Heinz aims for new growth in dollar, drug stores as profits surge
By Kim Leonard
Published: Tuesday, Nov. 20, 2012, 8:00 a.m.
Heinz foods are starting to appear on shelves and in freezer cases at Dollar General and other deep discount, dollar-style stores along with grocery sections at pharmacies.
The move by H.J. Heinz Co. is among several steps the food maker is pursuing to continue growth of its U.S. business in addition to strong sales in emerging markets such as Brazil, where ketchup and other products grew 33 percent in the August-October period.
Emerging markets include China, Russia, Mexico and the Middle East and now make up 23 percent of Heinz's overall sales compared to 9 percent eight years ago.
Heinz, based Downtown, on Tuesday reported a $289.4 million second-quarter profit, or 90 cents a share, which is up 22 percent from a profit of $237 million, or 73 cents, a year ago. Sales grew by 0.5 percent to $2.83 billion.
CEO William Johnson said in a conference call that the company increased spending on marketing by 13 percent in the period. A big focus in North America was on products such as Ore-Ida frozen potatoes, Classico pasta sauces and ketchup in new flavors and lower cost packages.
Johnson said he's encouraged by improvement in Heinz's U.S. business, with about 65 percent of consumer products building market share, even though he doesn't expect robust growth in the domestic economy.
“We need to remind ourselves that we sell staple products that enhance the foods that people enjoy every day,” he said, and the company must meet consumers' expectations for value-priced foods.
Shares ended the day at $57.43, down $1.29. Stifel Nicolaus analysts said the latest results beat their per-share earnings estimate, and an analysts' consensus, by 2 cents, and they maintain a buy rating on the stock. Heinz reiterated its full-year earnings growth estimate of $3.52 to $3.62 a share.
Heinz said its U.S. retail sales grew 3.7 percent in the quarter, the strongest performance in more than two years, said Art Winkleblack, chief financial officer. That number excludes a discontinued TGI Friday's frozen entrees business and a sale of the Boston Market license.
Johnson outlined some recent Heinz initiatives, including ketchup in special flavors such as balsamic vinegar and jalapeno, with the latter set to debut on Cyber Monday on Facebook. Others were an outreach to Hispanic customers through multilingual advertising and affordable packaging such as a 99-cent, 10-ounce ketchup packet.
Heinz's management team has “begun to make progress on alternate channels like drug and dollar stores” through improved distribution and products aimed at price-conscious shoppers, he said.
That's not having much impact yet. “We're just now getting into dollar stores, and we've cracked Dollar General on Ore-Ida,” he said, adding Heinz is “grossly underdeveloped” in terms of getting products on shelves at the stores that have fared well through tough economic times.
“Dollar stores have been growing faster than any other retail format, and they sell many of the products that Heinz would produce,” said John Stanton, a professor of food marketing at St. Joseph's University in Philadelphia. “My only question is, why haven't they done this already?”
Large food producers tend to fall into “organizational inertia” when it comes to responding to new concepts, when the bulk of their business comes from supermarket sales, Stanton said.
A food retailing report by market research firm Willard Bishop said supermarkets have a 46.7 percent market and increased sales by 4.4 percent in 2011. Dollar stores have a 2.2 percent market share but grew sales 11.8 percent last year.
“Drug stores are growing faster than supermarkets, too,” Stanton said. Food sales there grew 4.6 percent in 2011, Willard Bishop said, and drug stores account for 5.5 percent of food sales.
Heinz, while stressing condiments and sauces, said its frozen entrees business such as Smart Ones has been lagging. The category has lost about a third of its volume, or 20 million cases in sales, over the past five years, Johnson said. Sales declined $500 million in that time, he said, although frozen breakfast items have fared better.
Kim Leonard is a staff writer for Trib Total Media. She can be reached at 412-380-5606 or firstname.lastname@example.org.
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