by Greg Thain
It is hard to see anything-transformative happening in North America for General Mills, where it has struggled to reach significant volume growth for years. It does operate in a number of categories that are growing healthily, but as it is already number one in the majority, it relies more on natural category growth than internally generated major initiatives. It is not a notably innovative company and has not created any major new categories for some time, nor has it seriously disrupted anyone else’s, so it must look abroad. Perhaps the acquisition of Yoplait points the way forward. General Mills needs to become a much bigger player in the rest of the world - and quickly. As developing markets grow at breakneck speed, size will increasingly matter, just as size mattered in the 1920s in the flour-milling business. Its American DNA is readily transferable to the rest of the world, as Wanchai Ferry has demonstrated, so anything is possible. Ironically, General Mills is crying out for a move as far-reaching as the first one James Ford Bell made almost one hundred years ago.
Heinz
Where Did They Come From?
At 5pm on Friday, 17th December 1875, a Pittsburgh food company filed a voluntary petition in bankruptcy. Someone in the company had purchased, ill-advisedly and pre-harvest, an entire season’s crop of cucumber and cabbage. It did not work out.
Although the company had been employing 150 people across four cities preparing and selling 300 barrels of sauerkraut, 15,000 barrels of pickles and 50,000 barrels of vinegar, there was no escape. Already its CEO had been arrested twice for apparent (and later disproved) fraud and his parents’ house and all the money loaned by relatives appeared to be lost. It would take him nine years to pay off his creditors. And very fortunately, Henry John Heinz was a man not easily deterred: his next business reincarnation would eventually top $11.5 billion sales.
Henry had been launched into the produce business by his mother who tasked him with selling the surplus from the family’s garden. By the age of 12, he had bought himself a horse and cart and expanded the garden to three and a half acres to accommodate his best-selling line, which was his mother’s prepared horseradish. These he sold in clear glass bottles to showcase the absence of foliage and fillers habitually used by his more established competitors. Henry had already learned two lessons upon which the fortunes of H.J. Heinz & Co. would later flourish: that housewives will pay someone else to do their more difficult kitchen chores, and that a pure product of superior quality, properly packaged and promoted, would sell on its merits.
After a solid grounding in his father’s brick business and at Mercantile College, at the age of 25 in 1869, Henry founded the firm of Heinz and Noble with his neighbour, Clarence Noble. They produced and sold bottled pickled food under the Anchor brand name, and naturally their first product was his mother’s grated horseradish. Henry was the driving force. His beliefs shaped, and still shape, the modern Heinz business. No doubt resulting from spending his formative years largely in the garden, Henry never lost his fascination with how things grew and how to grow them better. This led to his third idea for a successful food business: to improve the finished product, you must improve it in the ground. So he spent countless hours picking the brains of various government research stations and farmers on how to improve the crops, not just in flavour but from a commercial standpoint: greater yield, earlier maturity and greater consistency.
Yet Heinz, Noble and Company collapsed, apparently due to Clarence Noble’s overdose on cucumber and cabbage. Henry was completely undeterred, and two months later set up again, this time with his brother John and cousin Frederick, with the firm of F &J Heinz. Of course, as an un-discharged bankrupt, Henry was not allowed his name over the door but, as manager, he ran the firm nonetheless. One of his earliest decisions was to add, to their range of pickles, the first commercial grade of tomato ketchup to be made available in the USA. Upon this ketchup the fortunes of his new company would rise. Somewhat ironically, the logo for the new company would be the image of a cucumber pickle: whether Henry was cocking a snoot at the bankruptcy authorities, or humbly reminding himself that disaster could always strike, is unclear. In 1888 Henry bought out his brother and cousin and was in sole charge of his destiny.
How Did They Evolve?
Henry Heinz cast a long shadow over the development of the firm. Even as late as 1966 the company had still only had three CEOs; and the three were Henry, his son and grandson. And most of the familiar imagery associated with the company – the octagon-shaped ketchup bottle with its keystone label, neckband and screw top, promoted as one of the 57 Varieties - was in place by the turn of the twentieth century. Henry also bequeathed Heinz’s trademark characteristics of salesmanship, initiative and quality. Heinz would be at every food show or country fair, giving away endless free samples backed by a money-back guarantee (unusual for those times). His travellers would sample their products at every sales call and pay the retailer to take down any old Heinz products past their best. But Henry saw that the less ethical companies were giving the entire prepared foods industry a bad name. Heinz products were pure, while it was not unusual for his competitors to be adding dyes, formaldehyde, sawdust and worse.
So Heinz went political. The company worked closely with the main advocate for food quality reform in the US Department of Agriculture. Henry campaigned relentlessly, even sending his son to the White House to give Teddy Roosevelt the hard sell. He finally sealed the deal - via the 1906 Pure Food and Drug Act -when he demonstrated to Roosevelt how adulterants were being used to transform gut-rot whiskey so it could be labelled as 10-year-old malt.
With the force of law behind it, the food industry went on an unprecedented boom, aided by a rapidly growing urban population with rising disposable incomes. Powered by this economic machine, the Heinz business prospered, still run very much on the founder’s key principles. These he had enshrined in stained glass windows in his ever-expanding Pittsburgh factory, the most powerful being: ‘To do a common thing uncommonly well brings success’. With the other manufacturers having to clean up their act, Heinz had to keep one step ahead in the quality stakes. So Henry’s son (and a future Heinz CEO) Howard, who was himself a chemistry major, overcame his father’s objections and hired a bacteriologist to lead the systematisation of the company’s production processes. Hitherto this had seemed a domain of highly secretive processes amounting to his men dipping their fingers in the mixes rather than reading gauges.
In 1919 Howard succeeded his father as CEO and by 1924 was presiding over a vast, vertically-integrated food empire that relied on 150,000 acres of crops, 25 branch factories, over 100 salting stations, and nearly 800 rail cars. All this was kept busy by nearly 1,500 salesmen out touting for business, including 160 of them overseas, primarily in the UK and Canada. Production processes were vastly improved and in 1931, driven by the impact the Great Depression was having on business, the company saw that its reputation for unimpeachable quality and purity could be used to enter the baby food market. Heinz were far from being the first into the category, but they had the brand strength and the retail coverage that could get distribution for and trial of their first four offerings of strained peas, carrots, mixed vegetables and spinach. This new sector, along with their booming UK business, saw the company through until better economic times returned. In 1936, another trait of the current company was born when Heinz bred its first hybrid tomato seeds to send out to their contracted farmers.
In 1941, the founder’s grandson, Henry John Heinz II, became the company’s third CEO at the tender age of 33 and, once peacetime production resumed, presided over the next two decades of success as post-war affluence and the baby boom naturally grew their markets for them. But the boom years made Heinz complacent. Many of the key executives had been there for decades and although the company had gone public in 1946, it still ran as a long-established family firm. However, the third-generation family member appeared to have a fraction of the interest in the business as the founder, a common problem for family business dynasties. Whereas the
original Henry had kept a diary every day detailing weather and crop growing conditions, Henry Mk II became more interested in travelling the globe, and new Heinz businesses he set up in the Netherlands and Japan were not successful.
The core business was still growing, but becoming increasingly unprofitable. By 1950 it was only making a 2.5% return on sales with matters not improving for another decade or more. The rise of the supermarket format in the US hit Heinz’s venerable business model hard. Time-starved chain store branch managers had little time to sample the latest version of Heinz’s product range. Food brokers became the industry’s preferred means of order-taking and distribution. Margins were continually squeezed as Heinz products regularly played the role of the loss leader for the brash supermarkets. Aside from their highly profitable UK arm (of which more later), the company was barely breaking even; in 1963 over 80% of company profits came from the UK.
While the products were still excellent, the management of the company had failed to move with the times, a fact duly noted by Forbes magazine in a 1964 article, 57 Varieties of Trouble. The company was volume driven, had little awareness of market trends and was losing share to more sophisticated rivals.
How Did They Build Their Modern Business?
Salvation was at hand in the form of the company’s fourth CEO, and first non-family member to assume the role: R. Bert Gookin, who had joined the board in 1960. As Vice President for Finance, Gookin persuaded the company to make its first domestic acquisition, of a local fruit-based drinks company. Another similarly underwhelming acquisition followed, but in 1963 Gookin hit the jackpot when he engineered the acquisition of StarKist. Their products, primarily canned tuna and pet-food, were both growing faster than Heinz’s traditional area and the company expanded into another boom category – frozen foods - in 1965 when it purchased Ora-Ida foods. These two acquisitions really saved the US Heinz business by giving them time to get their house in order. A year later, Gookin was appointed CEO and was to preside over a remaking of the company.
In a prior role as head of the failing US division, Gookin had hired his Vice-President of Marketing from P&G. This was Heinz’s first hiring of an externally trained marketer, but he was soon joined by several of his ex-colleagues. The company realigned itself behind a product management structure - the food service part of the company being separated out organisationally - and the company’s marketing was restructured. Gookin next set about the rest of the organisation with a cost-cutting zeal, while simultaneously putting in place the systems and processes of a modern business. The sales force was slashed as the company focused on grocery chain head office buyers. Factories were updated and modernised, improving both quality and costs, and the spending on brand marketing was increased.
One of Gookin’s top priorities had been to fix Heinz’s ailing US soup business, where they trailed far behind Campbell’s. After the ill-fated launches of Happy Soup for children and Great American Soups packaged in red, white and blue, the company switched out of a loss-making branded soup business and embarked on a much more successful private, or own-label soup, strategy. They became the dominant industry supplier, which eventually became the second-largest component of Heinz’s US operation.
Despite the success of StarKist and Ora-Ida, Gookin’s most significant acquisition came in 1967 when he authorised Heinz UK’s partnership with an innovative Irish company, Erin Foods. The value came not so much from Erin’s accelerated freeze-drying process, but from its managing director, Tony O’Reilly. A year later Gookin offered O’Reilly, then only 32, the job of managing director of Heinz’s booming UK business. He was soon asked to oversee the flagship US operation where he really made his mark. When O’Reilly got there, StarKist was making nearly three-quarters of the US division’s profits and most of the growth potential seemed to reside in Ore-Ida. On its traditional product lines, Heinz was shipping over 100 million cases a year and yet barely scraping a profit. Only ketchup and vinegar were market-leading brands.
StarKist had proved an inspired buy. The canned tuna part of the business was successful enough but the jewel in the crown was the pet food side. StarKist’s management had got into the cat-food business in the mid-1950s as a way of profitably selling the by-products of tuna processing. StarKist’s 9-Lives brand had initially prospered but by the time of the Heinz acquisition it was losing market-share. Heinz’s P&G-trained marketers turned to the Leo Burnett advertising agency for help. They came up with Morris the 9-Lives Cat. Morris, who had been rescued from a New England animal shelter, was for a time Heinz’s most productive employee, driving up sales to over 20% of the national market and keeping three canneries working flat out.
O’Reilly rapidly reorganised Heinz USA, instilling a much greater level of professionalism and setting the goal of becoming the lowest-cost operator in the industry. However, his greatest success in the role came with Heinz’s 1978 acquisitions: of Weight-Watchers International (which ran Weight-Watchers meetings where revenues of $50 million were generated); and of Foodways International who held the license for the manufacture of Weight-Watchers branded frozen meals. The initial attraction had been Foodways, which O’Reilly saw as a good fit with Ora-Ida, but as Heinz learned more of Foodway’s relationship with Weight Watchers, it became apparent that this was the real prize. By owning the brand itself, Heinz would have full scope to ride the upcoming health and fitness wave; as a mere licensee it would have been merely a bit-part player.
Another dramatic change, which would be instrumental in driving the revitalisation of the US business, took place over a prolonged period. It even started before Gookin’s tenure: this was a complete revolution in the company’s flagship tomato ketchup. On their arrival, Gookin’s P&G marketing recruits faced the grim news that Heinz Tomato Ketchup’s share of the market had slumped to 20%, neck and neck with Del Monte and Hunt’s, and was losing money. The key to the coming revolution lay in reducing production costs by switching from making the product from fresh tomatoes, available seasonally, to a Heinz proprietary tomato paste, which would be available all year round. By smoothing the huge peaks and troughs of production, costs could be dramatically reduced. But could it be done without impacting the taste and quality? Yes it could. An unknown Canadian factory employee had made a suggestion: the company should consider the massively efficient evaporators used by the dairy industry to turn surplus liquid milk into milk powder. Once they had proven the process worked, Heinz set about re-engineering around the use of tomato paste and by 1968 was making 50% of its ketchup that way. Protected by patents at every stage of the process, it gave Heinz an advantage in cost and the ability to drive up production volumes, both of which had been limited by the uneconomic nature of the previous process. Advertising spend was ramped up while prices were kept keen. Sales doubled during the second half of the 1960s, and two years later, brand share was a market-leading 34%.
Once Heinz had switched to 100% paste production, the company’s agronomists then set about developing tomato hybrids specifically suited to a paste production process. This was really the start of what has become a key part of the Heinz DNA – institutionalising the best tomato expertise. Heinz constantly developed new hybrids to optimise its proprietary processes. Competitors couldn’t even use them if they managed to get hold of some from less-than-loyal farmers, as the hybrids didn’t reproduce.
A year later, on Gookin’s retirement, Tony O’Reilly became the company’s fifth CEO. By the time Gookin handed over the CEO baton, he had overseen a transformation of the H.J. Heinz Company, tripled its sales and almost quadrupled its marketing spend as a percentage of sales. Heinz was now capable of moving to the next level. O’Reilly’s first priority was to expand the Heinz global footprint.
How International Are They?
Famously, Heinz were given an international dimension by their charismatic founder, Henry, cold-calling on London’s prestigious Fortnum & Mason in 1886, and getting a full listing for everything he pitched. The experience taught Henr
y another of the maxims by which he ran the business: that their field was the world. Having developed the UK business largely himself on his yearly visits and opening a sales office there in 1896, in 1905 Heinz sent his best manager, Charles Hellen, giving him carte blanche to develop as he saw fit.
This latitude would be the making of the business. One of Hellen’s first moves was the purchase of a long-established British pickle and sauce manufacturer, Batty and Co. Ltd., giving him a production base and much improved distribution network. Hellen had been relying entirely on products imported from North America - Heinz Baked Beans had first been imported in 1901 - and set about phasing in new Heinz-branded products made locally. This was the first example of the Buy and Build strategy the company would be using 100 years later for new markets. Heinz Salad Cream, launched in 1914, was the company’s first brand developed exclusively for the British market. By this time Heinz had also opened small factories in Canada and Spain.
Beans were the making of Heinz’s British Empire. Hellen decided to leave behind the upmarket clientele of Fortnum & Mason and focussed his advertising upon working class towns and cities. Heinz Baked Beans became synonymous with good, cheap, nutritious food. Heinz also made a go of its soup business in Britain - Campbell’s were slow off the mark entering the market - and was equally successful in canned pasta, salad dressings, ketchup and baby food. In each of these categories Heinz would build a market share of 70% or higher by 1960, and would have so influenced the British palette that they had the world’s highest per-capita consumption of baked beans. So successful was this local strategy that, still today, Heinz is regularly voted one of Britain’s most favourite brands.
