Heinz Emerging Mkts.pdf

8/9/2019 Heinz Emerging Mkts.pdf

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October 2011 Harvard Business Review 47

How I Did ItHBR.ORG

P H O T O G R A P H Y : C O U R T E S Y O F H E I N Z

The CEO of Heinz onPowering Growth inEmerging Markets

W hen I assumed the leadershipof Heinzs Asia/Pacific busi-ness, in 1993, the companysrevenues from that part of the world werehardly a blipand Id never visited most ofthe countries in the region. I made my rsttrip there soon after I took the job, and it re-ally opened my eyes.

I went to visit a small baby-food factorywe operated in China. There were no fin-ished roads to get there, so I took a train. Itwas an old British train from the 1930s, and

passengers were cooking on hibachis at the backs of the cars. I remember being amazed by the number of bicycles I saw. I went tomarkets where live poultry was being sold.And, of course, I saw food that was foreignto me. At one dinner the host pulled measide beforehand and said, Youre prob-ably going to be exposed to a lot of foodsyoure not familiar with, so if you dontwant to eat it, just move it around on your

plate and smile a lot. Sure enough, duringthe meal I was presented with an entire shwith the head intact. Its eyes seemed to bestaring at me. I wasnt sure exactly what todo with it, so I offered it to my host, whoacted as if it was a great honor.

China, India, Russia, and Indonesia arevery different from the Western Europeanand North American markets where Heinzwas focused at the time, but I could telleven during my rst visits that they repre-sented the future of the business. The mid-

dle class was clearly starting to emerge. Thepeople in those countries had motivationsand desires similar to those of Americansthey were going to want the same kind ofvariety and conveniences.

Back then most of our emerging market businesses were very smallthey weremore about sticking our toes in the wa-ter. But it was obvious that growth in thedeveloped economies was going to slowdown, and that these emerging marketswere where the new growth would be. Al-

though we still refer to these countries asemerging markets, I dont think the labelis accurate anymore. Clearly theyre notfully developed economies, but they are building infrastructureroads, airportsthat is world-class. And for consumer-oriented businesses like ours, theyre aprimary focus.

Soon after I became CEO, we developedour rst long-term emerging market strat-egy, with an emphasis on what we call theThree As. We even put it on the cover of ourannual report one year.

This year more than 20% ofHeinzs revenues will comefrom emerging marketssuch as China, India, Indo-nesia, Russia, and Brazil,versus less than 5% a fewyears ago. Longtime CEOBill Johnson describes hisstrategy for growing salesin developing economies.

THE IDEA

by Bill Johnson

Bill Johnson has been the president and CEOof the H.J. Heinz Company since 1998 and itschairman since 2000.


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HOW I DID IT

48 Harvard Business Review October 2011

Key Emerging Markets Acquisitions for Heinz During Bill Johnsons Tenure

The rst A is applicability: You haveto make sure the product suits the localculture. We do sell some ketchup in China, but the dominant condiment there is soysauce; if were to compete in sauces, thatswhat we need to offer. You also have to beaware that your notion of how a productmight be applicable will differ from thatof the people youre selling to. In Koreathey put ketchup on pizza, which wasanathema to me. The first time I visited

the Philippines and tasted the ketchup,I found that it was very different fromAmerican ketchup. It turned out that it wasmade from bananas. It didnt suit me, butits what Filipino consumers want, so itsapplicable.

The second A is availability: You haveto make sure you sell in channels that arerelevant to the local population. In theUnited States were used to modern gro-cery stores and supercenters; if a companygets shelf space in Safeway and Kroger and

Walmart, its products are available to virtu-ally 100% of the population. But thats nottrue in emerging markets. In Indonesia lessthan one-third of the people buy food inmodern grocery storesthey still shopin tiny corner stores or open-air markets.In China chain grocers have a 50% share; inRussia they have around 40%; in India itsless than 15%.

The third A is affordability: Youhave to remember that Westerners arewealthy compared with people in the restof the world and that the things we take

for grantedsuch as a giant bottle of soysaucemay be unaffordable luxuries tothem. You cant price yourself out of themarket. We try to address this issue by of-fering different package sizes or recipes.For instance, in Indonesia we sell smallpackets of soy saucethe size a Westernermight get with take-out sushifor threecents apiece. That wouldnt make sense in adeveloped market, but in Indonesia we sell billions of those packets because theyre

affordable, and besides, people dont nec-essarily have refrigerators or pantries tohold larger sizes for months at a time.

A few years after we unveiled the ThreeAs strategy, I added a fourthaffinity.That means you want local employeesand local customers to feel close to your brand, and you need to understand howthey live. Thats a large part of why werely on local managers for our emergingmarkets businesses. I believe they bringa deep understanding of local consumers

and employees. Typically we have onlyone or two expat managers in any market.When we need to improve skills such asmarketing or nance, or to implement ourparticular ways of doing business, we sendin our Emerging Markets Capability Teama group of senior people from Western businesses who travel around and coachlocal managers.

In some cases we take the Heinz brandinto a market and try to establish it organi-cally. We did that in China with baby foodwe started there in the mid-1980s, and to-

ot

ons Tenure

MEXICO

COSTA RICA

BRAZIL

Acquired ABALin Mexico (undisclosedamount)

Acquired ABCIndonesia for$78 million

Acquired 50.1% of HeinzFoods South Africa, a jointventure with Pioneer Foods(undisclosed amount)

Acquired ProductosColumbia, maker ofBanquete sauces, in CostaRica (undisclosed amount)

We try to addressaffordability by offeringdifferent sizes. InIndonesia we sell smallpackets of soy sauce forthree cents apiece.

AcquiredPetrosoyuz inRussia for$75 million


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day Heinz is Chinas leading brand of babyfood. But more often we buy and build.For instance, over the past year Heinz ac-quired Quero in Brazil and Foodstar inChina to accelerate our growth. Under ourstrategy, we look for solid brands with goodlocal management that will get us into theright channels, and we buy local infrastruc-ture as well. Then we can start selling other brandsincluding Heinzthrough thesame channels.

Our approach to evaluating acquisitionsin emerging markets is very different fromour approach in developed economies.Some of the due diligence is the same: Welook at the operating metrics of the busi-ness. Is it growing? Are there synergies?Can we manage it? Does it t with our core business? Does it add scale or scope? This business-focused due diligence is oftencomplicated by the premiums we pay foran emerging market acquisitionyou wantto be really sure the growth is going to be

there, so you have to look at per capita con-sumption trends, the macro environment,and the overall state of the category.

Then theres a whole second set of duediligence issues, which also differ fromwhat we do in developed economies. Welook at how the company goes to market,the tax system, the regulatory environ-ment, currency trends, and the politicalclimate, comparing them with what existsin the United States. We take these thingsfor granted in developed economies, buttheyre a big consideration in emerging

CHINA

markets, where governments are oftenmuch more active. This process may takea lot of time, and the companies wereconsidering as acquisitions are sometimesfrustrated by that. But these issues are veryimportant. Weve walked away from dealsin Ukraine, Vietnam, and other markets be-cause our due diligence told us there wereconsiderable risks involved in trying to gen-erate acceptable returns on the businesses.

For managers, probably the most im-

portant factor in growing a business in anemerging market is understanding therisks. Weve tried to manage that by di-versifying: Over the years, weve investedpretty equally in all the BRIC countries plusIndonesia and Venezuela. Weve begun in-vesting in South Africa and Mexico. Diver-sifying helps mitigate not only the politicalrisks but also the currency risks, which re-quire really adept financial management.I sometimes say that Heinz used to be adollar-pound-euro company, but theres

no doubt that in the future it will be domi-nated by the ve Rs: the Brazilian real, theChinese renminbi, the Indian rupee, theIndonesian rupiah, and the Russian ruble.Those currencies are volatile, but theyregoing to be the strongest currencies in theworld going forward, because their econo-mies are the strongest. If you spread yourrisks across markets and across currencies,you wont panic or run away the rst timeyou have a blowup.

However, you also have to know whenthe risk outweighs the potential reward.

RUSSIA

CHINA

INDONESIA

SOUTH AFRICA

EGYPT

Acquired remaining49% interest in CairoFood Industries inEgypt for $62 million

AcquiredFoodstar inChina for$165 million

Acquired Coniexpress,maker of Querosauces, in Brazil for $494 million


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HOW I DID IT

50 Harvard Business Review October 2011

HBR.ORG

For example, we created a really good busi-ness in Zimbabwe during the 1990s. But by the early 2000s the government was

too unstable, the currency had devalued,and we couldnt plan or get resources. Sowe walked away from the market. We alsopulled out of some cities in Russia after theruble devalued in the 1990s.

But generally we focus on the long term.We have learned that to succeed in emerg-ing markets, you need to be risk aware butnot risk averse. Indonesia provides a greatexample of that. We bought a big businessthere in 1999. The country was just start-ing to democratize and have elections; it

wasnt especially stable. Frankly, somepeople wondered if it was a good place foran American company. Today thats a $400million business for us, versus $80 mil-lion when we bought it. ABC is one of theworlds largest soy sauce brands, and itsvery pro table.

Another key to growing in emergingmarkets is to tailor products to local tastes.I try to sample many of the products we bring to market. Im curious, and localmanagers and employees really appreciate

it when I try something unfamiliar. Someof the foods dont agree with melike thePhilippines banana ketchup. We sell a chilisauce in Indonesia. Every time I go, theyask me to taste it. Its so hot that I haveto drink a gallon of water afterward, butthe local population loves it. Sardines arepopular in Indonesia, and meat pies arepopular in South AfricaIm not a big fanof either. In India we acquired Complan, ahigh-protein nutritional beverage for chil-dren. We recently introduced a new varietythat tastes like almonds. Personally, Im

not crazy about the taste; fortunately, In-dian consumers have a different opinion.This year we expect Complan to generate

more than $200 million in sales, and itsour best-selling product in India. You haveto be mindful of the rule of the goldentonguejust because you dont like some-thing doesnt mean the local populationwont like it.

Also, Im always looking to see if someof these products can be sold in developedeconomies. Every year, I ask our manag-ers in those markets to look at emergingmarket innovations that might work there.Consumers all over the world are looking

for bargains, so a lot of ideas for lower-priced products are becoming relevant inWestern markets. I dont like the phrase

mature brands, and we still manage togrow sales of products like ketchup, evenin soft Western economies. But it takeshard work and innovation. Weve had alot of success with new packagingsuchas squeeze bottlesand now were manu-facturing more-sustainable bottles that useup to 30% renewable plant-based materialand innovative technology developed by

our partner, the Coca-Cola Company. In-novation can still drive growth in devel-oped marketsjust look at Apple. But itsde nitely more diffi cult. In emerging mar-kets Heinz is also increasingly focused onconnecting with consumers through socialmedia to glean valuable insights and driveawareness of our new products and inno-vations in markets like Indonesia and India.

We expect more than 20% of our reve-nues (over $2 billion) to come from emerg-ing markets this yearand more than 30% by 2015. Our U.S. business is around 33%,

so thats really significant. Our companyis ahead of U.S. competitors in this areatheyre rushing to catch up. Many of themhave made mistakes in emerging markets.Theyve become too dependent on oneor two markets, instead of diversifying.Theyve relied on expats to manage theirlocal businesses. Theyve rushed in withWestern brands, Western package sizes,Western pricing, without understandingthe nuances of the markets. Many of themhave also been too impatient. Theyreready to walk away too quickly. Thosemarkets require patience. Our Indian busi-ness took seven or eight years to get right.

You have to be patient, exible, and opento ideas from local management. At thesame time, Heinz is leveraging the strengthof our global brand. For instance, we aregrowing our ketchup and condiment salesglobally by partnering with quick-serve res-taurant chains that are expanding rapidlyin emerging markets.

Being successful in those markets alsorequires that every managerincludingthe CEOwork hard to build relationships.I have attended a lot of banquets in Asia.

Theyre an important way to make friends,especially with government officials, butthey can be exhausting. When I travel theretoday, Im usually happy to have a dinner atthe hotel. Still, the cultural differences can be amusing. A few years ago the Chinesegovernment presented me with the MarcoPolo Award, which they give to the com-pany that does the most to improve U.S.China relations. They had a big dinner witha lot of government officials and a lot ofceremony. When I entered the room, they

played Hail to the Chief. My wife couldntstop laughing.Despite the cultural differences, weve

found that customers everywhere are simi-lar in some ways: They all want convenient,high-quality products at good prices. Heinzis a 142-year-old company thats had onlyfive chairmen, and in many of those cul-tures that kind of longevity is appreciated.Ultimately, its all about courage. Are youprepared to stick it out? Emerging marketsare the futurebut theyre not for the faintof heart. HBR Reprint R A

Heinz Vital Statistics

FOUNDED

35,000EMPLOYEES

$1FISCAL OPERATING INCOME

Pittsburgh, PAHEADQUARTERS 10.

FISCAL REVENUE

SOURCE HEINZ

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Heinz Emerging Mkts.pdf