HOW HEINZ EVOLVED INO A LEAN GIANT: SPECULATION GROWS ABOUT CEO O'REILLY'S PLANS

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Not since Henry J. Heinz expanded his thriving Pittsburgh business to England in 1905 have the company's global intentions drawn such interest.

With the purchase of Quaker Oats Co.'s U.S. pet food operation last week, H.J. Heinz Co. became a heavyweight in the $8.4 billion industry. Quaker is Heinz's fifth major acquisition in the past year; strategic divestitures and international buys in such categories as baby food and frozen food have also raised eyebrows.

Portfolio expansion has come in tandem with heavier dependence on trade and price promotion and less on advertising. That shift sparked the November end of Heinz's 36-year relationship with Leo Burnett USA, Chicago.

Though Heinz may bristle at the assessment, by cutting advertising to increase profits it has reduced many brands to commodity status. One exception is Weight Watchers.

These moves raise the question of whether Heinz is positioning itself for future growth-or to put itself on the block.

The status of Heinz's CEO is another uncertainty. Anthony J.F. O'Reilly has been dogged by questions about whether his loyalty lies with the company he has headed since 1979 or the newspaper empire he's building in the U.K. and Africa. Heinz has been criticized for the lack of a solid No. 2 person, but an agency executive close to the company sees a leader emerging.

"[Senior VP] Bill Johnson is getting his way," the source said. "There's no question that he-not [Senior VP] David Sculley-is the heir apparent to O'Reilly if O'Reilly, after further increasing profits with the acquisition, doesn't sell first."

Heinz has come a long way in 125 years in the food processing business. A billion-dollar projection for sales in Asia is within reach. After weathering rough spots with subsidiaries like Weight Watchers International and StarKist Seafoods, a leaner and meaner Heinz seems back on track.

For Quaker's part, the company-in what analysts have said is an effort to concentrate on beverage and grain-based products-has been divesting with a vengeance lately. The company sold the European part of its pet food business to the U.K.'s Dalgety for $700 million last week and handed over its Melona honey business to a private German company. Along with the sale of its Mexican chocolate business in December, Quaker has dumped more than $1 billion in annual sales. Coca-Cola Enterprises is rumored targeting the company for a takeover; Quaker denies this.

Quaker handed Heinz a bevy of brand names including Kibbles 'n Bits, Gravy Train and Ken-L Ration dog foods, plus Snausages, Pup-Peroni and Pounce treats for $725 million in cash.

The deal allows Heinz to nuzzle into the U.S. pet food industry's third spot, behind Ralston Purina Group and newly formed Nestle-Alpo (each with about 25% U.S. shares). With 9.6% from Quaker, Heinz comes in around 20%.

"This, historically, has been a fragmented market," said Michael Maboussin, an analyst at C.S. First Boston, New York. With Nestle USA's September acquisition of Grand Metropolitan's Alpo Petfoods, the number is down to four major companies. "Profitability will now be higher."

With $540 million in sales from Quaker, Heinz's 1995 revenue for the fiscal year ending April 26 will approach $8 billion, almost $1 billion more than last year. Rather than concentrating solely on mature brands like StarKist and Ore-Ida, Heinz is integrating acquisitions and, in the process, establishing footholds overseas.

"It's clear that markets in some parts of the world are growing at a much faster rate than Europe or the U.S.," said Timothy S. Ramey, analyst at C.J. Lawrence Deutsche Bank. "It makes a lot of sense."

While bolstering its already strong presence on supermarket shelves at home, Heinz's global invasion has had particular impact in baby food.

Heinz has been unable to break Gerber Products Co.'s stranglehold on the U.S., but it's beating Gerber internationally on the strength of recent acquisitions. Last July, Farley's Health Products near London was snatched up for $140 million, followed by the October pickup of Glaxo's family products division in India for half that price. Fiscal '94 worldwide baby food sales were $630 million.

Even Heinz's bread and butter, foodservice, that makes up nearly one-fifth of its sales is being spread abroad in Europe and Japan. Forty-three percent of sales last fiscal year came from overseas.

Back home in the U.S., Heinz last May acquired Borden's foodservice group for $100 million.

In frozen foods, Heinz coupled its Weight Watchers line with Budget Gourmet, purchased from Philip Morris Cos. in December. The acquisition vaulted Heinz into a tight market share race similar to the dog-eat-dog pet food category, where it is third behind Nestle and ConAgra with an 18.5% share.

While Weight Watchers frozen food is doing fine, its weight-loss classes bombed last year. Weight Watchers lost $50 million in '94, largely because of a tough East Coast winter and West Coast earthquake. January attendance has risen 15% from last year. New management and marketing strategies have pleased higher-ups, and the $30 million Kathleen Sullivan ad campaign is getting results.

With signs of a lackluster 1994 behind Heinz, its maneuverings can mean healthy dividends for investors. But speculation abounds about Mr. O'Reilly moving on and selling out.

Some analysts disagree.

"Heinz is so big, no one can afford it," said Roger W. Spencer, a PaineWebber analyst. "Unless you can find someone to write an $18 billion check or more. Maybe."

-----------------------------------------------------------------------CORPORATE CLOSE-UP

Headquarters: Pittsburgh.

Sales: $7.05 billion for fiscal 1994.

Top businesses worldwide: foodservice, 18%; pet food, 13%; sauces

and condiments, 10%; tuna, 9%; frozen food, 9%; baby food, 9%.

Leadership: Anthony J.F. O'Reilly, chairman, president & CEO.

Top U.S. brands: Heinz ketchup, StarKist tuna, Weight Watchers classes and foods, Ore-Ida frozen potatoes, 9-Lives cat food.

Lead agencies: Doig Elliott Schur, New York; Ally & Gargano, New York; Young & Rubicam, New York; Foote, Cone & Belding, San Francisco.

Recent successes: Acquisition of Quaker's U.S. pet food line, Philip Morris Cos.' Budget Gourmet frozen foods and Glaxo's family products division; double-digit growth in Japanese foodservice business.

1995 challenges: Integrating acquisitions overseas, taking advantage of growth opportunities without losing sight of mature markets and nursing Weight Watchers diet center division back to health.

Source: Advertising Age and company reports

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