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Trickle-down debacle
How Heinz squandered away an opportunity to break into the Indian market despite its several marquee brands

Krishna Gopalan

Kraft Heinz could well be Warren Buffett’s favourite investment right about now, given how his 2013 investment in HJ Heinz resulted in a windfall gain of $4.4 billion for his firm Berkshire Hathaway. Thanksto the one-time gain, the firm’s third quarter net profit nearly doubled. Buffett teamed up with investment firm 3G Capital in 2013 to buy ketchup maker HJ Heinz and then embarked on a massive cost-cutting drive to improve the company’s profitability.

Then, inMarch, the company bought Kraft Foods Group to create the third-largest F&B company in North America and the fifth-largest F&B company in the world, with eight brands breaching the $1-billion level. The Kraft Heinz portfolio today has products as diverse as cheese, ketchup, instant coffee, marshmallows, mayonnaise, salted peanuts and some of the most recognisable food brands in the world, such as Philadelphia, Oscar Mayer, Complan and Ore-Ida.

Herve Le Faou, MD, Heinz IndiaHeinz has been selling ketchup for 140 years now, holding over 60% market share in the US and a similar chunk of market share in some of its other key markets, such as UK and Canada. Post the merger, the combined entity boasts of total sales of $28 billion and profit of $1.65 billion, looking to get stronger with $1.5 billion savings in costs by 2017.

If Heinz’s global story is on song, its India story has been quite the opposite. Heinz, which made its entry here through the acquisition of Glaxo’s family products division in 1994 for ₹210 crore, seems to have lost its way. Every single brand it owns has lost market-share consistently. Its entry into new segments failed miserably and line extensions bombed, too.

And, most importantly, the product that Heinz is synonymous with globally and the only product from the parent’s stable that was ever introduced in India — tomato ketchup — is insignificant with an unimpressive 6% market share, even 15 years after its launch. As of 2014, Heinz’s India sales stood at ₹1,274 crore, a dismal 6% growth from ₹1,198 crore in 2011. Over the same period, net profit declined 25% from ₹195 crore to ₹145 crore. 

Double whammy

Heinz’s top line has been sluggish since FY11, even as profit has slipped

Hervé Le Faou, managing director, Heinz India, has been in India since last June and is intrigued by its complexity. He travels at least a week each month for market visits to get insights into what consumers are buying. In his mid-forties, this FMCG veteran has spent time working with giants such as Unilever, Danone and Cadbury Schweppes before moving to HJ Heinz in May 2011.

In one of the meeting rooms at Heinz India, what catches your attention is the presence of a large number of competitor offerings, including the likes of PediaSure and Kissan Ketchup. “We need to know what they are up to,” says Faou. He is acutely aware of Heinz’s situation, what with three CEOs taking charge and stepping down at the company over a decade. Competition — both large multinationals and homegrown companies — has been quicker to react to market opportunities, reaping rich dividends in the process.

But Heinz’s problems are not just external. “Heinz’s international management never invested time or money in bringing its global brands to India. The thinking was that if anything new was to be launched, the investment had to be made out of the profits made from local operations,” says a former employee. Ironically, even though Heinz has been profitable, it has been struggling with its brands. 

Neither sweet, nor hot

Heinz’s misery begins with its tomato ketchup. What made Heinz the ketchup king around the world is what has worked against it in India. Heinz has been faced with a double whammy — not only is its ketchup unappealing to the Indian palate, its global recipe is also a much costlier option. Heinz ketchup is on the sweeter side and not spicy, which is what Indian consumers like. And for its sweet variant, Heinz needs a higher pulp content, which means more tomatoes and, therefore, higher costs.

Rivals such as Kissan and Maggi use a lesser quantity of pulp and add spices to the mix. Its higher pulp content only makes Heinz’s offering more expensive. The company launched its ketchup brand at the price of ₹65 for a 500-gm bottle at a time when Hindustan Unilever’s Kissan was sold at ₹55, while Maggi from Nestlé was at ₹49. Even today, the market is dominated by these two biggies, with Heinz still sticking to its premium positioning. If Heinz’s 900-gm bottle sells at ₹147, Kissan offers a 1-kg version at ₹135, while Maggi is priced marginally higher at ₹137.

Arvind Sharma, former chairman, Leo BurnettFor Heinz, by any yardstick, it an uphill battle from here on, with the likes of Maggi and Kissan accounting for at least 70% of this ₹900-crore organised market. An equal worry for Heinz is the fact that smaller players with limited budgets have made serious inroads by just being more Indian in their approach. Take the case of Cremica, which was launched just a decade ago. It offers over a dozen variants, including Mexican salsa, English mustard, barbecue and schezwan, in addition to tomato and chilli.

Akshay Bector, chairman, Cremica Food Industries, claims that his company has a 12-15% market share today. “In this market, premium positioning is not a great idea. India has a very strong, local heritage with a palate that is very well developed and the product offering has to be adapted with that in mind,” he says. In contrast, Heinz has offered just two variants — tomato and chilli — since its launch, leaving the customers with hardly any options. 

Not the strongest one

Heinz’s woes are not restricted to the ketchup business alone, though. Its flagship brand, Complan, which brings in about 55% of its revenue, has ceded its position of being the second-largest in the health food drinks (HFD) segment to Bournvita from the Kraft-owned Mondelēz in 2013. Then Boost (GSK Consumer) raced past Complan in September 2014 to become the third-largest brand. Horlicks, also owned by GSK, continues to be the market leader.

Today, both Bournvita and Boost have surged ahead of Complan with market shares of 14% and 11.3%, respectively. At the unenviable fourth position with a 10.5% market share, things are starting to look a little worrying for Heinz India and there is an urgent need for the company to get its act together. Besides, brands that came with the Glaxo buyout — Nycil, Glucon-D, Farex and Sampriti ghee — are all going through their own individual growth challenges. Since it does seem like Heinz India can’t get anything right for now, it comes as no wonder that Faou is paying close attention to competition, given that this lacuna has cost his company dear in the past. 

Take the case of Complan, which had a market share of close to 16% in early 2010, dropping to 10.5% since. The former Heinz India official says that Complan made many mistakes with its positioning, in addition to dysfunctional brand extensions. What worked in Complan’s favour for so long was that doctors prescribed it and that it was considered a complete planned food (the acronym that supplied the brand’s name).

Ceding ground

From a position of dominance, the company’s brands have lost market share

Complan has always been a nutraceutical drink that reportedly helped children gain height, among other things. According to Arvind Sharma, former chairman, Leo Burnett, the agency that handled the Heinz account, Complan was historically bound by two key principles. “One was to look radically different from Horlicks and the other was to always have high GRPs (gross rating points or, simply, a higher level of spend on advertising),” he explains. Complan was meant to be everything that Horlicks was not.

The competition was never neck-to-neck, since it was always 25-30% more expensive. However, market share dropped when the company abandoned its nutraceutical positioning in 2011 and tried to directly compete with Horlicks, while retaining its premium pricing. Also, Heinz reduced its advertising and communication spend and moved it to the newer categories. Complan suffered, as a result. 

Large brands spend as much as 10% of their turnover on marketing and advertising; Heinz dropped this figure down to 7% for Complan, which had a direct bearing on the visibility of the brand. To Sharma, the task on hand is simple and straightforward. “Heinz will just need to fix Complan. It is a brand that generates high revenue and profits and leaves the company a lot of money to invest,” he adds.

Historically, this business has had over 70% of its turnover coming from two regions — the south and the east — both known to be milk-deficient. This is where large brands such as Horlicks and Complan make their money. With a lukewarm growth scenario (3-4%), companies like Horlicks were more aggressive in looking at segments outside the dominant markets; there was Junior Horlicks for kids in 1995 and Women’s Horlicks in 2008 from the brand. 

According to Swati Bhattacharya, former national creative director at JWT, who worked on the Horlicks brand between 2004 and 2014, says, “Horlicks saw the big opportunity to empower consumers and allowing them to decide, which worked in its favour,” she adds. To be fair, while Horlicks continued to be a strong player in health drinks, its other line extensions have not been as successful.

Horlicks nutri bars launched in 2006 and noodles were introduced in 2009; neither worked out. Way earlier in 1992, Horlicks launched biscuits but it remains a fringe player till date. “Horlicks’ positioning as a brand that offered pleasurable nourishment has helped maintain its market share in health drinks, though.” 

Heinz, too, tried its hand at brand extension. In 2000, Heinz launched Complan biscuits in a market dominated by Parle, Britannia and a host of local brands. In fact, this was the first time Heinz had entered the biscuits market in any part of the world. But unfortunately, the biscuit strategy came a cropper and the brand was withdrawn in 2013-14 after managing a market share of less than 1%. If Complan had to make a dent in this highly competitive market, it needed to offer something different. It did not do any of this and just faded away.

To shore up the brand image, Heinz even roped in Amitabh Bachchan as a brand ambassador to speak about the shakti in Complan, but even Bachchan couldn’t stem the bleed. Using a celebrity was a bit out of script for a brand that hasn’t used brand endorsements for over 50 years.

“While Complan’s advertising has been quite interesting, the question is whether it has communicated what is different about the product,” says Sharma. Today, even the brand’s previous positioning of being a complete planned food has been seized by PediaSure, a brand owned by pharmaceutical giant Abbott Laboratories and launched in 2000. However, this is seen as a premium brand, with a 400-gm vanilla-flavour jar selling for ₹515, twice as much as that for Horlicks or Complan.

But what has swung things in PediaSure’s favour is that while the margin on milk food drinks is 8%, it’s as much as 12% on PediaSure, translating to a healthy ₹60 margin on a 400-gm jar. “PediaSure is expensive but there’s enough reason for the trade to push the brand. Complan is in a really tricky position since PediaSure, too, offers many variants,” reasons the former Heinz official.

All downhill

Heinz also lost the plot with its personal grooming brand Nycil. It ended up losing its leadership position when Girish Patel of Paras Pharmaceuticals entered the market with his menthol talcum powder Dermicool in 1999. At that point, the market was clearly dominated by Heinz’s Nycil, a prickly heat powder, which had a whopping 65% market share. Competitors like J&J’s Shower to Shower were fringe players.

Historically, prickly heat powder’s peak consumption was in summer. “Our research findings showed that people desired a cooling sensation from powders to reduce the effect of prickly heat. It also had to address the issue of itching,” says Patel. Sensing an opportunity, he launched Dermicool in 1999. In the first year of its launch, the brand garnered an 8% share in a market that was already shrinking.

“We were grabbing market share from talc players such as Pond’s and Nycil, which focused on prickly heat. As the first menthol powder, we realised we had a market that could last for a large part of the year,” he explains. 

Innovations such as a sandalwood variant the following year helped Dermicool become the third largest player in the market, even as Nycil’s market share dropped, first to 55% and now to 42%. Faou believes that Nycil is on a firmer wicket today after a few product tweaks.

Girish Patel, founder, Paras Pharma“The brand has strengthened its cooling power and fragrance offering through research and understanding consumer needs. Apart from prickly heat and cooling powder offerings, the plan is to launch more variants,” he says. Today, Nycil has seven variants, some of which are chandan, gulab jal and lavender. If Nycil responded to a changing consumer profile, it was really because Dermicool played the disruptor. “Today, prickly heat is only about cooling power and the competition has been forced to move to that positioning,” adds Patel. 

Similar disruption has happened with Glucon-D, another Heinz brand that was sitting pretty, almost monopolising the market. Glucon-D saw some serious competition in 2002 when Dabur launched Glucose-D. Like the prickly heat story, Dabur’s success was the result of going Indian. Although Heinz has variants such as nimbu pani, it has lost market share, with Dabur accounting for a healthy 25%.

From a position of monopoly, Heinz’s share is down to around 55% in this ₹650-crore market. Glucon-D’s line extension into biscuits has also failed. Besides, in 2005, Heinz sold off baby foods brand Farex for ₹26 crore as its market share declined to 5% from 15% at the time it bought the brand. To add to its woes, Heinz launched Kitchen Klassics in 2009, a range of ready-to-eat meals including dishes like Amritsari chole and Awadhi dal fry. None of that worked and the meals have since been phased out. 

Without admitting that none of the line extensions worked, Faou now says the company is focusing on its core categories. “We have decided to focus on health drinks, glucose, prickly heat powders and ketchup. It is our belief that we can leverage these given India’s potential.”

Well, that’s pretty much all the product segments Heinz is present in right now. Faou, for his part, is guarded about his plans on what will be launched from the parent company’s portfolio of marquee brands. “The recent Kraft-Heinz merger gives us ample opportunity to launch new products. Over the next decade, we hope to bring in some brands from our global portfolio, apart from growing what we have through variants and innovations,” he says.

For a company that has never invested time or money in bringing global brands to India, it seems unlikely that Heinz is going to be in a rush to launch new products from the Kraft-Heinz portfolio anytime soon. Most MNCs that have succeeded in India have done so only by tweaking their products to suit the Indian consumer. It is important for Heinz India to do the same while playing on its strengths and maximising its core brands. At least, that’s what Buffett would expect. 

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