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H.J.Heinz Company (NYSE:HNZ) is all set to introduce a range of smaller-sized and less expensive products in order to boost sales in a sluggish economy. The company will also re-introduce baked beans back to the U.S. market.  Consumers often switch to lower priced products, even though they are more expensive per unit, during times of recession to cut down on overall costs. This move is in line with the string of measures taken by companies around the world as uncertainty looms over the health of the global economy. Heinz competes with major food and consumer companies like Kraft Foods (NYSE:KFT), Tyson Foods (NYSE:TSN), ConAgra Foods (NYSE:CAG) and Campbell Soup Company (NYSE:CPB).
Increasing Presence in Dollar Stores
The company is launching several products with a price tag of 99c and $1.99. According to Bill Johnson, Heinz’s Chief Executive, one-third to one-half of unit purchases in several categories in the U.S. consist of lower priced SKUs as more consumers now buy week-to-week to stretch their food dollars. These products will also help the company target households with an annual income of less than $50,000.  Some of the U.S. products include a 10 oz pouch of Heinz Ketchup, a 9-oz pack of yellow mustard and cans of Home Style Beans, all of which will cost 99c. In Europe too, the company will launch several products priced at €1.
Impact on Profit Margins
Smaller-sized products often have a higher profit margin associated with them, even though the absolute value of the margin is lower. With this move, Heinz should appeal to lower income and recession hit households who show a preference for smaller, lower-priced products as well as to medium and high income households who are more likely to buy larger-sized products since these products offer a greater value for money. So, impact if any, should only be on the upside.
The comments by Mr. Johnson come on the back of a weak second quarter which saw its net income dip to $237 million, compared to $251 million in the previous year.
We have a $54.50 Trefis price estimate for H.J. Heinz Company, which is about 5% above the market price.