Question

2) What were some of the key challenges they encountered? How did they overcome them?

3) What were some of the key takeaways they learned to use in the future?

When I assumed the leadership of Heinz’s Asia/Pacific business, in 1993, the company’s revenues from that part of the world were hardly a blip—and I’d never visited most of the countries in the region. I made my first trip there soon after I took the job, and it really opened my eyes. I went to visit a small baby-food factory we operated in China. There were no finished roads to get there, so I took a train. It was an old British train from the 1930s, and passengers were cooking on hibachis at the backs of the cars. I remember being amazed by the number of bicycles I saw. I went to markets where live poultry was being sold. And, of course, I saw the food that was foreign to me. At one dinner the host pulled me aside beforehand and said, “You’re probably going to be exposed to a lot of foods you’re not familiar with, so if you don’t want to eat it, just move it around on your plate and smile a lot.” Sure enough, during the meal, I was presented with an entire fish with the head intact. Its eyes seemed to be staring at me. I wasn’t sure exactly what to do with it, so I offered it to my host, who acted as if it was a great honor. China, India, Russia, and Indonesia are very different from the Western European and North American markets where Heinz was focused at the time, but I could tell even during my first visits that they represented the future of the business. The middle class was clearly starting to emerge. The people in those countries had motivations and desires similar to those of Americans—they were going to want the same kind of variety and conveniences. Back then most of our emerging market businesses were very small—they were more about sticking our toes in the water. But it was obvious that growth in the developed economies was going to slow down, and that these emerging markets were where the new growth would be. Although we still refer to these countries as “emerging markets,” I don’t think the label is accurate anymore. Clearly they’re not fully developed economies, but they are building infrastructure—roads, airports—that is world-class. And for consumer-oriented businesses like ours, they’re a primary focus. Soon after I became CEO, we developed our first long-term emerging market strategy, with an emphasis on what we call the Three A’s. We even put it on the cover of our annual report for one year.The first A is “applicability”: You have to make sure the product suits the local culture. We do sell some ketchup in China, but the dominant condiment there is soy sauce; if we’re to compete in sauces, that’s what we need to offer. You also have to be aware that your notion of how a product might be applicable will differ from that of the people you’re selling to. In Korea, they put ketchup on pizza, which was anathema to me. The first time I visited the Philippines and tasted the ketchup, I found that it was very different from American ketchup. It turned out that it was made from bananas. It didn’t suit me, but it’s what Filipino consumers want, so it’s applicable. The second A is “availability”: You have to make sure you sell in channels that are relevant to the local population. In the United States we’re used to modern grocery stores and supercenters; if a company gets shelf space in Safeway and Kroger and Walmart, its products are available to virtually 100% of the population. But that’s not true in emerging markets. In Indonesia less than one-third of the people buy food in modern grocery stores—they still shop in tiny corner stores or open-air markets. In China chain grocers have a 50% share; in Russia they have around 40%; in India it’s less than 15%. The third A is “affordability”: You have to remember that Westerners are wealthy compared with people in the rest of the world and that the things we take for granted—such as a giant bottle of soy sauce—may be unaffordable luxuries to them. You can’t price yourself out of the market. We try to address this issue by offering different package sizes or recipes. For instance, in Indonesia we sell small packets of soy sauce—the size a Westerner might get with take-out sushi—for three cents apiece. That wouldn’t make sense in a developed market, but in Indonesia we sell billions of those packets because they’re affordable, and besides, people don’t necessarily have refrigerators or pantries to hold larger sizes for months at a time.A few years after we unveiled the Three A’s strategy, I added a fourth—“affinity.” That means you want local employees and local customers to feel close to your brand, and you need to understand how they live. That’s a large part of why we rely on local managers for our emerging markets businesses. I believe they bring a deep understanding of local consumers and employees. Typically we have only one or two expat managers in any market. When we need to improve skills such as marketing or finance, or to implement our particular ways of doing business, we send in our Emerging Markets Capability Team—a group of senior people from Western businesses who travel around and coach local managers. In some cases we take the Heinz brand into a market and try to establish it organically. We did that in China with baby food—we started there in the mid-1980s, and to-day Heinz is China’s leading brand of baby food. But more often we “buy and build.” For instance, over the past year Heinz acquired Quero in Brazil and Food star in China to accelerate our growth. Under our strategy, we look for solid brands with good local management that will get us into the right channels, and we buy local infrastructure as well. Then we can start selling other brands—including Heinz—through the same channels.Our approach to evaluating acquisitions in emerging markets is very different from our approach in developed economies. Some of the due diligence is the same: We look at the operating metrics of the business. Is it growing? Are there synergies? Can we manage it? Does it fit with our core business? Does it add scale or scope? This business-focused due diligence is often complicated by the premiums we pay for an emerging market acquisition—you want to be really sure the growth is going to be there, so you have to look at per capita consumption trends, the macro environment, and the overall state of the category. Then there’s a whole second set of due diligence issues, which also differ from what we do in developed economies. We look at how the company goes to market, the tax system, the regulatory environment, currency trends, and the political climate, comparing them with what exists in the United States. We take these things for granted in developed economies, but they’re a big consideration in emerging markets, where governments are often much more active. This process may take a lot of time, and the companies we’re considering as acquisitions are sometimes frustrated by that. But these issues are very important. We’ve walked away from deals in Ukraine, Vietnam, and other markets be-cause our due diligence told us there were considerable risks involved in trying to generate acceptable returns on the businesses.For managers, probably the most important factor in growing a business in an emerging market is understanding the risks. We’ve tried to manage that by diversifying: Over the years, we’ve invested pretty equally in all the BRIC countries plus Indonesia and Venezuela. We’ve begun investing in South Africa and Mexico. Diversifying helps mitigate not only the political risks but also the currency risks, which require really adept financial management. I sometimes say that Heinz used to be a dollar-pound-euro company, but there’s no doubt that in the future it will be dominated by the five R’s: the Brazilian real, the Chinese renminbi, the Indian rupee, the Indonesian rupiah, and the Russian ruble. Those currencies are volatile, but they’re going to be the strongest currencies in the world going forward, because their economies are the strongest. If you spread your risks across markets and across currencies, you won’t panic or run away the first time you have a blowup. However, you also have to know when the risk outweighs the potential reward. For example, we created a really good business in Zimbabwe during the 1990s. But by the early 2000s the government was too unstable, the currency had devalued, and we couldn’t plan or get resources. So we walked away from the market. We also pulled out of some cities in Russia after the ruble devalued in the 1990s. But generally, we focus on the long term. We have learned that to succeed in emerging markets, you need to be risk-aware but not risk-averse. Indonesia provides a great example of that. We bought a big business there in 1999. The country was just starting to democratize and have elections; it wasn’t especially stable. Frankly, some people wondered if it was a good place for an American company. Today that’s a $400 million business for us, versus $80 million when we bought it. ABC is one of the world’s largest soy sauce brands, and it’s very profitable. Another key to growth in emerging markets is to tailor products to local tastes. I try to sample many of the products we bring to market. I’m curious, and local managers and employees really appreciate it when I try something unfamiliar. Some of the foods don’t agree with me—like the Philippines banana ketchup. We sell chili sauce in Indonesia. Every time I go, they ask me to taste it. It’s so hot that I have to drink a gallon of water afterward, but the local population loves it. Sardines are popular in Indonesia, and meat pies are popular in South Africa—I’m not a big fan of either. In India we acquired Complan, a high-protein nutritional beverage for children. We recently introduced a new variety that tastes like almonds. Personally, I’m not crazy about the taste; fortunately, Indian consumers have a different opinion. This year we expect Complan to generate more than $200 million in sales, and it’s our best-selling product in India. You have to be mindful of the “rule of the golden tongue”—just because you don’t like something doesn’t mean the local population won’t like it. Also, I’m always looking to see if some of these products can be sold in developed economies. Every year, I ask our managers in those markets to look at emerging market innovations that might work there. Consumers all over the world are looking for bargains, so a lot of ideas for lower-priced products are becoming relevant in Western markets. I don’t like the phrase “mature brands,” and we still manage to grow sales of products like ketchup, even in soft Western economies. But it takes hard work and innovation. We’ve had a lot of success with new packaging—such as squeeze bottles—and now we’re manufacturing more-sustainable bottles that use up to 30% renewable plant-based material and innovative technology developed by our partner, the Coca-Cola Company. In-novation can still drive growth in developed markets—just look at Apple. But it’s definitely more difficult. In emerging markets Heinz is also increasingly focused on connecting with consumers through social media to glean valuable insights and drive awareness of our new products and innovations in markets like Indonesia and India. We expect more than 20% of our revenues (over $2 billion) to come from emerging markets this year—and more than 30% by 2015. Our U.S. business is around 33%, so that’s really significant. Our company is ahead of U.S. competitors in this area—they’re rushing to catch up. Many of them have made mistakes in emerging markets. They’ve become too dependent on one or two markets, instead of diversifying. They’ve relied on ex-pats to manage their local businesses. They’ve rushed in with Western brands, Western package sizes, Western pricing, without understanding the nuances of the markets. Many of them have also been too impatient. They’re ready to walk away too quickly. Those markets require patience. Our Indian business took seven or eight years to get right. You have to be patient, flexible, and open to ideas from local management. At the same time, Heinz is leveraging the strength of our global brand. For instance, we are growing our ketchup and condiment sales globally by partnering with quick-serve restaurant chains that are expanding rapidly in emerging markets. Being successful in those markets also requires that every manager—including the CEO—work hard to build relationships. I have attended a lot of banquets in Asia. They’re an important way to make friends, especially with government officials, but they can be exhausting. When I travel there today, I’m usually happy to have dinner at the hotel. Still, the cultural differences can be amusing. A few years ago the Chinese government presented me with the Marco Polo Award, which they give to the company that does the most to improve U.S.–China relations. They had a big dinner with a lot of government officials and a lot of ceremonies. When I entered the room, they played “Hail to the Chief.” My wife couldn’t stop laughing. Despite the cultural differences, we’ve found that customers everywhere are similar in some ways: They all want convenient, high-quality products at good prices. Heinz is a 142-year-old company that’s had only five chairmen, and in many of those cultures, that kind of longevity is appreciated. Ultimately, it’s all about courage. Are you prepared to stick it out? Emerging markets are the future—but they’re not for the faint of heart.

Answer 1

2) What were some of the key challenges they encountered? How did they overcome them?

Some of the key challenges encountered by Heinz while expanding their business in developing countries were:

· Poor infrastructure: Most of the developing countries had inadequate infrastructure. Heinz overcame it by using whatever best was available. For instance, quality roads were lacking in China, so employees used to travel by train.

· Satisfying local tastes: Every country had their own unique food preferences. Heinz overcame this challenge by adapting to local tastes. Products were designed keeping in mind local preferences. For example, chilli sauce in and sardines in Indonesia, meat pies in South Africa.

· Economic disparity: The developing countries were not economically well off. So the company sold their products in smaller quantities. For example, in Indonesia soy sauces were sold in sachets.

· Knowledge of local market: It was difficult to get knowledge about the preferences and tastes of the local market. Hence, the company recruited local managers and employees who had a deep understanding of the market.

· Tax and regulatory issues: Many of the emerging countries had complex tax rules, regulatory environment and political climate. Hence, the company followed a thorough, time consuming due diligence process to evaluate collaboration and acquisition opportunities with local companies.

· Emerging market risk: Every market had unique risks, such as political and currency risks. To minimize these risks, Heinz decided to diversify its business in many countries.       

3) What were some of the key takeaways they learned to use in the future?

Some of the key takeaways Heinz learned to use in the future include the following:

· Products should be introduced keeping in mind local tastes and preferences.

· Products should be sold in retails channels that are widely available in the local market.

· Product pricing is important.

· Local employees and customers should develop an affinity towards the brand.

· Inorganic growth can increase business quickly.

· Understanding of the various types of risks associated with each market is important.

· Diversifying the business in different countries will minimize risks.

· The company can gain valuable insights by connecting with the consumers through social media.

· Local managers and employees should be hired.

· It is important to have a long term horizon, while growing the business, especially in developing countries.