006 - Case Study Summary - Heinz Ketchup 705a12

Case Study Summary: Heinz Ketchup Submitted to – Dr. D. D. Swain Associate Professor Sales & Marketing IMI-Bhubaneswar

Submitted By: Anant Ashesh 12PGDM-BHU005

Index of Contents 1. Declaration 2. Introduction 3. Problem Identification 4. Scanning the Environment 5. Alternate Solutions and Their Selection

DECLARATION

I, Anant Ashesh of PGDM BATCH 2012-2014 of International Management Institute, Bhubaneswar, do sincerely declare that none of the content in this document is copied from any other source and a match is purely coincidental. I make this declaration conscientiously believing the same to be true. Made and declared at International Management Institute, Bhubaneswar this 10th Day of Novemeber, 2012

Anant Ashesh

Introduction Produced by H. J. Heinz Company, Heinz Tomato Ketchup is the largest product under the company’s portfolio. The ketchup was first introduced in 1876 and by 1907 it was selling 13million bottles per year and exporting it to numerous countries around the world. The biggest reason for Heinz’s success is the complimentary nature of ketchup with American food such as hotdogs, hamburgers, French fries, etc. And due to this reason the company was selling 650million bottles of ketchup around the world in 2012. The company produces majority of its product in its U.S plant located at Fremont, Ohio and the second biggest plant is located at Lamington, Ontario in Canada. The company went in for a redesign of its logo in 2009 and the gherkin that had been sitting atop the Heinz logo for over 100 years was replaced by a vine-ripened tomato. The slogan that is now used is “Grown not made” and it implies that the Heinz ketchup is made out of real tomatoes that are grown naturally. The result of such measures can be seen in the companies’ scores in surveys as in a recent American Customer Satisfaction Index poll, Heinz beat out Kraft, Coca-Cola, and Nestle to secure the highest score. Other than the variation in bottle sizes the company also offers two varieties of ketchup known as “Organic” and “Simply Heinz”. Also with this it also offers Hot Ketchup and Sweet Onion Tomato Ketchup as different flavor options.

Problem Identification Heinz has enjoyed the market leader position since the 1970s and with its well thought out, as well as well executed, expansion plans it has grown at an astonishing pace. But now the company is facing issues from various aspects, such as   



High oil and natural gas prices have increased the COGS by 20% in 2 years. Frequent trade dealings has led to undercutting of Heinz’s margins and eroded its profitability. To increase its sales volume the company offered the Red Rocket at special 99cent prices and that has led to the bottle being assosicated with promotions and not selling during the period the promotion is off. The private label brands of retailers have created tension between the retailers, competition and Heinz.

All these factors have affected Heinz and its position in the market. The management has sat down to formulate plans that will help increase the profitability, release the built up tension with the retailers and tackle the issue of the increasing cost of packaging and production.

Analysis of Environment

Threat Of New Entrants: HIGH

Power of Buyers:

Competetive Rivalry:

Power of Suppliers:

HIGH

HIGH

LOW

Threat of Substitutes: LOW

Competitive Rivalry (High) – The rivalry in the ketchup market is very high and this is not only due to the branded ketchup brands in the market like Hunt’s and Del Monte. The private label brands of the supermarkets and retailers are providing stiff competition to Heinz as well. Threat of New Entrants (High) – The ketchup industry has no barriers to entry and the technology required to start a ketchup business is also not expensive. Therefore the threat of new entrants is high as seen by the emergence of private label ketchup brands around the world. Powers of Suppliers (Low) – The raw materials required for producing ketchup are available easily and from a variety of sources. Heinz therefore, can change suppliers if he faces problem from any particular one. Threat of Substitutes (Low) – The consumption of ketchup with certain food items has become routine for the consumers and this relates specially to fast food. But apart from ketchup there is no other sauce that goes well with everything. The consumer

has option of mustard and many other sauces but none can be used to substitute ketchup. Power of Buyers (High) – Ketchup is a widely used product around the world and the companies supplying the product in the market are also very high. This makes the power in the hands of the buyer very high. They can switch over to other brands and that too without any barriers.

Internal Analysis:Using exhibit 1 we see that the Heinz’s sale has not been a constant increase. Their sales rose from 12946255 units in ’99 to 13228458 units in ’00 and it declined to 12626177 units in ’01. Coming to the latest figures we see that the sales have fallen from 13,091,720 units to 12,064,861units and that is a fall of 7.84%. The revenue has fallen from $264,707,477 to $261,360,428 which is around 1.26% fall in revenue. Which means that the per case revenue must have gone up and on closer analysis we see that in 2005 per case revenue was $20.21 but in 2006 it had increased to $21.66. ing an increase of 7.189% the company actually managed to increase it’s per case revenue even though its total units have gone down.

S.W.OT Analysis – Strengths:  Brand Name – Heinz is over a 100 year old brand and that legacy has helped the company in cementing its name in the market.  Customer Satisfaction – The Company scored the highest points in a recent customer satisfaction survey. This translates into loyal and happy customers who will not leave Heinz in the blink of an eye. Weakness:  To maintain its quality and use the best raw material, Heinz manufactures majority of its products in US and Canada. This increases the transportation cost and also prevents the company was localizing in the countries it exports.  Red Rocket has become associated with promotions and consumers are now ignoring it during the non-promotion period. The Red Rocket is one of the biggest sellers for the company but that is now becoming restricted to the promotion periods. Opportunity:  Growing and Untapped markets like Asia and Africa where the culture of ketchup has not fully developed can be a good opportunity for Heinz.



Consumers were willing to be persuaded to purchase bigger bottles and this would mean an increase in the consumption volume of ketchup, albeit a small one.

Threat:  Private label brands were proving to be a lot of trouble for Heinz. They offered higher margins to the retailers and therefore were pushed ahead of Heinz. To counter this Heinz has had to cut its margin and it on to the retailers.  Rising input prices has been pushing the COGS of the company higher and higher. This has reduced the profitability of the company and resulted in smaller overall margins.

Strength:

Weakness:

* Brand

* Centralization

*Customer Satisfaction

* Promotion Sales

Threat:

Opportunity:

* Private labels

* Developing Markets

* Rising input costs

* Increase in consumption

Alternate Solutions and Their Selection

Alternative 1 – The production of Heinz is highly centralized and almost all the ketchup is manufactured and shipped from either USA or Canada. This has resulted in higher in higher production cost due to  

High gas prices High wages



High input costs

The production costs can be brought down by decentralizing the production process. By shifting to developing economies the costs of inputs and wages can be brought down. By going out of USA the benefits that can be had by Heinz are   

Lower tax rates in developing countries Setting up in rural areas of developing countries will attract the Government and will result in benefits as tax free periods The sustainability principle that has become a part of Heinz’s policy will also help them in the long run

A detailed cost benefit analysis was not possible because details about Heinz’s production process and its ingredients are not available.

Alternative 2 – The highest gross margin for Heinz is in the 14 oz. 20 oz. 32 oz. and 64 oz. bottles. And the highest sales for Heinz come from the 36 oz. 46 oz. 64 oz. 20 oz. and 32 oz. bottles. As we can see that the 20 oz. and 32 oz. bottles are one of the highest selling and also offer higher margins. Therefore Heinz should look at increasing the sales of the other two bottle sizes i.e. 14 and 64 oz. By doing so Heinz will also be able to increase the consumption of ketchup in the market and gather the profits while doing so as well. The other aspect of doing so would be remove the promotional buying phenomenon that has become associated with Red Rocket. By promoting other variants and not just the Red Rocket the company can look to remove that pattern and sell it the whole year round.