Why Heinz Is Leaving Leamington

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By Robert Tuomi

(WINDSOR, ON) – There are some who are wondering if the closing of the Leamington Heinz tomato products plant is the result of the marketing department not selling enough ketchup. It is a good question and often the marketers get blamed when plants are closed but unfortunately, or fortunately whichever side of the argument you are on, it is unlikely marketing will take the hit for this one.

What did cause Heinz to close one of its largest plants is most likely the global competitive nature of the commodity food business and an out-of-date business model. Companies have three basic ways to increase their sales revenue. They can fight for more market share but with an oligarchy in place few gains could be made particularly given Heinz is the market leader. They can raise their prices but selling commodity products governed by economist Alfred Marshall’s rules of elasticity probably leave little opportunity to cash in with higher prices. The third and often most effective is cost cutting and business model changing.

Heinz is now owned by arbitrageurs looking to profit on the hidden value of the company. Berkshire Hathaway and 3G capital paid $28 billion, including absorbed debt, on Valentine’s Day this year, for 100% of a once public company generating only $11.6 billion in revenue, or, about $2.50 for each dollar of sales. Usually companies are bought on multiples of their profits so it is clear that in this deal the arbitrageurs must be seeing some real potential to squeeze more profits out of the food processor.

Because of the transaction the once public Heinz is now private which means it is no longer is traded on stock markets and no longer has to publish its financial results. Thus how well the program goes will largely remain secret until the company is either split into pieces and sold as parts or sold to the public again for a profit, a profit earned by making the company more cost effective at what it does.

Sometimes selling the parts of a business can generate more revenue than the business is worth as a whole. This may not happen here given Heinz is not all that diversified and is largely in the tomato and related food business.

Indications are, however, that the first chore of the new owners is to change the company’s business model. It is a model that Heinz has been using in Leamington and elsewhere for most of its existence and comes with a big financial hurdle. The company must pay upfront, at harvest time, for its feedstock of field grown tomatoes. No matter how you look at it, that is a big expense and money to pay for such purchases is not cheap. It is complicated by the fact that getting the money back is a year long slow process of selling ketchup.

One of the first actions of the new owners was to eject hundreds of head office staff. Most of these workers, it is assumed, are expert in its business model and might not be needed for a new model. This could be one that evens out the purchasing of feedstock from one gigantic purchase to much more cost effective weekly or monthly purchasing depending on the needs of its remaining plants.

It is in effect moving to just-in-time production which is a hallmark of the automobile industry. Car makers realized that having large parts inventories was not profitable because they only made money when they sold their cars. The OEMs moved to a process of buying parts when they were needed, in some cases on a daily basis. They also reduced their final product inventories by adjusting their production schedules to meet dealer demand in the hope of selling cars before they have to pay for the parts. This is same formula used by Walmart which tries to sell its goods before it has to pay its suppliers.

Tomatoes are grown at different times all over the world. The same is true for all the other commodities that go into products like ketchup and which are listed on the package.

Most likely those fired administrators are being replaced with people with new skills, particularly global commodity buyers who will daily fight for the best prices On a current want ad on its website for a senior buyer Heinz talks about these people needing to drive costs out of the business as part of its “Procurement Transformation Model.”

Most likely the company will also be seeking currency traders who will allow Heinz to buy on the world market and take advantage of currency fluctuations. It is a high risk strategy but the rewards can be extreme.

In the end, what Heinz is doing should be instructional to those who think they can simply find another company to take over the Leamington plant. The same realities that caused Heinz to close the operation will be in play. To find a new operator may not be easy. Heinz, itself, might not want a competitor taking over the plant. It might gut it of any salvageable equipment thus reducing its market value or it might just bulldoze it to reduce costs.

Possibly its arbitrageur owners have already mapped out a plan that earns a premium. It is what they are good at, very good at.

If you have a question about marketing, you’ve come to the right place. Let us know and we’ll give you an answer to help your business.

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About the Author

Ian Shalapata
Ian Shalapata is the owner and publisher of Square Media Group. He covers politics, the police beat, community events, the arts, sports, and everything in between. His imagery and freelance contributions have appeared in select publications and for organizations in Canada and the United States. Contact Ian with story ideas.

1 Comment on "Why Heinz Is Leaving Leamington"

  1. I think there are three reasons why Heinz is leaving Ontario, the first being the high cost of hydro, the second is the new Liberal proposal that they are trying to put into law on recycling which will cost food manufacturers millions of dollars, and the last thing is the cost of labour. The United States are giving better incentives to manufacture in their country,Ontario has to be more competitive if we do not want to loose more jobs.

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