Heinz Product Line
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Heinz Ketchup had long been a nostalgic piece of Americana. Millions of consumers in 140 countries from all walks of life have purchased and used what has become a symbol of American innovation and prosperity. In the United States, ketchup was ubiquitous, always served with American favorites such as hot dogs, hamburgers, and french fries. Its presence graced the tables of outdoor barbecues, church festivals, truck stops, and countless restaurants across the United States and around the world. It was distributed by all major grocery retailers in the United States and many outside the United States. At any given point in time, 95% of U.S. households had some ketchup in their pantries or refrigerators, and over half those households chose Heinz. In 1964, Andy Warhol immortalized the humble Heinz Ketchup case with his sculpture “Heinz Tomato Ketchup Box” (Figure 1).
Figure 1. Andy Warhol’s “Heinz Tomato Ketchup Box [Prototype].” Synthetic polymer paint and silkscreen ink on wood, 1963–64.
Source: Andy Warhol Foundation for the Visual Arts/Artists Rights Society (ARS), New York. Used with permission.
This case was prepared by Rebecca Goldberg under the supervision of Professor Ron Wilcox. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected] No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
Originating in eastern Asia as a type of spiced fish sauce, the modern version of the tomato-based condiment was introduced in the United States in the early 19th century. By 1801, a recipe for tomato ketchup was printed in an American cookbook entitled The Sugar House Book. In 1824, a ketchup recipe appeared in The Virginia Housewife, an influential 19th-century cookbook written by Mary Randolph, Thomas Jefferson’s cousin. Heinz brand ketchup was introduced in 1876 by the H. J. Heinz Company and since the 1960s has commanded a leadership position in the ketchup category, advertising it as a “Thick & Rich” leader in product quality.
While Heinz Tomato Ketchup was the flagship brand of the H. J. Heinz Company, the company’s portfolio of food products and restaurant chains generated nearly $10 billion in annual sales. Among its other leading U.S.-based brands were Classico pasta sauces, Ore-Ida potato products, Heinz 57 sauce, and Jack Daniel’s Grilling Sauce. Heinzbranded beans were popular in European markets, particularly England. In all, H. J. Heinz owned 15 brands that each accounted for more than $100 million in sales. Ketchup, however, was the juggernaut, representing over 30% of sales.
Heinz had also been aggressive in developing and acquiring brands that catered to tastes around the world. It owned the Netherlands-based Koninklijke De Ruijter (chocolate sprinkles) and the Indian brand Nycil (“prickly heat powder”). Emerging markets in particular had driven significant growth for the company. In fiscal year 2008, sales in emerging markets grew at a robust 25% clip, accounting for 13% of overall sales. Heinz CEO William R. Johnson said emerging market sales were expected to account for approximately 20% of Heinz’s sales in 2013.1 While increasing international sales and diversification had been an important, oftenstated goal of the company, the North American market still represented the single-largest market for Heinz products, representing about half of all worldwide sales in 2007.
Heinz Ketchup in 2007
In early 2007, ketchup was a saturated market in a mature category. Category sales growth was slow. As the clear leader in market share, Heinz had relied for many years on innovations in packaging, promotion, and pricing to maintain modest growth and to provide value to shareholders. (Refer to Exhibits 1 and 2 for profitability data from 2000 through 2006.) Figure 2 presents volume of both the ketchup category as a whole and market share specific to Heinz from 1966 to 2004.
Raw material costs
The Heinz recipe and leading product quality made Heinz Ketchup a brand rather than a commodity; certain commodity prices, however, had a direct impact on Heinz’s margins, among them oil-based packaging. High oil and natural-gas prices had significant cost implications for the ketchup category starting in 2004. COGS increased by nearly 20% from 2004 to 2006. Heinz 1
Ketchup experienced three years of declining operating income despite its position as the market leader.
Competition and retail pressures
Heinz Ketchup competed against other ketchup brands, most notably Hunt’s. But in many respects, its primary competitors were retailers that had developed their own private-label products. In effect, Heinz’s own channels of distribution were competing against the Heinz brand. Retailers could achieve far better margins by devoting shelf space to in-house products, so these labels were aggressively marketed on store shelves. Heinz was under constant pressure to offer trade deals to retailers, and it often cut its wholesale prices substantially on the most popular sizes in exchange for marketing support at the retail level. Such frequent trade dealing had the effect of undercutting Heinz’s margins and eroding profitability. Over the previous 20 years, however, this strategy enabled Heinz to block the growth of private-label ketchup and strengthen its share position significantly.
Note: “Anticipation” was a popular advertising campaign featuring the music of Carly Simon; “Plastic Bottle” refers to the introduction of plastic bottles as a replacement for the traditional glass bottle; “No Advertising/Price Increases” is a period of low marketing activity and increasing margins; “Red Rocket” refers to the introduction of the heavily promoted 24-oz. plastic bottle; “EZ Squeeze” indicates the introduction of the upside-down package design.
The Red Rocket
Heinz’s Red Rocket 24-oz. ketchup bottle, a bottle designed to be reminiscent of the older glass bottles, was introduced in 2000; it was successful bysome measures, yet it resulted in a complex marketing problem.
One of the key tactics Heinz adopted between 2000 and 2007 to block private-label growth was to run seven annual trade promotions discounting the Red Rocket to a 99-cent retail price point. When retailers ran promotions to lower the price of any of their items, they were in essence compressing their gross margin in hopes of driving higher-volume sales. Heinz and other manufacturers paid out trade allowances to the retailer to help offset the margin compression during these promotional periods. Retailers across the country embraced this Heinz promotion strategy, giving it the highest levels of support with front-page features in their weekly flyers and prominent in-store displays during each of the seven promotional periods.
While the Red Rocket promotions resulted in temporary category expansion and strong retail support, they also had several negative effects. The 99-cent price point trained consumers to wait to purchase ketchup until these periodic sales took place. By 2004, over 50% of retail volume was sold on promotion. Retailers realized that the Red Rocket promotions were also great for blocking Wal-Mart’s “Everyday Low Price” (EDLP) strategy, which kept prices so low that Heinz felt pressured to extend Red Rocket’s discount periods. (See Exhibit 3 for a display of price points for Heinz Ketchup products sold from 2000–02 in traditional retail, Wal-Mart, and club consumer retail locations.)
Leveraging Consumer Habits
Tapping into the ways in which Heinz products had been consumed was another tactic Heinz used in developing innovations in packaging and promotion. The upside-down bottle, or EZ Squeeze, introduced in 2002, is one example of this, because it appealed to the many consumers who stored ketchup bottles upside down: the way they emptied most easily. (See Exhibit 4 for price point information.) The EZ Squeeze was an ergonomically designed 20-oz. bottle that carried the same retail price as the traditionally bottled 24-oz. size. Ryan Stansberry, Heinz’s vice president of marketing for ketchup, said of the EZ Squeeze bottle: “The challenge here will be delivering a value that the consumer is willing to pay the premium price for. Consumers are telling us this scores very high in value at the suggested retail pricing behind the benefits that we’re delivering.”
Marketing support could include lower prices for the promoted product at the retail level, premium or additional shelf space, and/or inclusion in the weekly feature flyer many grocery stores circulated.
Pam Demetrakakes, “Heinz and Hunt’s Play Ketchup with Upside-Down Bottle Battle: Here’s What Happens When Two Ketchup Giants Develop Similar Concepts at the Same Time,” Food & Drug Packaging, August 2002
Heinz focused on several key concerns in the development of the EZ Squeeze that it believed were most important for its consumers. Henry Henners, Heinz’s brand manager, said the guiding principle for Heinz from a point-of-sale standpoint was maintaining links to the company’s ketchup traditions. “What we found out was consumers wanted to be reassured that it was the same Heinz Ketchup they were used to,” he said. “The best way to do that was with a clear bottle showing the ketchup and also with a keystone label.” Consumer research indicated that 7 out of 10 consumers preferred the upside-down bottles; sales performance in the U.S. market, however, did not reflect those scores.
The upsidedown bottles represented only about 12% of the Heinz Ketchup business. Meanwhile, its performance was significantly better in the United Kingdom, where the entire ketchup line was taken upside down to boost Heinz’s UK market share and profits to record levels. The reason behind the disappointing sales in the United States was unknown but was possibly related to the release of Hunt’s Perfect Squeeze, a similarly designed upside-down ketchup bottle, at roughly the same time.
The introduction of the upside-down bottle brought the Heinz Ketchup product line to nine package sizes in 2002 (Figure 3); this number remained constant through the first part of 2007. Heinz margins on each product can be viewed in Exhibit 5. Figure 3. Heinz’s nine ketchup package sizes in 2007.
Source: Heinz. Used with permission.
When the introduction of the upside-down bottle in the United States failed to provide a significant short-term profit boost, the marketing team members began searching for another strategy for stimulating sales through product innovation. Again, they looked to buyer behavior patterns to help guide innovations in packaging and promotion. They conducted consumer focus groups and examined historical sales data and then analyzed the results. An ongoing theme emerged: A modest increase in ketchup consumption seemed to result when people purchased larger-size bottles (Table 1). This finding was not being driven by the simple fact that people who wanted to consume more ketchup typically purchased larger sizes. Rather, the researchers at Heinz captured what was described as “exogenous stockpiling…which
triggers consumption,” uncovering how customers’ consumption behavior changed if they were convinced to purchase a package size that was larger than they typically bought.5 Another noticeable theme in the research was that because ketchup was a storable product, people in the tested focus groups were willing to purchase more ketchup at one time in anticipation of future need. Thus, product “freshness” was noted as being a less critical value driver than price or the consistency of quality.
Table 1. Percentage increase in ketchup usage based on consumer habits when switching from a 24-oz. (Red Rocket) bottle, 2005. Consumers switching from 24 oz. to… Expandability Rate
Data source: Heinz.
Given this information, the marketing team determined that Heinz would see sales and revenue growth if consumers could be persuaded to change their behavior by purchasing larger bottles of ketchup. The team discovered, however, that getting consumers to purchase these larger sizes—defined as 46 oz. and higher—brought its own set of challenges. Focus group data showed the larger bottles were more difficult for consumers to handle and store, which reduced their attractiveness. In addition, these bottles took up far more space on retail shelves and provided retailers with far less margin on sales. (See Exhibit 6 for a typical store “planogram.”) This problem was compounded by the costs associated with stock-outs.
Price discounts on larger sizes might induce some consumer switching to these promoted sizes, but the physical dimensions of the packaging would require the store to restock the shelf space allocated to Heinz at a potentially much faster—and more costly—rate than they were accustomed to. Allowing the shelf space allocated to a promoted item to remain empty, even for a few minutes, would generate problems for the retailer. Interested customers would begin questioning staff about the availability of the product, seeking to determine if there was any more “in the back.” They might also become disgruntled about having to search for and ask about product availability. For this reason, Heinz believed that promoting the very largest sizes (especially the Twin 50 oz.) was unlikely to gain retail support.
Expanding the shelf space allocated to Heinz Ketchup was simply not a feasible option. Traditional retailers continued to compete against Heinz with private-label ketchup in their own stores, and they were loath to decrease the shelf space for their own products. Even if some retailers could be persuaded to expand the shelf space allocated to Heinz, they would certainly demand slotting allowances for the space, which would prove very expensive for Heinz.
Pierre Chandon and Brian Wansink, “When Are Stockpiled Products Consumed Faster? A ConvenienceSalience Framework of Postpurchase Consumption Incidence and Quantity,” Journal of Marketing Research 39, no. 3 (August 2002): 321–35.
A slotting allowance is a payment from a manufacturer to a retailer to secure a prescribed amount of shelf space for an agreed-upon period of time.
Taken in totality, changing the current system of product promotions was going to be very difficult. Barriers existed for both the display and the purchase of larger ketchup bottles. It was far from clear how much resistance there would be from consumers about purchasing larger sizes, even if such sizes received substantial retail promotional support.
Preserving the Icon
In 2007, Henners and Stansberry sat down to formulate a plan to increase profitability of Heinz Ketchup. They were well aware of the complex tensions among Heinz, the retailers, the competition, and the buying public. They needed to maximize net profit by increasing the sales of their highest-margin items, yet they were experiencing constant pushback from retailers, which responded with less shelf space and reduced promotional support for precisely those highmargin products. Consumers, on the other hand, seemed to have developed a preference for the Red Rocket during its promotion. The cost of packaging was increasing and squeezing margins further. Henners and Stansberry put their heads together to come up with a workable plan.