Heinz is exploring new pack sizes and products with a lower entry price point in the US market as consumer confidence hits new lows.
In a conference call with analysts yesterday to discuss the firm’s first quarter results, Heinz executive vice president and chief financial officer Art Winkleblack said sales in emerging markets had grown strongly.
However, US consumer confidence had “hit a new low”, he said. “It is even lower than in the depths of the recession of the first quarter of 2009 and in fact is at the lowest level since 1980.
“Q1 brought fresh economic uncertainty and more challenges for US consumers. Debt ceiling debates, the [S&P] downgrade, weak employment and housing markets and wild volatility in the stock market all served to make consumers here very nervous… As a result, they are reacting by cutting back on discretionary spending.”
Innovation for the ‘bifurcated consumer’
Given the “worsening economic uncertainty” the focus in the US was on cost cutting, reducing unprofitable trade spending, and recovering cost inflation, he said.
However, bosses were also looking at introducing new products and pack sizes to cater for the needs of the “bifurcated” US consumer, said Meg Nollen, senior vice president, investor relations and global program management officer.
“We originally anticipated more of a recovery scenario…now we’re seeing things get tight again. There is a lot of innovation being brought forward that’s different from what we would have planned maybe three months ago.
“It’s about great innovation at the top line, new flavors, dinner formats but now we’re also looking at other opportunities at the lower end of the scale.”
Less about the price per ounce and more about the entry price point
She added: “There is a portion of the population that has $40-50 a week to feed a family of four. Value to that consumer … is a price point, it doesn’t matter what the cost per ounce is, it matters can I afford to buy even a small portion of that per week?
“Our core portfolio in the US tends to skew towards the more affluent… But there is a huge opportunity for us …to get into the right channels and the right sizes for a different consumer.”
Winkleblack added: “It’s about [product] sizes that allow people to play, because you’re seeing folks that are living pay check to pay check, so it’s less about the price per ounce and more about the entry price point.”
Higher prices cancel out volume declines in US
US constant currency sales were flat in the quarter as higher prices to cover increases in the cost of sweeteners, dairy, oil and resin were cancelled out by volume declines. Sales in the US foodservice division dipped 1.1% to $325m reflecting a 2.3% rise in prices and a 3.4% drop in volumes as restaurant traffic dipped.
Overall, said Winkleblack, “the quarter slightly exceeded our expectations, despite the tough economy in developed markets and a more challenged US consumer."
He added: “Emerging markets continue to grow in importance to Heinz, we’re delighted with our new acquisitions FoodStar in China and Quero in Brazil. We have owned FoodStar for nine months and in that time it has grown more than 20 percent versus the comparable period in the prior year.”
Heinz, which posted a 6.3% drop in net profit to $226.1m on sales up 14.9% to $2.85bn in the first quarter, said sales from emerging markets now represented almost a quarter (23%) of group sales (compared with 18% a year ago).
The firm, which plans to invest at least $130m in “productivity initiatives” this year, spent 15% more on marketing during the quarter, while cash had also been pumped into project keystone, a program to standardize systems and processes under a common SAP technology platform.