Heinz Adapts Retail Strategy To Changing Consumer Behavior And Divisional Growth Trends

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H.J. Heinz

H. J. Heinz & Co. (NYSE:HNZ) is modifying its retail strategy for three of its core businesses – Ketchups & Sauces, Infant/Nutrition and Meals & Snacks – in an effort to adapt to evolving consumer behavior and divisional growth trends. Heinz competes with major food and consumer companies such as Kraft Foods (NYSE:KFT), Tyson Foods (NYSE:TSN), ConAgra Foods (NYSE:CAG) and Campbell Soup Company (NYSE:CPB).

We notice two key trends in US consumer behavior which have become evident from economic data gathered over the past couple of years. Firstly, consumers are aggressively cutting debt, and debt levels have seen a substantial decline. Secondly, consumer confidence, though improving, still remains at a low level relative to pre-recession times. Buyers have developed a far more frugal and disciplined attitude towards spending with emphasis on price and value. This trend is very pronounced in the grocery segment in which Heinz primarily operates.

Frozen Foods Suffer While Meals & Snacks Thrive

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One division which has been negatively affected by these trends is Frozen Food, which we classify under Meals and Snacks. Volumes for these products have declined substantially, and consumer price sensitivity has also increased, resulting in a sharp decline in revenues. The division has traditionally been highly profitable for the company, but the effect of these trends has hit hard, and the company is looking to alter the pricing profile of the products, aggressively cutting costs through divestitures and downsizing, and attempting to boost sales through marketing activities.

On the other hand, the rest of the Meals and Snacks division has performed exceptionally well, since it is a fairly non-cyclical business, with Heinz outperforming its peers owing to its strong brand and the introduction of innovative products such as Heinz Squeeze & Stir Soups. The division operates almost exclusively under the Heinz brand in developed markets but uses different brand names, including the local ones, in emerging markets.

Infant/Nutrition Shows Strong Growth in Emerging Markets

The Infant/Nutrition division is a profitable business for the company and has witnessed significant growth in emerging markets. Heinz is actively looking to expand the division and is currently building a baby cereal production unit in China, which is expected to begin operations in 2014 [1]. We believe that this segment is capable of driving growth for the company over the long term, considering the rapidly growing market for these products worldwide, especially in developing countries.

Ketchups & Sauces Maintain Industry Leading Position

The company continues to focus on its large and successful Ketchups & Sauces division, which delivered strong results last year. The division enjoys a strong competitive advantage owing to its brand and is the worldwide leader in the ketchups segment (and is #2 in sauces). The company is focusing on expanding this division in China, Mexico, Brazil and other emerging markets with large untapped potential. The global market share for this division is around 11%, and we expect further growth as the company continues its aggressive expansion.

Heinz is also actively involved in efforts to operate in a sustainable manner with minimal damage to the environment. It has adopted the use of PlantBottle™ technology as part of its partnership with Coca-Cola, and it is also collaborating with a number of big brands such as Coca-Cola and Nike in the development of plant-based plastics. [2]

We currently have a price estimate of $57 for Heinz, which is about 2% above the market price.

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Notes:
  1. Heinz Builds New China Baby Food Manufacturing Base in Foshan, China Sourcing News, April 2012 []
  2. Coke, Ford, Heinz, Nike, P&G in plant plastics use, Reuters, June 2012 []