H.J.Heinz Company (NYSE:HNZ) continues to suffer significant declines in sales volume and gross margin in the Australian market, that accounts for almost 10% of the company’s revenues. Along with a 2.6% decline in sales volume, Asia-Pacific segment’s operating income has gone down by 30%, largely due to the company’s Australian headwinds. The market is becoming increasingly inhospitable for branded products like Heinz as Australia’s two biggest retailers Coles and Woolworths battle over offering lower prices. 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).
Heinz Suffers Down Under
Heinz’s weakening sales in the Australian market continued to worsen this quarter, with the Asia-Pacific region suffering a further 5% decline in sales volume (y/y). The Australian market’s double digit top-line decline also weighed down Heinz’s gross margin that has already been struggling under intense input commodity cost inflation exceeding 10% this quarter. The company’s overall gross margins worsened by 180 bps with almost 30% of the operating income decline relating to the Asia-Pacific markets. All this weakness in the region’s performance came largely from the Australian market as the rest of the neighboring markets performed well with high growth of Complan in India, ABC in Indonesia, Sauces in China and frozen potatoes and sauces in Japan.
The Retailer Battle
Australia’s two biggest retailers Coles and Woolworths, that account for >87% store market over 2000 sq-mts, have engaged in a fierce price war this year that has proved very detrimental to the branded packaged food companies like Heinz, significantly stripping them off their brand and pricing power. Both the retailers have been increasingly replacing branded products on their shelves by lower-priced home-brands and private label products that also provide them with higher margin mix. With input cost pressure and high price competition, Heinz has been struggling in the market on all fronts. (Also read - Heinz, Branded Products Suffer Down Under as Retailers Woolworths & Coles Battle)
With the entire Asia-Pacific region generating almost one-fifth of Heinz’s revenues, Australia and New Zealand together contributed to about 60% of the Asia-Pacific sales in FY 2009 and still contribute to about half of the region’s revenues.
We have a revised $54.50 Trefis price estimate for H.J. Heinz Company, which is around 8% ahead of the market price.