Heinz: sound results, but is the frozen potato market solid?
first-quarter profit excluding a year-earlier tax benefit, as
demand for frozen food products continues to drive profits. But is
the company investing in the wrong type of product?
Anthony Fletcher reports.
Heinz claims that its top 15 brands saw sales growth of 7.8 per cent, and strong results were recorded for Extra Crispy and Easy Fries, two new products in its Ore-Ida frozen potato range.
"Innovation continues to drive profitable growth in our top brands, most notably Ore-Ida frozen potatoes, which had excellent results behind the launch of our exciting new Extra Crispy and Easy Fries lines," said Heinz president William Johnson.
"This, combined with restaging and repricing initiatives around the world, helped generate strong first quarter sales and volume growth against our full-year objective of net sales growth of 2 to 3 per cent."
These figures suggest that Heinz is capitalising on growing consumer demand for convenient, healthy and, above all, safe food, a demand that has in turn increased demand for frozen food. According to analysts Euromonitor, frozen processed poultry retail value sales grew by 27 per cent in western Europe and by 30 per cent in Scandinavia between 1998 and 2003.
Of total frozen ready meals, Euromonitor's latest research found that the 'healthy' share in western Europe increased significantly from 30 per cent value in 2001 to 38 per cent value in 2002.
However, the analysts believe that frozen potato products have a less healthy future, which puts into question the faith placed by Heinz in its new frozen potato range. It points out that this sector had the lowest growth rate of all frozen food categories in western Europe over the last five years, and is expected to show further declines in the future.
Health conscious Scandinavians, in particular, have turned up their noses at frozen potato products, Euromonitor said, not least after Swedish scientists discovered for the first time that acrylamide, a synthetic substance used in the manufacture of plastics and dyes as well as to purify drinking water, is also present in potato products that have been subjected to high heat.
Further exacerbating the gloomy outlook for frozen potatoes is the increasing trend towards low-carb dieting. The sector lost 1 per cent of its retail value share of frozen foods in 2003 in Scandinavia, and Euromonitor expects it to slowly lose value share in the rest of western Europe as well. Low-carb dieting in the US is still a huge preoccupation - there are currently 30 million people following the Atkins plan or some sort of diet that restricts carbohydrate intake.
This analysis, of course, spells bad news for companies such as Heinz and also McCain, which have invested heavily in new frozen potato products. But both appear confident that they can turn public opinion by focusing on product innovation.
Both companies are looking into making crispier, healthier fries, introducing new shapes, implementing different types of seasoning and introducing microwaveable fries. And certainly, the strong results from the launch of Heinz's Extra Crispy and Easy Fries suggest that there is a market for such products.
But whatever the long-term future of frozen potato products, Heinz is confident that it is well placed financially. The food manufacturer reported quarterly net income of $194.8 million, up from $179.8 million a year earlier, excluding the tax gain.
Heinz Europe's sales increased 7.3 per cent. Favourable exchange translation rates boosted sales by 8.4 per cent, with volume increasing 2.1 per cent due primarily to strong performance in the UK and Italy.
Operating income increased 5.2 per cent, mainly due to strong sales volume and favourable currency exchange translation rates. These benefits were partially offset by increased trade promotional spending to improve price competitiveness in Italy and The Netherlands together with unfavourable raw material and production costs for the European seafood business.
However, if the tax benefit and other one-time items are included in the results, then year-earlier earnings were $214 million. Heinz claims that the lower earnings this year are partly the result of the loss of contributions from several slower-growing brands that Heinz spun off and sold to Del Monte last year.
