Can Heinz supply its ketchup to rivals of its parent company?

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One thing that tantalized Wall Street following the announcement that Pittsburgh-based H.J. Heinz Co. was being sold to the owner of Burger King was the connection between that important combo -- fries and ketchup.

3G Capital, one of the partners in the Heinz acquisition, has been immersed for the past couple of years in a makeover of the Miami-based restaurant chain that serves up piles of condiments daily, even as Heinz supplies its signature ketchup to numerous fast-food rivals including McDonald's, Wendy's and Chick-fil-A.

The guy leading the "Restaurant Impossible"-like overhaul for 3G Capital -- Burger King Worldwide CEO Bernardo Hees -- left that job earlier this year to start running Heinz, even as he kept one foot in the old workplace by hanging onto the role of vice chairman of the fast-food chain's board.

That choice may not sit well with some in the McDonald's operations, where Heinz had gained ground in recent years as a supplier in international markets, even though it doesn't supply the majority of the restaurateur's U.S. locations. McDonald's representatives did not respond to requests for comment.

Many observers can't imagine Mr. Hees would do anything to jeopardize whatever business Heinz has with the world's "leading global food service retailer," which runs more than 34,500 locations and claims to serve 69 million-plus customers in more than 100 countries daily.

"Despite 3G owning both brands, I don't see this becoming an issue, as any disruption with McDonald's (a much bigger customer than Burger King) would severely hurt the business of Heinz, and therefore not good for 3G," said Will Slabaugh, a restaurant industry analyst with Stephens Inc., in Little Rock, Ark., in an email.

Before the Heinz sale closed in June, Jack P. Russo, an analyst with Edward Jones & Co. in St. Louis, expressed surprise that Mr. Hees would even consider keeping his Burger King board position. "That's going to be a big problem," Mr. Russo said at the time.

A Heinz spokesman said last week that the company values all of the businesses that it supplies.

"All our food-service customers globally remain valuable to the company and are an important part of what has made the H.J. Heinz Co. what it is today," said Michael Mullen, senior vice president of corporate and government affairs.

"We continue to operate respecting every customer while upholding the high level of confidentiality and business ethics that the H.J. Heinz Co. has built with our business partners over the years."

Restaurant chains and food vendors have had mixed results in pairing up in the past -- creating spectacles like the Coke-Pepsi slugfests while PepsiCo owned the KFC, Pizza Hut and Taco Bell chains.

A 1990 New York Times report on the Burger King chain's decision to switch from serving Pepsi products to Coca-Cola products noted the move followed years of Coke advertising in trade publications to call attention to the relationship between the soda company and its restaurants: "If a PepsiCo restaurant is your competition, every time you serve Pepsi you're pouring money into your competitor's pocket."

Dennis Lombardi, a restaurant industry consultant at WD Partners in Dublin, Ohio, recalls those battles well. "Coke really used it as a leverage point," he said.

In a 1997 book on PepsiCo, author Bob Stoddard wrote that being in the restaurant business actually hindered the company because many other large restaurant chains refused to sell Pepsi beverages. That same year, PepsiCo spun off its restaurant chains into a separate company.

Even beyond the potential conflict in having a supplier own a competitive operation, the challenge is that running restaurants and food companies takes different skills and different priorities.

"It's typically not all that common that you would see a joint ownership between a manufacturer and a restaurant brand," Mr. Lombardi said.

Not that it hasn't been tried.

"Many a food company thought they could manage both," said James McClain, a member of the Food Consultants Group who teaches strategic management at Cal State Fullerton.

Keeping restaurants competitive requires remodeling every three to five years, Mr. McClain said, which demands a steady investment in appearances that businesses steeped in making products inside factories don't always appreciate.

One example of an awkward food company/restaurant marriage that he offered was Burger King.

The fast-food chain was bought in the late 1960s by Pillsbury Co., which kept it through the 1970s and into the 1980s. Mr. McClain, who worked at Lamb Weston, which is now part of ConAgra Foods, described a period when Pillsbury management tried to get profit out of Burger King using tactics that can bring short-term gains -- cutting back on research and development, marketing and maintenance. Burger King also regularly changed CEOs during one challenging period, he said.

Mr. McClain, whose operation sold fries to fast-food companies, said the turmoil and lack of investment helped set back Burger King.

Meanwhile, Heinz and McDonald's offer up a different sort of business school-style lesson, one documented in "McDonald's: Behind the Arches," a book published in 1986 by John F. Love.

Until 1973, Heinz had 90 percent of the business supplying ketchup and pickles to the fast-growing McDonald's chain, according to the book. That year, the Pittsburgh company ran into problems with a tomato shortage and told McDonald's it couldn't meet the restaurant operator's growing needs.

The fast-food company took most of its business elsewhere with the idea that it needed to be the most important customer to whatever supplier it used.

Heinz has worked hard to rebuild the relationship, reportedly with mixed success, and even cited an opportunity to pick up McDonald's business as a factor in decisions such as the one in 2005 to acquire a ketchup maker in Russia, where the market for the condiment was estimated at between $300 million and $400 million a year at the time.

In the U.S., other fast-food operators such as Wendy's and Chick-fil-A have embraced Heinz's Dip & Squeeze portion-controlled ketchup innovation.

One key to how much of an issue the Burger King-Heinz relationship becomes for competitors will be how much overlap there is in the operations. The question to ask, Mr. Lombardi said, is, "How strong is the connection?" Serving on the board of a rival company is different, for example, than owning a rival company.

There is precedent. Activist investor Nelson Peltz was on the board at Heinz at the same time he served as nonexecutive chairman of the board of fast-food chain Wendy's.

In the case of 3G Capital, "It's really as much of a philosophy as to how they want to run their companies," Mr. Lombardi said.

Warren Buffett's Berkshire Hathaway is a partner in the Heinz deal, but 3G Capital is generally seen as leading the day-to-day management.

McDonald's franchisees, as with any restaurant operator's franchisees, will be among the key players in determining where Heinz ketchup is served. More than 80 percent of McDonald's restaurants worldwide are owned and operated by independent local business people, according to a recent regulatory filing by the restaurateur.

Corporations like McDonald's set standards and create lists of approved suppliers for products, but franchisees have leeway. Mr. Hees knows that, having led a push to sell numerous Burger King company-owned restaurants to franchisees.

"They can't force their franchisees to take Heinz," Mr. McClain said, noting that PepsiCo, during its years owning Taco Bell, Pizza Hut and KFC, had hoped to get its restaurants to serve its products but some franchisees declined.

If McDonald's would decide to stop using Heinz, the change could take awhile to play out, since new suppliers must be identified and approved, including quality audits.

While any loss of business would not be helpful to Mr. Hees' efforts to squeeze more profit out of the Heinz ketchup bottle, he may have bigger challenges than just trying to get the company's signature product into restaurants around the world.

Mr. McClain suggests the new owners, who have already announced they'll be bringing in the zero-based budgeting strategies that require every year's budget to start from scratch, may apply the same approach to the Heinz product line. That includes asking questions such as, "What should we be in if we're starting the business over?" he said.

Still, ketchup is unlikely to be shoved off to the side. In the fiscal year that ended April 28, the company's ketchup and sauces segment accounted for $5.4 billion in sales, with global ketchup showing growth in markets such as Russia, Brazil and the U.S.

Meanwhile, just last week, Burger King came out with an innovation in that most staple of products, french fries. The new "Satisfries" promise 40 percent less fat and 30 percent fewer calories than McDonald's fries, and might make diners feel better about indulging in some fries and ketchup.

"One out of every 2 Burger King guests orders our classic french fries, and we know our guests are hungry for options that are better for them but don't want to compromise on taste," said Alex Macedo, president North America, Burger King Worldwide in the official announcement.

"When it comes to what we eat, we know that small changes can have a big impact."

businessnews - dining

Teresa F. Lindeman: or at 412-263-2018. First Published September 29, 2013 4:00 AM


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