Improving economic data notwithstanding, the US market will remain challenging for packaged food companies for some time, according to bosses at Heinz.
Quizzed by analysts on how positive he felt about Heinz’s home market during an earnings call on Friday, chief financial officer Arthur Winkleblack said: “I am maybe more pessimistic than certainly our government is about where this economy goes.”
A tough place to do business
While Heinz reported stronger-than-forecast Q3 earnings per share on Friday, driven by growth in emerging markets and strong Ketchup sales, the US market remained sluggish, said Winkleblack.
“I think this is going to continue to be a tough place to do business in the US. You're not seeing companies doing a lot of hiring. In fact, you're hearing more companies announcing layoffs and things like that.
“So with that, we're going to hope for the best and plan for the worst.”
Senior vice president of investor relations Margaret Roach Nollen added: “It’s nice to see some improving statistics. But unemployment is still over 8%. You have more people on food stamps than ever before. “
Value means cost per ounce to some, lower entry price point to others
Heinz has responded with new products at lower entry price points to tap into the trend to buy smaller packs, more frequently, and reach a segment of the population that historically has been underserved by Heinz, said Winkleblack.
“Value means different things to different people. For some people, value means lower cost per ounce. For others that are really struggling, it is that entry level price point. And at all levels of the socioeconomic ladder, we're going to be innovating to meet those needs.”
Dollar stores represent growth opportunity
Many of the smaller packs were targeted at dollar stores, which were performing better than the big grocers, he added.
“Alternate channels are doing very well outside of that retail-measured data, and I think that's part of the piece that you guys can't see right now.”
Senior vice president, finance, Edward McMenamin added: “The smaller sizes also address smaller household sizes, and that's probably here for a while regardless of the rebound in the economy.”
Commodity cost inflation has hit its high water mark and is starting to ease
As for raw material cost inflation, Winkleblack said it had peaked at around 10% in the second quarter of fiscal year and dropped to around 7% in the third quarter.
He added: “Commodity inflation, while not going away, will continue to moderate, easing the pressure on gross margins somewhat”.
Q3, 2012 results breakdown
Net income in the three months to January 25 was up 3.98% to $284.7m, while sales rose 7.35% to $2.92bn.
In North American consumer products, third quarter (Q3) organic sales of frozen products were up although Ore-Ida brand sales were “basically flat”, he said. However, the gains in frozen were partially offset by weaker sales in pasta sauces.
The US foodservice business returned to sales and profit growth in Q3 as restaurant traffic improved, while in Europe, constant currency sales were up over 4% and operating income about flat.
“Turning to the Asia/Pacific, that region posted nearly 7% constant currency sales growth and almost 23% operating income growth, a dramatic improvement from their results last quarter. “
In the ‘Rest of World’ segment (mainly Latin America), “on a constant currency basis, both sales and operating income more than doubled”, he added.
“And finally, Africa/Middle East contributed to the strong sales growth in the quarter as well.”