What Warren Buffett's Heinz Investment Means for Advertising

Ketchup Giant Could Pursue Acquisitions Under New Private Owners

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With brands like Geico, Dairy Queen and Fruit of the Loom in its stable, Warren Buffett's Berkshire Hathaway has emerged as a major player in the ad world, ranking 23rd on the Ad Age DataCenter list of the nation's top 10O spenders. But the conglomerate's move Thursday tojointly acquire H.J. Heinz Co. with a private-equity firm will barely move Berkshire's ad-spending needle.

Although Heinz is the undisputed ketchup king, the company spends relatively little on advertising. The marketer -- whose brands include Ore-Ida, Smart Ones and Classico -- dedicated only $48.4 million to measured media in 2011, falling from $58 million in 2010, according to Kantar Media. That amount leaves Heinz far behind the nation's top ad spenders. (Safeway, which ranks No. 100 on the Ad Age list, spent $157.5 million on measured media.)

But will Heinz's strategy change under the partial ownership of Mr. Buffett, who has been known to open his Omaha vault to top marketers such as Geico? It seems unlikely that the billionaire will have much of a say in the marketing decisions. He pretty much said so himself today in an interview on CNBC, noting that his investment partner in the deal, 3G Capital Management, will take the lead on day-to-day decisions. "It's their baby from an operational standpoint," he said.

And 3G Capital, a firm with Brazilian roots that has a stake in Burger King, has been known to engage in aggressive cost cutting. Still, asked at a news conference if that strategy would carry over to Heinz, 3G Managing Partner Alex Behring hinted that it would not. "If you were to compare and contrast with some of the business that we got involved with in the past, [Heinz] is a company that's doing extremely well as it is," he said.

But that doesn't mean big changes won't be coming once the $28 billion deal finalizes later this year. For one, 3G and Berkshire seem poised to use their new holding as a vehicle for acquisitions. "One of the things that interested 3G and Mr. Buffett in moving into Heinz is the ability to use this as a platform to get bigger around the global food industry," Heinz President-CEO William Johnson told reporters. (Mr. Johnson, who has held the CEO title since 1998, said he has not decided if he will stay with the company, but stressed that Heinz would keep its headquarters in in Pittsburgh.)

Rick Shea, owner of Shea Marketing and a former packaged-food company executive, suggested that Heinz's new owners might unload the marketer's frozen-food business and acquire brands that are more complimentary to its ketchup and sauce brands. He said "there's really not a ton of synergies between" Heinz's sauces and condiment business, which are sold in the center of the store, and its frozen food line-up. Mr. Shea speculated that Campbell Soup Co. and Kraft Foods Group -- which both have large center-store businesses - could be potential targets.

Wall Street analyst Bernstein Research noted that "disposing of the frozen business while still a public company would have been problematic" for Heinz. But "the move to private ownership could facilitate more restructuring and the sale of one or more of its businesses."

Globally, the Heinz brand is a "$4.5 billion global powerhouse," covering products from ketchup to baked beans to baby food (overseas) that together account for 40% of the company's total revenue, Morningstar analyst Erin Lash stated in a note to investors. But she added that the company has "been challenged in North America." She cited the Ore-Ida brand, which has been hurt by "aggressive competition from private label" and "product innovation that has failed to excite consumers." Still, she said she is "encouraged by management's focus on driving further efficiencies and reinvesting in its brands."

Heinz's lead strategic and creative ad agency in the U.S is Cramer-Krasselt, which handles most big brands, including Heinz, Ore-Ida, Classico and Smart Ones.

But for the Heinz brand itself -- which controls some 60% of the U.S. ketchup market according to Euromonitor International -- marketing only goes so far because of the brand already dominates. "They have a high share, and spending heavily on advertising isn't going to drive overall ketchup consumption," Mr. Shea said.

Indeed, the amount of measured media dedicated to the Heinz megabrand -- which includes condiments, sauces and canned tomatoes -- amounted to only $5.6 million in 2011, according to Kantar Media. And that amounts to a mere drop in the bottle when compared with Berkshire-owned megabrands Geico ($768 million), Dairy Queen ($76.7 million) and Fruit of the Loom ($33.7 million.)

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