Heinz adapts in China

07 March 2011

BEIJING: Firms hoping to progress in China must invest in marketing, infrastructure and managerial development "up front", a model Heinz established based on its experience in other emerging markets.

Over the last three months, the food group reported like-for-like growth of 30% in China, where it recently rolled out Green Rice Cereal and a new infant formula.

Indeed, the latter of these offerings is a particular priority, as some local products in this sector have lost the confidence of consumers due to ongoing safety concerns.

"A portion of our higher marketing investment this year has been in support of our infant formula launch in China," Arthur Winkleblack, Heinz's chief financial officer, said on a conference call.

"We're pleased with our progress to date, and we're very excited about the halo effect the advertising is having on our base baby food portfolio, including jar foods, cereals and nutritional supplements, with our total organic sales up 35% year-to-date."

Another central driver of the company's success in China is Foodstar, a soy sauce manufacturer it purchased for $165m in 2010.

It took on two brands via this deal, in the form of premium range Master Weijixian, and Guanghe fermented bean curd.

"We have never seen more opportunities than we're seeing now, and we've been very selective," said Bill Johnson, Heinz's chief executive

"Foodstar is a business that fits right in the middle of our heartland core category of condiments and sauces."

Its products are especially popular in Guandong and Fujian, housing 125m people between them, and Heinz hopes to expand such a reach into Zhejiang.

The US firm anticipates Master Weijixian will become one of its "Top 15" brands - which generated 70% of sales during the last quarter - in the near future.

Foodstar's stable contains less than 40 products, and Johnson suggested this constituted its primary strength.

"We're trying to buy concentrated brands, buy good management," he said.

"We're trying to find really focused businesses with strong growth prospects with good manufacturing capabilities … [not] businesses that have been grown simply through SKU proliferation."

Among the key discoveries following on from Heinz's experience in China, and elsewhere, is acting rapidly in specific areas.

Since finalising the Foodstar deal in November, Heinz has boosted marketing and infrastructure expenditure levels, but is struggling to keep up with demand, although this should be eased by a new factory in Shanghai.

"You have to put management in immediately so that they can learn the business," said Johnson.

"Ultimately, the owners that sell these businesses decide that they'd rather go do other things, or they lose interest."

"And the biggest lesson we've learned, and it's one we probably should have known but we really learned a lot of it through China this year, is you have to get your investments up front. Not only in capital but in marketing."

"So the biggest lesson: good management, focused portfolios, strong brands, good infrastructure, manufacturing capacity and invest up front - don't wait."

As a result of growth in China, and nations like Brazil and India, Heinz believes emerging markets are likely to deliver over 20% of sales in its current financial year, up from 10% just a few years ago.

Data sourced from SeekingAlpha; additional content by Warc staff