructuring and wringing cost savings from the North American business, with Operation Excel the emphasis is on Europe.

Global Category Management Approach

Central to Heinz’s future expansion strategy is the adoption of a global category management approach which has replaced the previous geographical emphasis. The six core food categories upon which Heinz is now focused and developing along global lines are: ketchup, condiments and sauces; frozen and chilled foods; tuna; soup, beans and pasta meals; infant foods; and pet foods. Recognising the growing trend towards eating beyond the home, Heinz has also established a dedicated FOOD SERVICE operation. Organising its production, logistics and sales and marketing operations along global food category lines will not only yield major savings in sourcing, manufacturing, selling and distribution, but it will also allow Heinz to mirror the changes in its customer base, as the major supermarket chains consolidate internationally.

Good Track Record in Cost Reduction

According to Bill Johnson, president and chief operating officer, Heinz has “a proven track record of reducing costs across the value chain of procurement, manufacturing and logistics.” The cost savings realised will allow Heinz to better exploit its assets. “The scope of our international operations and our ability to enter fast growing, emerging markets with high quality brands are key strengths,” adds Bill Johnson.

The move to tackling the six food categories globally, instead of on the country by country basis formerly preferred, is not only generating cost savings but also allowing the rapid transfer of ideas about new products or manufacturing processes throughout the various category organisations. For example, the innovative pouch soups launched last September in the UK were first sold in New Zealand under the Wattie’s brand name.

Increased Marketing Investment

Heinz already spends well over $1 billion a year promoting products directly and indirectly to consumers, points out Bill Johnson, and this investment will be increased by about $100 million, funded by savings from Operation Excel.

A clear manifestation of this strategy is the $50 million global advertising campaign for Heinz Tomato Ketchup launched last year. The campaign is targeted at teenagers, and is indicative of the focus of future marketing initiatives by Heinz as it shifts its target audience to achieve long-term sales growth. “Teens are our entree to new markets because they are the vanguard of new tastes,” Bill Johnson points out.

Acquisitions

In addition to its global category management approach and accelerated marketing investment, Heinz is also using acquisitions and joint ventures to further its global expansion. Assets which do not fit the growth criteria within Heinz’s six core food categories have been divested. For example, the Weight Watchers International diet control business was sold for $735 million last year.

Acquisitions are being used to strengthen the company’s core portfolio of products but also to gain a strategic foothold in emerging markets and to facilitate the introduction of Heinz products. For example, the acquisition of a majority stake in PT Heinz ABC, Indonesia’s leading soy sauce and condiment producer, has strengthened Heinz’s position in Asia while also enhancing its ketchup, condiments and sauces portfolio, just as the acquisition of German-based canned soups and convenience meals manufacturer Sonnen Bassermann has extended Heinz’s European presence and bolstered its soup category business.

The most recent acquisition is the £190 million ($317m) purchase of UB Frozen and Chilled Foods which received EU regulatory clearance last month and has substantially increased Heinz’s frozen and chilled food interests in Europe into a $500 million business.

European Focus

Headed by Malcolm Ritchie, Heinz Europe, which also encompasses the Middle East and Africa (excluding South Africa), accounts for about 30% of Heinz’s global sales and profits. The main element of the $215 million savings to be generated from Operation Excel will be realised in Europe. The manufacturing base in Europe is being reduced from 21 factories to 14 as production is centralised. Of course, the subsequent acquisition of UB Frozen and Chilled Foods has added another five plants to Heinz’s manufacturing capability in Europe, although it remains to be seen how many of these facilities will be retained.

From a UK perspective, the key aspects of the Operation Excel streamlining programme include closure of the Harlesden factory in London and transfer of canned goods production to the Kitt Green plant in Wigan, and bottled goods to Elst in Holland. Kitt Green is being established as the manufacturing centre of excellence for canned goods, while Elst has a similar role for ketchup and sauces. Within food service, the Redditch facility is being closed with production being consolidated at the Heinz Single Serve operation at Telford and the recently acquired Serv-A-Portion in Belgium.

Other key aspects of restructuring and rationalisation programme include consolidation of two older factories into a single site in both Spain and Greece, and the closure of plants in Hungary and the Czech Republic. Of all the factory closures within Europe, the Harlesden factory has the longest lead time and this is expected to be completed by the year end.

“Operation Excel may be superficially seen as a restructuring programme delivering massive cost benefits, but the real driver behind Excel is growth,” points out Malcolm Ritchie. “We are committing to put at least half of these cost savings back against growing the business in terms of supporting our brands, launching new products and so on and so forth.”

In addition to the $215 million in cost savings, Operation Excel is ultimately expected to produce volume growth of 3-4% per annum, yearly earnings per share growth of 10-12%, a gross margin of 42%, a 40% return on invested capital, while yielding $2.5 billion of free cash flow.

Pan-European Approach

Operation Excel will continue the process started under Project Millennia of transforming Heinz Europe from being a geographically based structure into a pan-European category based organisation supported by shared services. Because of the lead time involved in installing new information system technology, this fundamental realignment will take a further 18 months to two years to fully achieve.

Under the previous, geographically based structure, resources tended to be focused into markets where Heinz was already strong, such as the UK and Italy. “That meant that some times the growth opportunities which were outside these markets were never properly resourced,” explains Malcolm Ritchie. “By changing the business structure and creating managing directors who are now responsible for categories across all of Europe, it makes them think about where the real growth opportunities are. A pan-European category focus allows us to redirect resources to the best growth opportunities, whether it be organic growth or by acquisition.”

Integration of UB Frozen and Chilled Foods

Having only received EC approval for the acquisition of UB Frozen and Chilled Foods in December, Heinz is still reviewing its options for its enlarged frozen and chilled fooods business, both in a European context and from a global category management point of view. Heinz’s existing frozen and chilled business in Europe is based on its centre of excellence in Dundalk, Ireland, believed by Malcolm Ritchie to be the “lowest cost manufacturing unit for frozen ready meals in Europe.”

The UB Frozen and Chilled acquisition is a good fit, providing synergies in terms of cost savings but also opening up major opportunities for growth. “The products are very complementary and there will be very little, if any, cannibalisation,” says the head of Heinz Europe. “There is a wealth of knowledge, expertise and innovation within our US business which, having acquired the UB Frozen and Chilled business, we can now fully capitalise upon.” Equally, products developed in Europe will also be considered for introduction into the US and elsewhere within the group’s frozen and chilled global category.

Acquisition Strategy

Heinz Europe will continue to seek appropriate acquisitions within its core food categories. Of particular interest will be acquisition opportunities in areas of continental Europe where Heinz is under-represented. For example, during the past year, Heinz concluded ‘in-fill’ deals in Germany (Sonnen Bassermann), Belgium (Serv-A-Portion) and Israel. Heinz has a strong presence in a large number of European countries in all of its categories, with the exception of pet food. Indeed, even globally the pet food category has proved problematic and unless it is turned around within the next couple of years, it could well be disposed of.

Heinz’s quest to move into high growth food sectors, which prompted its purchase of UB Frozen and Chilled Foods, could also see it diversify into other areas. It recently acquired a 19.5% stake for $99 million in Hain Food Group in the US – that country’s leading organic and natural foods company. Natural and organic food is now a $20 billion business in the US and exhibiting annual growth of 15-18%. The strategic alliance will not only provide Heinz with access to the attractive US market but will also offer significant growth potential internationally. As part of the deal, Malcolm Ritchie and Joseph Jimenez, president and ceo of Heinz North America, are representing Heinz on the expanded Hain board.

Developments in Central and Eastern Europe

Despite the economic turmoil in the region, Malcolm Ritchie is optimistic about the long-term growth prospects in central and eastern Europe. Heinz has taken strong remedial action in the region. Its baby food factory in the Czech Republic has been closed with production switched to Farleys plant in Cumbria, which now exports product to the region. Similarly, a factory in Hungary has also been sold, although a presence in the country has been retained for selling ketchup and sauce products. Both plants relied very heavily on the Russian market and were consequently badly hit when the Rouble collapsed.

However, signs of recovery are now evident in Russia, where Heinz operates an infant food plant which is market leader in baby cereals. Because raw materials and packaging materials are sourced locally, the plant has enjoyed a significant advantage over rivals without a manufacturing presence in Russia. Malcolm Ritchie also notes that sales of imported products into Russia, which had crumbled in the wake of the economic problems, are now starting to show strong growth again, particularly ketchup. “We are very positive about the future of that market but you have to take one step at a time rather than going headlong into it,” he cautions.

Heinz has adopted a similar expansion strategy in emerging markets to other multinationals by using joint ventures or acquisitions to establish a local presence and distribution and before introducing its branded products. For instance, in Poland it purchased Pudliszki – the leading sauce brand in the country – and subsequently used it as a platform to sell Heinz products.

Food Service

Heinz has also recognised the enormous growth potential in the food service market in Europe and has established a dedicated business unit, mirroring its global focus on this category which now contributes sales of $1.5 billion (of which over $1 billion is generated in the US). Food Service now accounts for about 10% of Heinz Europe’s sales and it is one of the fastest growing categories.

“What we are trying to develop is a one-stop-shop for many of the food service items that our customers require – ketchup and sauces, single serve products or bulkier items such as soup or beans,” remarks Malcolm Ritchie. Again, the knowledge and techniques employed in the food service market in the US, where half of all consumer food expenditure is now spent outside the home, is being applied in Europe. Globally, Heinz expects food service sales to grow at annual rates of 7% to 10% over the next five years.

Sustained Growth

Bill Johnson is confident that continued global expansion and the renewed emphasis on marketing and innovation, helped by the savings from Operation Excel, will generate sustained volume growth while increasing shareholder value. “Heinz has the talent, the strategy, the scale, the brand power and the leadership to unlock new growth opportunities around the world and be the premier performer in the global food industry,” says the Heinz chief.

About half of group sales are generated by ‘star’ businesses, such as ketchup and frozen food, which are growing in excess of 5% per annum, according to Bill Johnson. Another 30% of revenues are from ‘power performers’ – businesses capable of 3-5% annual growth, leaving the remaining 20% comprising of under-performing and non-core brands.

Future Development

Heinz will continue to move into faster growing food segments or bring new technology to the group through acquisition, and is considering a number of targets in North America and Europe. Its strategy for developing emerging markets is focused on acquisitions in Asia, where China, India and Indonesia represent three of the world’s four most heavily populated nations.

To counter the growing scale and power of its retail customers and to boost its stock market rating at a time when food shares are distinctly unfashionable, Heinz is also amenable to leading industry consolidation, as evidenced by its recent unsuccessful talks with Bestfoods. Operation Excel is just the springboard for further change at one of the world’s best known food companies as it adapts to meet the new challenges presented by the new millennium.