As price-war continues between Australia’s two biggest retailers Coles and Woolworths, H.J.Heinz Company (NYSE:HNZ) continues to suffer significant declines in gross margin in the Australian market that is increasingly becoming inhospitable for branded products. Heinz manufactures and markets an extensive line of processed food products that includes condiments, meals, snacks and infant/nutrition products that are well known globally. The company 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).
We have a $62 Trefis price estimate for H.J. Heinz Company, which is around 20% ahead of the market price.
The Coles-Woolworths War
The two powerful supermarket chains, Coles and Woolworths dominate the Australian market and account for 87% store market over 2,000 square-meters. The two retailers have been increasingly stripping off branded products off their shelves and are focusing on lower-priced home-brands and private label products that provide them with higher margin mix.
Woolworths recently added over 600 new generic products to its supermarket shelves, bringing the private label range to around 2,500 products. This however, has seriously hurt the pricing power of food manufacturers like Heinz, dramatically weakening their brand power. Steep reductions in the price of food products are shifting demand to private label products and threaten the viability of supply chain for corresponding products from other brands.
Impact on Heinz
With almost no room for pricing, Heinz has been performing poorly in the Australian segment. It has been struggling to compete with lower-priced private labels, leading to intense downward pressure on gross margins. It is not just limiting Heinz’s ability to reinvest but has also forced product de-engineering to meet price points.
The Australian market that generates around US $1 billion in annual revenues for Heinz, underwent 8% decline in sales in the last quarter. It also hit Heinz’s gross margins in the wider Asia-Pacific region, which fell by 2% and operating income was down 20%, excluding currency.
In order to revitalize its operations in the inhospitable market, Heinz is attacking the cost structure to stabilize its performance. It is restructuring its supply-chain and manufacturing network in Australia as part of its “global productivity plan”. That includes closure of its Girgarre factory (New South Wales) and downsizing of its factories in Northgate (Brisbane), and Wagga Wagga (New South Wales).