FMCG: The trouble with Heinz

Three UK marketing chiefs in a year tells a tale, as Heinz has failed to respond to own-label growth due to a risk-averse attitude to NPD.

Last month, two stories emerged from the corridors of Heinz that, at first glance, appear entirely unconnected, if similarly bizarre. The first was splashed across most of the national newspapers and prompted a collective dissecting of the merits of Heinz's plan to produce Pop Tart-style beans on toast. The second made it into only a handful of the broadsheets; Nelson Peltz, a controversial American corporate raider who has built his shareholding in Heinz beyond the required 5%, was proposing five new additions to Heinz's board of directors, including himself and Australian golfer Greg Norman. This coincided with Peltz suggesting his own plan to boost Heinz's profits.

The two tales are more related than they might appear. The pressure to boost profits has had many effects on the staffing and marketing strategy of the company in recent months. And as Heinz chairman, president and chief executive officer Bill Johnson mounted a spirited defence of his strategy to Wall Street, it did no harm for it to be set against a global publicity blitz promising innovation.

Heinz's ownership battle has particular resonance in Europe, where 36% of the company's profits are derived. The central plank of Peltz's argument - that Heinz's management has lost the plot - is based on the fact that revenue, gross profit and shareholders' returns have fallen over the past eight years. In Europe, Heinz's performance has been distinctly worse than that of its grocery rivals, with a 14% fall in operating profit in 2004.

Heinz took drastic action in an effort to get back on track.

It instigated a Unilever-style plan to consolidate European activities into three divisions - baby food; ketchup, condiments and sauces; and convenience meals (soups, beans) - putting the 'for sale' sign over businesses that fell outside these categories. It also bought HP Foods to bolster its sauces portfolio.

Of the cast-offs, John West was sold to merchant banker Lehman Brothers, while the Linda McCartney brand has just been bought by Hain Celestial.

Heinz was less successful in its attempt to rid itself of its licence to produce Weight Watchers-branded frozen ready meals. After failing to get a high enough offer it has decided to keep the business, installing former HP managing director John Garnett to grow the division by investing in new products.

The European action plan has led to constantly revolving doors at Heinz's Hayes Park head office. The business has had three UK chiefs in one year; when managing director Stefan Barden left in May, he was replaced by Jane Miller, who was parachuted in from the Pittsburgh head office to instigate a programme of heavy cost-cutting and given an enhanced title of president. She froze Heinz's £11m advertising budget and made seven of the company's 10-strong central marketing department redundant, including vice-president of brands Scott Garrett. But Miller failed to achieve the tough targets she had been set by headquarters in Pittsburgh and resigned two months ago. Sources suggest that her background in the US grocery business had not prepared her sufficiently for the bargaining strength of the UK supermarkets, and her tough stance when trying to reduce Heinz's trade spend had not gone down well.

Her replacement, David Woodward, a former sales director at Procter & Gamble, starts at the end of June, followed within weeks by a new chief marketing officer, Suzanne Douglas.

There have also been changes at European level, with European president and chief executive Joe Jiminez replaced by Scott O'Hara in May.

Loyalty disrupted

The management upheaval and savage cost-cutting, all aimed at staving off a takeover, have taken an inevitable toll on the strength of the Heinz brand's relationship with consumers, say observers. 'Heinz is an iconic brand that used to be part of the fabric of our culture,' says Pete Edwards, who ran Heinz's media planning and buying at Starcom for three years until July 2004 and is now partner at communications planning agency Edwards Groom Saunders. 'But the heart of the brand has not been supported and people have fallen out of love with it.'

A spokesman for Heinz denies that the company has neglected the relationship between brand and consumers, pointing to a study by Bath University last year which found that Heinz Beans and Soup were the top 'most preferred' grocery brands. However, with a sample size of only 872, the research would not be considered statistically reliable by most market researchers.

A look at the performance of Heinz's key products over the past two years also questions consumer brand loyalty, especially in light of the one metric Heinz needs most urgently - sales growth. Although Heinz Beans, the company's biggest single revenue stream, has a 63% share of its market and saw 5% growth last year, the firm's other major revenue contributor, soups, slipped by 2.5%, according to ACNielsen. Rival Baxter's took all the advertising share of voice and a subsequent brand growth of 14.3%.

The really bad news - the area in which Heinz is doing so miserably that it is showing up as a notable negative effect in its group financial results - is frozen food. Heinz has shed £25m worth of sales in this sector over the past four years through both its own brand and products sold under the Weight Watchers from Heinz banner. Although the overall frozen sector is suffering, Heinz's 29% sales fall is double that of market leader Unilever.

Sales troubles cannot, of course, be blamed solely on the withdrawal of marketing communication support. The company is, to a great extent, hampered by the fact that most of its products are fighting in mature markets with heavy own-label penetration. But, say insiders and Peltz, the European division of the company has failed to be proactive about tackling this problem, with little home-grown innovation to create excitement in the aisles. The standout innovation - the much-lauded top-down ketchup bottle - was a hit in the US before it was brought to the UK.

Heinz's cost-cutting has not meant a freeze on innovation and brand support alone; it has also indirectly aided competitors by flooding the recruitment market with experienced marketers. Premier Foods, which created a wealth of publicity late last year with the launch of its Branston Beans, has employed a number of marketers made redundant by Heinz.

The outflow is continuing - one observer close to the company reports that resignations from Heinz's commercial teams have recently been running at about one a fortnight. The exception is the new UK marketing chief; Suzanne Douglas has just spent three years as the general manager of marketing at Heinz Australia, well-regarded internally for its ability to achieve growth in key categories by more than 10% during her tenure.

Douglas' brief is wider than that of the previous top marketer, Garrett.

While he led a central marketing department that supported the work of the category teams, Douglas will have the four category commercial directors Clodagh Ward (sauces), Ben Pearman (beans and pasta meals), Gary Power (soups) and Steve Turner (infant feeding) reporting to her.

This promises to be a far more effective way of structuring the department than the previous system, say insiders, because the marketing function will be integrated more closely with the commercial side. Heinz has always been a heavily sales-oriented company, with marketers much more involved with the product and price aspects of the job and less with the communications elements than at other grocery giants.

Heinz's existing culture is one of preoccupation with reaching stringent quarterly sales and profit targets. Teams are arranged by category and marketers work for commercial managers in each. Achieving retail listings is paramount. One of the major motivations for Heinz's acquisition spree a few years ago (which saw it buy the very brands now sold) was to give it a wider portfolio in order to leverage better deals with supermarkets.

This emphasis on sales, together with the fact that its major brands are all fighting strong retailer brands, has also led to the heavy investment in retailer promotions that Peltz has flagged up as being too high.

Every grocery brand has to budget for these in-store activities - they are essential to gain listings as well as often being highly effective in reaching consumers at the point of making a purchase decision. But the problem is that Heinz's scale has become unwieldy. It is thought to spend up to three times its average consumer marketing budget on in-store spend - up to £30m.

Making the trade budget work harder - and reducing it - will be a top priority for incoming commercial directors Woodward and Douglas, along with new vice-president, channels, John Hans, who will need to carefully study the effectiveness of individual elements in order to prioritise the activity that shifts product and aids listings (see box, page 28).

Risk assessment

Tackling the trade spend is just the most tangible area of concern. Douglas will also need to address what insiders describe as Heinz's intrinsically conservative culture in order to achieve growth in categories that have been under-performing, such as soup.

Risk-aversion runs deep within the company, says Garrett. 'There is no culture of new product development. The problem is that while there are only one or two people who can sign off on such activity, the power of veto is widespread. It took me two years to go from idea to launch - by that time the market had moved on, the need for it had passed.'

Garrett was keen for Heinz to assert its category leadership positions by innovating through extensions. Although he was frustrated by the process and saw many ideas sent back to the drawing board, he launched Mean Beanz last year. The spicy range has been credited with bringing some value back into the firm's beans sales, offsetting price falls on the main brand, and is now set to launch in Australia.

Despite its success in boosting margins on beans, Garrett is realistic in describing Mean Beanz as 'just a line extension. What Heinz really needs to tackle is the fact that its products sit in aisles that shoppers make few trips down. It needs to extend the brand into different aisles.'

Lost initiative

Heinz's culture means that the company has been more likely to cost-cut, rather than innovate its way out of a crisis. Inevitably, this strategy fails when rivals become more proactive. Last autumn, when Heinz was in the midst of its advertising purdah, it was caught out by Premier Foods, which conceived its Branston Beans launch in a matter of months. Premier had lost the licence to produce HP beans when it sold the brand to Heinz and created the Branston product to replace it. Although figures suggest that Premier has taken share more from own-label than Heinz, the launch illustrated how easily Heinz is caught napping.

Given the constant pressure from his corporate stalker Peltz, chief executive Johnson has had to come clean about this limitation of the Heinz style of business. He recently admitted 'we could have moved faster'. And this is exactly what Heinz needs to do. On June 1 it announced a full-year sales increase of 6.7% to $8.6bn. But net profit fell from $752m to $645m, a drop of 14.2% and profits in the fourth quarter fell by 19%.

Weak sales in the UK frozen-food division were flagged as a negative contributor, as was pricing pressure in Europe. Fourth-quarter European profits were kept afloat only by the reduction in marketing expenditure.

In a separate announcement, Johnson revealed a two-year growth plan that won't actually begin until the start of 2007. Four factories will close in Europe, which will account for the majority of the 600 job cuts.

Central to the plan is a promise to reduce trade spend, referred to as 'deals and allowances', by £145m. A 'significant portion' of this is planned to be cut in Europe. This figure is half the $300m demanded by Peltz, but Johnson has condemned that plan as 'unrealistic', a judgment supported by UK grocery experts.

Much of this saving will be funnelled into consumer marketing; Johnson promises a rise across the firm of 18.7% in this area. A 'double-digit' increase in research and development over each of the next two years will prioritise healthier products - Heinz has already started on this path in the UK with lower-sodium beans and soup, and wholemeal canned pasta.

Following the US model

All the proactive development rests on Heinz's ability to cut trade spend.

But a closer look at how it hopes to do that raises questions. The company aims to replicate the US trade management model in the UK, yet the two markets are very different, suggesting that Heinz has failed to learn from Miller's inability to transfer her American grocery experience to the UK market.

Wall Street critics have not been placated by Johnson's plan. One US fund manager described Heinz as a 'pretty bloated and happy company', condemning its plan as 'baby steps' compared with Peltz's radical steps.

That said, marketing support is starting to crank back into action in the UK; a TV campaign for tomato ketchup was recently launched, created by Beattie McGuinness Bungay, the agency that has been working on ads for HP Foods. This reinforces the brand leadership with the line 'We don't have to play ketchup', while emphasising the quality of ingredients. There are also rumours that an advertising campaign is being planned to support the main Heinz brand.

With analysts predicting that Peltz will not stop in his campaign to influence the strategic direction of Heinz, the company's marketers will have to work against a backdrop of uncertainty for some time yet.

DATA FILE - MARKET SHARES

SOUP BRAND SALES (pounds m)

2004 2005 % chng
1 Heinz 162.5 158.4 -2.5
2 Baxters 42.9 49.1 14.3
3 Batchelors 46.6 45.2 -2.9
4 New Covent Garden 37.9 39.0 3
5 Campbell's 13.7 13.3 -2.9

Source: ACNielsen.
Figures are for year running Sept-Oct



SALAD CREAM BRAND SALES

2003 2005(est) % chng
pounds m pounds m 2003-05
Heinz 36 39 8.3
Waistline 2 2 -
Own-label 6 7 16.7
Others 1 1 -
Total 46 49 6.5

Source: Mintel



DATA FILE - BABY FOOD AND DRINK SALES

2002 2005 (est) % chng
pounds m pounds m 2002-05
Heinz 92.5 93.3 0.9
SMA 66.9 81.1 21.2
Cow & Gate (Nutricia) 67.2 81.1 20.7
HiPP 28.1 33.6 19.8
Milupa (Nutricia) 13.2 19.7 49.2
Organix 9.3 13.1 40.9

Source: Mintel

TRADE MARKETING CUTS

Heinz's attempt to tackle the thorny subject of how to reduce the amount of money channelled to retailers without compromising listings is fraught with problems. It isn't just consumer marketing departments that hand over money to supermarkets - sales and any trade marketing department may be spending with them too, making it difficult to track down and analyse the total budget.

There are a wide variety of promotional and other activities that retailers ask manufacturers to contribute to, many of which may not have been subject to any kind of effectiveness analysis.

Agency Commercial Advantage specialises in helping manufacturers manage trade spend. Chairman Emyr Williams says that one of the first areas his team looks at is retailer magazines. Manufacturers can spend tens of thousands of pounds a year on promotions in these titles 'to little effect', says Williams. The only exception he makes is for Waitrose Food Illustrated, which offers a valuable 'halo effect' of association for a brand.

Other areas that manufacturers can often chip away budget savings in include: fees for in-store promotions, fees for products being placed on gondola ends (of aisles) and paying a retailer's 'lost' margin on a 'buy one, get one free' promotion.

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