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Supply Chain Management of H.J. Heinz Company -
January 8th, 2011
Perhaps best known for its ketchup, the H.J. Heinz Company manufactures thousands of food products in plants on six continents and markets these products in more than 200 countries and territories. Heinz ranked first in ketchup in the United States with a market share in excess of 50 percent. Moreover, the company's StarKist brand tuna led its market with a 45 percent share, and its Ore-Ida label held more than 50 percent of the frozen-potato sector. Overall, the company claims to have 150 number one or number two brands worldwide. Breaking the company's sales down by sector, ketchup, condiments, and sauces account for about 24 percent of overall sales; frozen foods (including Ore-Ida, Budget Gourmet, and Weight Watchers), 15 percent; pet products (9-Lives, Gravy Train, and Ken-L-Ration), 14 percent; soups, beans, and pasta meals, 12 percent; tuna, 12 percent; infant foods, 11 percent; and other, 12 percent. Geographically, about 55 percent of revenues are generated in North America, 26 percent in Europe, 11 percent in the Asia-Pacific region, and eight percent elsewhere.
Henry J. Heinz and the Founding of His Company
The origins of this vast food empire may be traced to Pennsylvania, where eight-year-old Henry John Heinz began selling produce from his family's plot to nearby neighbors. At ten he used a wheelbarrow, and, by the time he was 16, Heinz had several employees and was making three deliveries a week to Pittsburgh grocers. Born in 1844 to German immigrant parents, Heinz was the oldest of nine children. He grew up in Sharpsburg, Pennsylvania, near Pittsburgh, and, after graduating from Duff's Business College, he became the bookkeeper at his father's brickyard. At age 21, he became a partner. (Heinz retained an interest in bricks all his life--he personally supervised the buying and laying of brick for his company's buildings, and his office desk was often piled with brick samples acquired on his travels.) In 1869, Heinz and L.C. Noble formed a partnership called Heinz, Noble & Company in Sharpsburg to sell bottled horseradish. Their product line soon expanded to include sauerkraut, vinegar, and pickles.
Following the panic of 1873 and subsequent economic chaos, the business failed in 1875, but Heinz quickly regrouped, and the following year started afresh with the determination to repay his creditors. With his brother John and cousin Frederick as partners and himself as manager, Heinz formed the partnership of F & J Heinz to manufacture condiments, pickles, and other prepared food. Ketchup was added to the product line in 1876. The business prospered, and Heinz made good on his obligations. In 1888, the partnership was reorganized as the H.J. Heinz Company after Heinz gained financial control of the firm. Soon Heinz was known throughout the country as the 'pickle king.'
Small, energetic, and ambitious, Heinz was a cheerful man with courtly, old-fashioned manners. He exuded enthusiasm, whether for work, family, travel, religious activities, or good horses, and had a passion for involving others in his interests. According to his biographer, Robert C. Alberts, Heinz once installed an 800-pound, 14-foot, 150-year-old live alligator in a glass tank atop one of his factory buildings so that his employees might enjoy the sight as much as he had in Florida.
In the late 1800s, the typical American diet was bland and monotonous, and the Heinz Company set out to spice it up with a multitude of products. The phrase '57 Varieties' was coined in 1892. Tomato soup and beans in tomato sauce were quickly added to the product line. Even as '57 Varieties' became a household slogan, the company already had more than 60 products. At the World's Columbian Exposition in Chicago in 1893, Heinz had the largest exhibit of any American food company.
By 1900, the year the company was incorporated, the H.J. Heinz Company occupied a major niche in American business. It was first in the production of ketchup, pickles, mustard, and vinegar and fourth in the packing of olives. Overall the company made more than 200 products. Still, Heinz liked the lilt of his original slogan and in 1900 put it up in lights in New York City's first large electric sign, at Fifth Avenue and 23rd Street. A total of 1,200 lights illuminated a 40-foot-long green pickle and its advertising message.
Heinz's clever merchandising won him a reputation as an advertising genius, but he did not allow his ambitions to overshadow his religious convictions; during his lifetime, in deference to the Sabbath, Heinz's advertisements never ran on Sundays. Heinz Company factories were considered models in the industry, both in their facilities and their treatment of workers. The company received many awards, and Harry W. Sherman, grand secretary of the National Brotherhood of Electrical Workers of America, remarked after visiting a Heinz plant that it was 'a utopia for working men.'
In 1886, Henry Heinz went to England carrying a sample case, and came home with orders for seven products. By 1905, the company had opened its first factory in England. The following year, the Pure Food and Drug Act was vigorously opposed by most food manufacturers, but Heinz, who understood the importance of consumer confidence in the purity of processed foods, was all for it, and even sent his son to Washington, D.C., to campaign for its passage.
Transition from Family Firm to Public Company: 1920s--60s
Henry Heinz died at age 75 in 1919. At that time, the company had a workforce of 6,500 employees and maintained 25 branch factories. Heinz was succeeded as president of the company by his son, Howard, who began his career with H.J. Heinz as advertising manager in 1905 and became sales manager in 1907. In 1931, at the height of the Great Depression, Howard Heinz saved the company by branching into two new areas: ready-to-eat soups and baby food. He remained president until his death in 1941. In 1939, Fortune estimated total sales for the still privately owned company at $105 million.
By the time Howard's son H.J. Heinz II (known as Jack) became president of the company at his father's death, he had worked in all the company's divisions, from the canning factories to the administrative offices. He chose to launch his career as a pickle-salter for $1 a day in the Plymouth, Indiana plant. Later he became part of the cleanup staff, then a salesperson for H.J. Heinz Company, Ltd. in England. In 1935, fresh out of Cambridge University, Jack Heinz was sent by his father to establish a plant in Australia. Heinz-Australia later became that country's biggest food processing plant.
From 1941, when Jack took over, to 1946, H.J. Heinz's sales nearly doubled. That year, Heinz made its first public stock offering and revealed that its net profit was more than $4 million. Foreign sales of baked beans and ketchup, particularly in England, contributed substantially to the company's success. During World War II, Jack Heinz was active in food relief and personally made four wartime trips to England to examine food problems there. The company insignia went to war, too; the 57th Squadron of the 446th Army Air Force chose for its emblem a winged pickle marked '57.'
Jack Heinz's tenure was distinguished by expansion of the company, both internationally and at home. Subsidiaries were launched in the Netherlands, Venezuela, Japan, Italy, and Portugal. In 1960 and 1961, the H.J. Heinz Company acquired the assets of Reymer & Bros., Inc. and Hachmeister, Inc. StarKist Foods was acquired in 1963 and Ore-Ida Foods, Inc. in 1965.
During the 25 years that H.J. Heinz II was chief executive, the food industry changed greatly. The era was marked by the rise of supermarket chains and the development of new distribution and marketing systems. In 1966, H.J. Heinz II stepped down as president and CEO, though he retained his position as chairperson until his death in February 1987.
1970s and 1980s: The O'Reilly Revolution
In 1969, R. Burt Gookin, then CEO of Heinz, made Anthony (Tony) J.F. O'Reilly president of the company's profitable British subsidiary. O'Reilly, who was managing director of the Irish Sugar Company at the time, shook up the company by working 14-hour days and stressing a policy of winning through effort. O'Reilly was an uncommon executive; he was, among other things, a world-class rugby player. In 1973, O'Reilly was named president of the parent company, and in 1979 he became CEO. Shortly after the death of H.J. Heinz II, he was also made chairperson. From the beginning, O'Reilly stressed the importance of strong financial results. Some critics claimed that this emphasis created too stressful an atmosphere; in 1979, it was learned that managers of several subsidiaries had for years been misstating quarterly earnings in order to meet their target goals and impress top management.
Overall, O'Reilly's achievements were impressive, however. The timely acquisition of Hubinger Company in 1975 put Heinz in a position to cash in on the demand for high-fructose corn syrup when the price of sugar soared. In 1978, O'Reilly acquired Weight Watchers International, just ahead of the fitness craze that swept the nation.
At the same time that the company was branching out into new products, O'Reilly was cutting back on traditional businesses. By 1980, Heinz had increased volume, while cutting its number of plants from 14 to seven and reducing employment by 18 percent. O'Reilly also gave up the battle with Campbell Soup Company for the retail soup market. When generic products hit the supermarket shelves, Heinz countered not by producing for the generics industry but by 'nickel and diming it,' as he said. For example, Heinz switched to thinner glass bottles that cut the cost not only of packaging but also of transportation. When imports began to undersell StarKist tuna, StarKist decreased the size of the tuna can, just as Hershey had downsized its chocolate bar when cocoa prices soared. This ploy netted StarKist $7 million in savings. Other nickel-and-dime cost savings came from eliminating back labels from bottles, reclaiming heat, and reusing water.
O'Reilly's strategy in the 1980s was to pare costs to the bone and to use the savings to beef up marketing, primarily advertising, in an effort to increase market share. At the same time, Heinz pursued a cautious acquisition policy. By the mid-1980s, the company had spent $416 million to acquire more than 20 companies. Return on equity increased from nine percent in 1972 to 23.3 percent in 1986.
O'Reilly's cost-cutting war included a threat to go to contract manufacturers rather than his own plants if the same products could be purchased elsewhere for less. Such tough talk elicited substantial concessions from labor unions in 1986. O'Reilly's hard-nosed, bottom-line strategies won Heinz recognition as one of the country's five best-managed companies in 1986. When H.J. Heinz died the following year, O'Reilly became the first non-family member to advance to Heinz's chair.
In 1988, Heinz bid $200 million for Bumble Bee Seafoods, the third largest tuna company in the country. The purchase would have given Heinz, whose StarKist brand already ranked number one, more than 50 percent of the domestic tuna market. Accordingly, the U.S. Justice Department prevented the purchase on antitrust grounds. Also in 1988, Heinz reorganized StarKist Foods into StarKist Seafood and Heinz Pet Products in order to strengthen seafood operations for a push abroad. In pet foods, Heinz, already a leading canned cat food producer, strengthened its dog food position through the acquisition of several regional brands.
In overseas markets, Heinz began to expand into the Third World. It became the first foreign investor in Zimbabwe when it acquired a controlling interest in Olivine Industries, Inc. in 1982. Heinz also formed joint ventures in Korea and China, and in 1987 the company bought a controlling interest in Win-Chance Foods of Thailand. Win-Chance produced baby food and milk products, and, of course, Heinz planned to add ketchup to the line.
1990s and Beyond: Slower Growth and Restructurings
O'Reilly's strategies succeeded in the 1980s. Heinz's sales doubled from $2.9 billion in 1980 to $6.1 billion in 1990, and net profits quadrupled to $504 million during the period. The CEO had hoped to increase Heinz's annual revenues to $10 billion by 1994, then retire at the close of his contract in 1995. Recession and competition from private-label products in the early 1990s, however, thwarted that plan and held the company's sales to $7 billion in 1993 and 1994. As Heinz's growth slowed from its double-digit pace of the previous decade, the company's stock declined as well--30 percent from 1992 to 1994--in spite of continuously rising dividends. As a result, O'Reilly postponed his retirement and embarked on a reorganization.
Divestments (most significantly, of the Hubinger subsidiary) in 1993 totaled $700 million. Internal cost-cutting measures included workforce and management staff reductions as well as achievement of manufacturing efficiencies. In America, O'Reilly cut brand advertising by 40 percent from 1990 levels and resorted to discounting to reverse 1991's market share losses to private labels. He shifted the company's domestic sales focus to the high-margin foodservice sector, acquiring J.L. Foods from Borden Inc. in 1994 for $500 million.
But domestic operations were little more than half of Heinz's operations in the 1990s. O'Reilly pinned his expectations for future growth on overseas markets, targeting baby food, in particular, for expansion. Heinz controlled 29 percent of the global infant food market in 1994 and completed the acquisition of Farley's baby food of Great Britain (from the Boots Company PLC) and Glaxo Holdings plc's baby food interests in India that year. Previously unchallenged in international baby food sales, Heinz faced a serious threat from the U.S. leader, Gerber, which was acquired by Swiss pharmaceutical giant Sandoz Ltd. and groomed for international expansion that year as well. Heinz also buttressed its interests in the Asia/Pacific region with the 1992 purchase of New Zealand's Wattie's Limited for $300 million. O'Reilly characterized the new addition as a 'mini-Heinz' in a 1994 address to the New York Society of Securities Analysts. Heinz marked its 125th year in business with flat sales that O'Reilly himself characterized as disappointing.
The next two years, however, seemed to indicate that O'Reilly's restructuring efforts were paying off. Sales surged ahead by more than $1 billion in each of those years, culminating in 1996 revenues of $9.11 billion. Further acquisitions played a role as well. In December 1994 Heinz paid $200 million to Kraft General Foods, Inc. for the All American Gourmet Company, maker of the Budget Gourmet line of frozen meals. Heinz nearly doubled the size of its pet food operation through the March 1995 purchase of the North American pet food businesses of the Quaker Oats Company for $725 million. Thereby added to the company's existing brands, which included 9-Lives and Amore, were Kibbles'n Bits, Cycle, Gravy Train, and Ken-L Ration, among others. In March 1996 Heinz acquired Boulder, Colorado-based Earth's Best, Inc., a maker of organic baby food. In June of that year William R. Johnson was named president and COO, positioning him as the likely successor of O'Reilly. Johnson, who had joined Heinz in 1982, was previously head of the tuna and pet food divisions, where he was noted for slashing costs and squeezing out profits from mature brands.
In March 1997 Heinz launched a major restructuring that involved the closure or sale of 25 plants and a workforce reduction of 2,500, as well as a plan to divest the foodservice operations of the Ore-Ida unit. The latter came to fruition in June 1997 with the sale of said operations to McCain Foods Limited of New Brunswick, Canada, for about $500 million (Heinz retained the Ore-Ida retail business). In connection with the restructuring, Heinz took pretax charges of $647.2 million in fiscal 1997, resulting in a reduction in net income to $301.9 million (compared with $659.3 million for 1996). Heinz also continued to make selective acquisitions, with one of the more important ones being the June 1997 purchase of John West Foods Limited from Unilever. John West was the leading brand of canned tuna and fish in the firm's home country, the United Kingdom. In May 1998 Johnson was named president and CEO of Heinz, with O'Reilly becoming nonexecutive chairman.
Restructuring efforts continued into the early 21st century. In late 1998 the company took a $150 million charge to combine the operations of its Ore-Ida Foods and Weight Watchers Gourmet Foods units into a new unit called Heinz Frozen Food Company. Early the following year, Heinz announced its largest restructuring yet. In the first phase of a projected four-year program, the company planned to close 20 of its remaining 100 factories, reduce the workforce by an additional 4,000, and divest the diet class business of Weight Watchers. A key component of the program was the realigning of the company along global category lines, a major shift from the previous geographic arrangement. The six main categories, generating 80 percent of global revenues, were ketchup, tuna, frozen foods, infant foods, pet foods, and convenience meals. Heinz also planned to concentrate on the six countries that generated 80 percent of the company's revenues: the United States, the United Kingdom, Italy, Canada, Australia, and New Zealand. While the company hoped eventually to reap $200 million in annual savings from these efforts, it also planned to spend an additional $100 million during fiscal 2000 to increase its spending on marketing its flagship brands. Pretax restructuring charges for fiscal 1999 totaled $552.8 million.
In late 1999 Heinz completed the sale of the Weight Watchers diet class unit to Artal Luxembourg, S.A., a European venture capital firm, for about $735 million. Around this same time, with pressure for global consolidation among food companies growing, Heinz entered into merger talks with Bestfoods, maker of soups, sauces, bouillons, dressings, and other products. The talks collapsed, however, and Unilever soon stepped in to acquire Bestfoods. In the wake of this failed merger, Heinz continued its acquisitive ways. The company gained a foothold in the fast-growing natural and organic foods sector through the purchase of a 19.5 percent stake in Hain Food Group Inc. for $100 million. The Hain product line included Health Valley cereal and other products, Terra Chip snacks, and Westsoy soy beverages. Through the alliance with Heinz, Hain also acquired the Earth's Best line of organic baby foods. In May 2000 Hain acquired Celestial Seasonings, best known for its herbal teas, in a stock swap, leading Heinz to invest an additional $80 million in Hain to keep its stake at 19.5 percent. Other developments included the acquisition of the frozen food business of U.K.-based United Biscuits PLC for $317 million. Sales for the unit in 1998 were $360 million, with the product line including frozen desserts, pizzas, potato products, and vegetarian/meat-free items. In February 2000 Heinz announced that it had signed an agreement to acquire Milnot Holding Corporation, maker of the Beech-Nut brand of baby food, for $185 million. Beech-Nut was the number two baby food brand in the United States, with 13 percent of the market, while Heinz was number three with 11 percent. The commanding leader was Gerber, with 73 percent. Despite what Heinz officials called Gerber's virtual monopoly position, the Federal Trade Commission moved to block the deal in July 2000 under antitrust laws. In June 2000 Heinz began selling StarKist tuna in vacuum-sealed pouches, claiming that the tuna was fresher-tasting and firmer than the traditional canned variety.
The restructuring efforts launched under Johnson's leadership appeared to be paying off for Heinz. Although overall revenues remained flat--the $9.41 billion for 2000 was only marginally larger than the 1996 total of $9.11 billion&mdash′ofits were growing. For fiscal 2000, a pretax restructuring charge of $392.7 million was more than offset by a pretax gain of $464.6 million on the sale of the Weight Watchers unit, resulting in overall net income for the year of $890.6 million. The company's future remained uncertain, despite such improvements, as speculation about further food industry consolidation remained rife. Should Heinz not join in the merger wave, Johnson was prepared to pick up some of the brands that were certain to be discarded following the mergers of other food companies.
Principal Subsidiaries: Alimentos Heinz, C.A. (Venezuela); Alimentos Pilar S.A. (Argentina); AIAL S.r.l. (Arimpex Industrie Alimentari S.r.l.) (Italy); The All American Gourmet Company; Boulder, Inc.; Ets. Paul Paulet (France); Heinz Europe Ltd. (U.K.); Heinz Frozen Food Company; Heinz Iberica S.A. (Spain); Heinz India Private Ltd.; Heinz Italia S.r.l. (Italy); Heinz Japan Ltd.; Heinz Polska Sp. Z.o.o. (Poland); Heinz South Africa (Pty) Limited; Heinz-UFE Ltd. (China); Heinz-Wattie Holdings Ltd. (New Zealand); Heinz Win Chance Ltd. (Thailand); H.J. Heinz (Botswana Proprietary) Ltd.; H.J. Heinz B.V. (Netherlands); H.J. Heinz Company Australia Limited; H.J. Heinz Company of Canada Ltd.; H.J. Heinz Company Limited (U.K.); H.J. Heinz Credit Company; H.J. Heinz European Frozen & Chilled Foods, Ltd. (Ireland); Indian Ocean Tuna Ltd. (Seychelles); Industrias de Alimentacao, Lda. (Portugal); Mareblu S.r.l. (Italy); Olivine Industries (Private) Limited (Zimbabwe); Portion Pac, Inc.; Pudliszki S.A. (Poland); PT Heinz ABC Indonesia; Seoul-Heinz Ltd. (South Korea); StarKist Foods, Inc.; Thompson & Hills Limited (New Zealand).
Principal Competitors: Aurora Foods Inc.; Bestfoods; Borden, Inc.; Campbell Soup Company; Chicken of the Sea International; Colgate-Palmolive Company; ConAgra, Inc.; Groupe Danone; Del Monte Foods Company; Hibernia Foods plc; Hormel Foods Corporation; International Home Foods, Inc.; Jenny Craig; Kraft Foods, Inc.; Mars, Inc.; McIlhenny Company; Nabisco Holdings Corp.; Nestlé S.A.; Novartis AG; Pillsbury Company; The Procter & Gamble Company; Ralston Purina Company; Sara Lee Corporation; Slim-Fast Foods Company; Tyson Foods, Inc.; Vlasic Foods International Inc.