Why Heinz Wattie's Australasia came home to New Zealand

Frank Findlow, Director Supply and Operations, Heinz Wattie's Australasia

Scene Setter 11:40am Thursday 7 March

It is unfortunate that Sir James Wattie and Henry J Heinz never met, because they had much in common. You can easily see them sitting on the porch long into the night, swapping ideas.

Both were visionaries who built their company's reputations on superior quality. Long before Michael Porter, they understood the need to be fiercely competitive in your home market to succeed in export markets.

Both realised you had to improve the raw product in order to improve the quality of the processed product. The quality and diversity of Hawkes Bay agriculture owes much to James Wattie.

They were both natural innovators. Henry Heinz' first product was horseradish. While his competitors used green jars because their product was padded out with wood fibre, Heinz horseradish was sold in clear jars so consumers could see the purity they were buying.

When Sir James Wattie introduced asparagus he had it canned green to differentiate it from the only alternative - bleached asparagus from California. We know from the sales figures that he gave consumers what they wanted.

I want to say that innovation, by itself, is not enough to guarantee success. You also need to be excellent at all aspects of business to ensure you are price competitive, reliable and responsive.

Just as importantly, if you are not producing at the lowest possible cost then you have less money for R&D, marketing and other functions.

This was the idea behind the global restructuring of Heinz over the last four years: to reinvent the company as a least-cost manufacturer and invest the savings in an accelerated innovation program.

A changing industry worldwide

Trade in agriculture and food has been a mainstay of the global economy for centuries, and processed foods have had a rising share of this for decades.

Yet it is really only in the 1990s that we have seen global consolidation and expansion in the processed food industry.

Two developments sparked this globalisation. First, the European and North American multinationals "discovered" Asia. It had, of course, always been there - but the emergence of affluent middle classes, with 'westernised' tastes and diets, attracted new attention.

Since 1995 the global agrifood businesses have doubled their presence in Asia. Those multinationals which have not built a physical presence in Asia have nonetheless targeted and built a brand presence in these markets.

The second major factor was a wave of consolidation between industry leaders. This was driven by a need to spread the financial risk of global expansion, and by a need to achieve greater scale efficiencies at a time of falling margins.

This means a global food industry that's more competitive than ever, and more demanding in terms of quality and cost.

Operation Excel

In 1998 the H J Heinz Company launched a global growth and restructuring initiative called 'Operation Excel'.

As our President and CEO Bill Johnson said at the time:

The major components of this restructuring have included:

• Restructuring the company around four solution categories and aligning R&D, marketing and other management resources to build these categories globally. These categories are:

• Flavour solutions (ketchup, condiments and sauces)
• Meal solutions (frozen food; seafood; soups, beans and pasta meals)
• Nutrition solutions (infant foods), and
• Pet solutions.

• Creating larger volume manufacturing "centres of excellence" dedicated to these categories, and closing smaller factories.
• Realigning the company's management teams. This led to the merger of Wattie's and Heinz Australia into a Trans-Tasman company with a single corporate office for Australasia and the South Pacific.
• Investing in growth initiatives, innovation and new markets.

Quite clearly we faced a daunting challenge. We had to realign the Australasian business and manufacturing footprint at the same time that Heinz was moving to this new category focus worldwide.

Restructuring in Australasia

Wattie's and Heinz Australia had both opened for business in 1934. Despite having the same parent company after 1992, both companies had continued to operate separately and in competition - with great pride in their heritage.

Beginning in 1998 we commenced a transformation of the business in Australia and New Zealand. This had four overarching platforms.

First, a program of cultural change. We needed to build a united community of our people from both countries, aligned to common values. This was not an easy task when Kiwis and Aussies beat each other up on the sportsfield.

It also meant breaking down the barriers between brand teams. Rather than Wattie's teams or Heinz teams - they had to now become category teams growing all of the company's brands.

The second platform was "one process, one system". Both Wattie's and Heinz had legacy systems in virtually all of the management information processes. We established a unified system, and invested heavily in training and people management.

The third and fourth platforms - consolidation of the manufacturing footprint, and consolidation of support services and the corporate office - were the most difficult.

In 1998 the manufacturing footprint of Wattie's and Heinz Australia was 14 factories including one in Japan.

While the total production volume of 330,000 tonnes across all of these sites placed us in Heinz' top five operating units worldwide, none of our sites approached scale efficiency on a global basis.

Today we have six factories - three in New Zealand and three in Australia. These are dedicated Centres of Excellence in their categories, supporting innovation and new market opportunities.

The last four years have been an interesting journey. There was no roadmap for what we set out to achieve. Different people in the management team understandably had loyalties and sentimental ties to particular sites, but each decision was dispassionate and based on a compelling business case.

Some of the decisions were relatively straightforward and only required some minor relocation of production.

Wagga in southern NSW and Girgarre in northern Victoria were the immediate and logical sites for centres of excellence in, respectively, meat and sauces and condiments.

Wagga is the largest producer of canned meats in the Asia-Pacific region and exports around 19 million cans a year to more than 20 countries, and Girgarre already specialised in tomato pastes and sauces.

The smaller factories were progressively closed over a period of two years.

Where it was cost-effective to absorb their production we upscaled existing plant - for example, Tomoana has absorbed mayonnaise lines from Girgarre, petfood from Timaru and The Good Taste Co production from Panmure.

In some cases, however, it was more cost-effective to outsource the volumes to co-packers. Tuna volumes from Eden went to a co-packer in South Australia; frozen corn went from Gisborne to Cedenco and Parle for co-packing; and Wanganui's petfood volume is now co-packed by NRM. (In Levin)

The difficult choices concerned infant foods, and the Quick Serve Meals family of soups, beans and pasta. The solutions here were not readily apparent.

There was no logical home for infant foods. It was produced at both Dandenong and King Street, but was not a dominant line for either site.

Our options were to consolidate production or to look at a greenfields site. Each option had benefits and drawbacks.

Ultimately we chose to invest in a greenfields site in Echuca in northern Victoria.

We saw substantial room for expansion in infant foods, especially in new export markets and into new lines such as organics. A dedicated centre of excellence for babyfoods, with stringent quality control and safeguards, would best position us for the future.

Echuca was not only in the heart of Victoria's foodbowl, there was also a vacant factory 'ready to go' and with sufficient room for expansion.

That left us with the problematic decision about soups, beans and pasta - which was then produced at Hastings and Dandenong.

There were compelling cases for both plants, but Dandenong in particular had difficult - but not insurmountable - challenges.

This was a 45 year old factory that would need a large capital investment to bring it up to state of the art. Dandenong also had an antagonistic culture forged by decades of industrial militancy.

Not surprisingly, when we benchmarked Dandenong it had the lowest productivity of any major Heinz site worldwide.

Still, there was strong sentimental attachment to the Dandenong site. To be honest, it was probably our preferred choice if the productivity issues could be resolved.

We were open with our people about the options for Dandenong. Heinz would invest to make the factory the regional centre of excellence if the unions agreed to greater flexibility in work practices and rostering.

We spent more than 12 months working for a solution, but at the end of the day it was just too hard for the unions to come on board.

That was very sad because it sealed Dandenong's fate and we had to part company with people who had been part of our family for long periods of time - in some cases, all of their working lives.

I should say that the same unions that found it hard to deliver change at Dandenong worked with us to agree a flexible culture at Echuca. Factories do develop their own industrial culture, and as managers we can't escape some responsibility for what had developed at Dandenong over four decades.

With Dandenong no longer an option, we grasped the opportunity to build a world-class volume-efficient plant at Hastings - which had already been upscaled to absorb some 30,000 tonnes of production that we brought back from Utsunomiya in Japan as a joint venture.

With the relocation of Dandenong's production to Hastings we now have a plant that is producing around 140,000 tonnes of soup, beans, pasta and recipe meals each year.

This makes it the largest and most sophisticated plant of its type in the Southern Hemisphere, and one of the largest factories in Heinz worldwide.

This scale has significant benefits for our employees and our customers.

A more complex plant requires more investment in people. The majority of Hastings staff now participate in skills development and training that gives them externally recognised qualifications.

The Japanese business, in particular, has fostered new skills and expertise. In the standard product for Australasian consumers there are usually eight to ten ingredients in a single batch. For the Japanese volumes you can have up to 45 ingredients in a batch, and we are now doing 180 recipes for Japan.

The major benefit to our organisation has been a new appreciation of what Japanese customers expect in quality - understanding the cultural significance of quality, and then translating that to our entire production process including packaging and labelling.

It has been said that the Japanese believe they can tell a book from its cover. Understanding how this applies to processed foods has helped us lift our game generally.

In the last two years we have been able to introduce new breakthrough products ranging from pouch soups - which are now exported to Japan and Europe - to new and exciting sauces and condiments, new tuna food solutions and a wider range of organic infant foods.

When you consider that this year alone, retailers in Australia will admit just ten percent of the 22,000 new products they are offered, and will delete 2,000 lines of failing products - it's a source of some pride to us that our innovation strategy is now consistently backing winners.

Conclusion

So did Heinz Wattie's "come home" to New Zealand, and why?

Well, we would say that we never left!

With the exception of the production that Wattie's had in Japan, the manufacturing footprint of the company since 1934 has proudly been on New Zealand soil.

We are, however, a genuine Trans-Tasman company with loyalty to Australia and to New Zealand. As we celebrate the 20^th anniversary of Closer Economic Relations, it would be good to see more companies that transcend the borders and have a commitment to growing both countries together.

When we look at the changes since 1998, it has actually been two-way traffic. Production was transferred from Australia to New Zealand, but some also went from New Zealand to Australia together with the corporate office.

The two major expansions at Hastings were the Japanese JV and the relocation of volume from Dandenong, and they happened for different reasons.

The principal factor in bringing home the Japanese production was our desire to have more direct oversight and control of quality. This had been a long-standing relationship between Wattie's and Utsunomiya, and there was never an option to base this production in Australia.

The relocation of Dandenong production was ultimately driven by the need to consolidate soups, beans and pasta in a single centre of excellence.

Where Hastings had the advantage - and this is where New Zealand also has an advantage - is proximity to abundant agricultural produce, a strong reputation for innovation, and a highly skilled, productive work culture.

Once the opportunity presented itself to build Hastings into a world-scale plant, we pursued this with enthusiasm to capture economies of scale and boost production flexibility. In turn, this scale gives us greater scope to be a serious and innovative test market for Heinz worldwide.

As you know, on February 23 we celebrated the 100^th anniversary of the Sir James Wattie's birth, and it's fitting that I end with some words of wisdom and encouragement from this great man.

After his 1935 visit to Australia, where the scale of operations towered over his own young company, he warned his fellow directors against over-confidence. In his words:

That message inspired us as we embarked on our restructuring in 1998, and it is a hardy message to innovators everywhere.

Thank you.