CEO OF THE YEAR 1990
July 1 1990 by Chief Executive
We have heeded your call. Chief Executive readers have nominated Anthony J. F. O’Reilly of H.J. Heinz Company for this year’s Chief Executive of the Year and our panel of judges has concurred in your choice. During O’Reilly’s tenure, Heinz’s profit margins have grown to 39 percent of sales while return on equity climbed to a healthy 26.1 percent. With 40 percent of1989 income realized from international operations, O’Reilly relishes Heinz’s position as a major player for the next decade. Charles Sanford of Bankers Trust summed up the selection committee’s decision: “He’s turned Heinz into a truly global competitor which is number one or two in 46 distinct product categories in over 200 countries. He also caught early on the current drift toward nutrition and health and acquired the right product mix to capitalize on it.
In more than a decade Anthony O’Reilly has made Heinz a truly global company. “You can’t argue with Heinz’s financial record under his leadership,” said Manufacturers Hanover’s Tom Johnson. “He has not only a great bottom line, but inspirational and motivational ability as well,” added Wharton’s Russ Palmer. Last year’s Chief Executive of the Year, Ford Motor’s Don Petersen, said “Tony O’Reilly clearly understands that the CEO’s role includes providing inspiration.” Transamerica’s Jim Harvey agrees: “In addition to his financial performance, his inspirational and motivational impact is obvious. “He has made good on all his goals,” observed Columbia’s Robert Lear. “The combination of total quality, total return, and total world marketing has produced superb results,” said Public Service Company of New Mexico’s Jerry Geist.
Chief Executive magazine salutes Anthony J. F. O’Reilly, 1990 Chief Executive of the Year
In anointing Anthony J.P. O’Reilly of H.J. Heinz, the $6 billion Pittsburgh based food processor, 1990 Chief Executive of the Year, the committee of his peers was mindful of a number of accomplishments. There was no doubt about consistent financial performance. Since he became CEO 10 years ago the average annual return for shareholders who have reinvested dividends was 31 percent, which compares with an annual average of 17.5 percent for the S&P 500 and 21.4 percent for the S&P food index. Over the same period market capitalization went from $908 million to $9 billion with the same number of shares outstanding. Financial performance is also matched by internal performance. During the 1980s Heinz led the charge in corporate America as a cost cutter. Its gross operating margins grew from 33.4 percent in 1980 to 38.8 percent in 1989-this in a tight “nickel and dime” business.
Developing and extending such powerful names as Heinz, Weight Watchers, StarKist, Ore-Ida and 9-lives to the point where 55 percent of sales derive from number one brands marketed in over 200 countries is nice work if you can get it. But what drove the panel of judges to their selection was the sensibility behind these accomplishments. Using global strategies while satisfying local markets is not unique. Nor is employing a decentralized management structure to respond to local tastes. What set O’Reilly apart in their minds is the degree to which vision, leadership, skillful marketing, and an empowered employee base can execute the strategy on a consistent basis.
Much ink is spilt describing the company’s low-cost operator techniques and its Phil Crosby inspired Total Quality Management discipline. Both are important. But what funnels the vital oxygen driving the organization – Heinz’s core competency if you like – is a collegiality and consistency that permits execution. Much of what is represented as America’s competitiveness problem stems from organizational rigidity. O’Reilly’s gift, other than his Jamesian urbanity (how many CEOs quote T. S. Eliot, the Duke of Wellington, and Will Rogers in one conversation?) lies in striking the right balance between control and anarchy. “He’s bright, witty, intelligent and also highly intimidating, highly demanding,’ reflects Heinz Pet Products CEO Bill Johnson. “If somebody has a problem typically other managing directors are willing to pitch in to compensate for the financial shortfall or resource allocation. It makes this a demanding place because you have to satisfy your peers.” Other senior managers and Heinz customers suggest that O’Reilly leads not as a general marching at the head of troops,
Even customers succumb to the charm. “He’s my hero,” says IGA CEO Tom Haggai. “Heinz couldn’t go up against Campbell in launching a line of soups or maybe it didn’t work as anticipated. So he developed a store branded line with IGA. He can be ruthless. Peck’s Bad Boy. He enjoys being different, as if to say, ‘I know we’re going to succeed no matter what you think of me.’ He’s taken a stuffy company and internationalized it.” Safeway CEO Peter Magowan says, “Tony has done an outstanding job with Heinz. All Heinz operating companies are focused businesses, responsive to industry and consumer needs. Heinz is one of our very best suppliers.”
There is one anomaly. Al a time when CEO pay is subject to increasing scrutiny, the judges have selected a man who is generously compensated even allowing for the company’s strong performance. His 1989 total cash equivalent pay (salary and incentives, the proxy lumps the two) consisted of $2,756,545 which is a tact under the $3.2 million, competitive total pay offered in the food industry. But Heinz also gave him 1,269,160 options, exercisable with restrictions in a ten-year period, that grant the right to purchase shares at an approximate average price of $22.50 each, With Heinz common trading at $32.50, those options if used would provide a net gain exceeding $12 million. At this rate O’Reilly will barely see Ross job taillights (the RJR chief walked away with $53 million) but it will be interesting to see if future performance justifies the long-term gain.
At 54, life is not all ketchup and baked beans for the Dublin-born former rugby star, ex time and motion consultant and youngest CEO of an Irish state-owned enterprise. Former Mobil vice chairman and now Bekaert CEO James Riordan remembers him (O’Reilly had served on Mobil’s board) as intelligent and quick with the charming epigram. (“What is the Irish definition of a queer? Someone who prefers women to whisky.”) In Kilcullen, Ireland he is master of a 500-acre estate, Castlemartin, with an 18th century Georgian manor house. His entrepreneurial interests include stud farms for racehorses, cattle breeding, oil and gas exploration and hotels, and he is Ireland’s leading press baron. Total investments exceed $100 million.
A reflective man, Heinz’s chief identifies most with Winston Churchill, “because be was absolutely dauntless and had the courage to learn. We are sometimes slow to make up our minds to do a lot of things, but once we decide to do something we stick with it. We stuck with Weight Watchers. In the first four years it was not a great success. We couldn’t find a formula to unlock what we knew to be something quite important. But we eventually put it together by sticking to it.” CE’s J.P. Donlon caught up with this year’s Chief Executive of the Year between meetings and tennis matches at the company’s annual senior management review held in Bermuda.
What is the core competency of Heinz?
Professional collegiality is something we prize greatly. By that I mean a form of community within the organization that promotes support, openness and candor and is underwritten by our structure of goal setting, compensation, and the sense of ownership that all the senior executives have.
We are probably unique in the U.S. in percentage of ownership by way of option that is controlled by management, and the employees. In an era of LBOs, we’re probably the only management and work team to have in a sense created an LBI, a leveraged buy-in, in that we probably have about 17 percent of the company, which is worth 59 billion, owned by management and work force. That’s very unusual.
This has been created over a long period of time. My predecessor, Burt Gookin, made a major contribution to our system by structuring an incentive program that had been very short-term goal oriented, until he brought in a tong-term incentive program. When I took over in 1979 as chief executive – I’d been president since 1973-I emphasized the notion of the symmetry between shareholder and executive by introducing a vigorous stock option program.
Base salaries at Heinz are way below industry norms. The incentive programs are based on the year’s results and certain subgoals. The long-term incentive program is based on three-year aggregate earnings per share calculations that give an intermediate-term focus to the way you manage your business.
If you miss any of the targets, 75 percent of your total compensation is at risk. And in many cases, people just have failed to get any compensation bonus in a particular year.
What did you bring to this culture?
A sharply redefined marketing focus. This has basically transformed the company. Our marketing expenditure went from about 2.5 percent of sales to 9 percent, which is really very big spending, even by Procter & Gamble’s standards.
One of the reasons why I am often identified with marketing is that I am very responsive to demographic changes and I am fascinated by media changes in the world. I’m going to read a paper in Berlin entitled, “The Brand: Citizen of the World.” Until mass marketing techniques were facilitated by television, the brand was citizen of a nation.
The advent of television in America heralded the great era of brand expansion in this country. It’s my thesis that the advent of satellite television will transform the marketing map of Europe. Instead of having numerous brands that are being marketed in different ways in Portugal, Spain, France, etc., manufacturers will embrace the notion of international brands which they mass market simultaneously through satellite television to 12 countries in 12 different languages.
Manufacturers will ask themselves, what inherently are the great brands that Heinz has, or General Mills has, or Procter & Gamble has? In our case we probably have over 700 brands of which interestingly enough, only 35 percent of our total sales are under the Heinz name. Sixty-five percent are our other branch: StarKist, 9-Lives, Ore-Ida, Weight Watchers, Near East and so on.
We are considering the notion of extracting the major international brands that we think stand for the universal potential of the corporation, like Heinz ketchup, like Weight Watchers, like Heinz baby food. And we’re thinking in global terms now, whereas prior to that, we never did. The “Dallasization” of the world, the “McDonalclization” of the world will be the most startling facet of the next decade.
“Dallasization” and “McDonaldization” imply that American tastes are being absorbed or grafted onto other societies? Don’t French tastes remain French, even after 1992?
No. Don’t you like Perrier?
But is that really “French”?
It’s French. It’s imported. R’s from the Perrier springs. I think that that’s a classic example of the way things are coming this way. Maxwell House is Swiss. But we are going to absorb an awful lot of European tastes, Ramen noodles from Japan, Mexican dishes (if there is a great Mexican food manufacturer), Benetton clothing, Gucci watches and shoes. The world is moving toward global brands. I used to he a skeptic about that. But it is this powerful new agent, the magic of this eye in the sky that has so changed the marketing potential of the great brands. The Europeans are ahead of us on this. The most admired company in France with the largest capitalization on the Paris bourse, is LVMH, the company that has Dior. [CEO] Bernard Arnault may not be overwhelmed with the burden of his own humility, but he’s done a good job. They are basically capitalizing on the social insecurity of the newly rich. It’s a fascinating world that’s opened up before us.
How will Heinz ketchup or Weight Watchers be marketed differently as a result?
We have a recipe in Holland that wins hands down against our British product in Holland and Belgium and Germany. We tested the Dutch recipe in Britain land it loses hands clown. So there is a standard thing called Heinz ketchup, but it’s quite different in the two markets. It’s the same product, but it just has a slightly different texture to it. The palate of the Brit requires a sweeter tasting product, and the palate of the German and the Dutch requires a slightly spicier, sour taste. But the actual marketing message for all of them is roughly the same.
The prospect of 1992 has changed our view of our British company. We’re now thinking of factories that happen to be located in Britain as “Eurofactories.” We have built in Kitt Green, U.K., the world’s most modern food factory. With the Channel tunnel opening up soon, we will be able to deliver truckloads of our products. We’ve moved into Spain and Portugal and Greece. They’re countries that excite us very strongly. So we are very European and non-nationalistic. We harbor great ambitions to globalize our brands, particularly ketchup, baby food and Weight Watchers.
Observers assert that Nestle and Unilever are mopping the floor with American food companies in Europe.
That’s completely untrue. We were absolutely mystified by that Wall Street Journal article. The fact of the matter is that, this year, we have probably got the two most profitable food companies in Europe-a lot more profitable than Nestle or Unilever. I don’t know how you rank success, but my method includes margin on sales, sales growth, profit growth, return on equity, return on invested capital. By any of these criteria, we’re better than Nestle, better than Unilever. You can buy Unilever stock for 11 times earnings. One pays 17 times earnings for ours. And obviously, 40 percent of our business is outside the U.S. We think the person who wrote that article just didn’t do her homework.
Isn’t Weight Watchers having some difficulty, not only in Europe, but elsewhere? Third fiscal quarter sales for frozen entrees were flat after a long period of double-digit growth.
I can’t answer you on a quarter-by-quarter basis, but for the year, they were modestly up from the previous year. Desserts were up very substantially. And of course, we think we hit a home run with breakfasts. So although the category was static to down, our share of the category was up and our most important competitor, Lean Cuisine, was down. In fact, Weight Watchers passed Stouffer’s Red Box for the first nine in our history. There were a whole lot of new launches. There was Healthy Choice, there was Right Course, both of which took away a lot of volume with all the couponing and trial and sample basis product that’s out there. People are able to buy these things for half price, so they buy them.
Will international competition become cutthroat, thereby putting pressure on your gross margins?
We don’t see any intensification of international competition because of 1992. More damaging, particularly in Europe, is the growth of the power of the retailers. The retailers in Europe are extremely powerful and given very substantial latitude under the antitrust laws by their individual governments. We have situations of almost oligopolistic strength in Great Britain, France and Germany, where the three or four dominant retailers control 85 percent of all the buying decisions in each market.
That’s very daunting, but if you have a great brand like Weight Watchers, they have to stock your product. Because you create the consumer demand by going directly to the consumer saying, buy our product, because it promises longevity, and a smoother figure, and a more elegant step in your stride, and the prettiest girl in the room. That’s what Weight Watchers is all about. It promises control over your life, control over your calorie count and nutrition.
So that’s the way you do it there, and you do it by inventive copy and you do it by strong marketing. This is an unrelenting nickel and dime business.
Will the “green marketing” phenomenon endure?
People now realize that there real hazards, paradoxically, in fresh foods, which don’t really get processed. After Chernobyl, in our Italian business, people ceased to eat fresh produce that they thought had been affected by the radium fallout. They used up virtually all our pre-Chernobyl stocks of processed products. We assumed after three or four months of stock that they would revert back to a mixture of fresh and processed foods. They didn’t-they stayed with our products.
One of the reasons was that our Italian company was able to say, look, we conduct checks that no fresh produce manufacturer conducts. We actually start at the farm level. We in effect put up an “environmental oasis” around our products, and we guarantee that the manufacturer polices and controls procedures that ensure that the minimum amount of pesticide, of fungicide, of insecticide, of fertilizer, is ingested by anyone who eats their food. This has had an enormous appeal. Five years before Alar was rejected by the Food and Drug Administration, we had ceased to use it. We believe that the purity of our brands is extremely vulnerable to this sort of criticism, unless we’re extremely careful and extremely innovative about the future.
I don’t think we’ll get to organic farming, but one of the biggest opportunities opening up for food manufacturers in the next decade will be the public’s concern about their own health and the ingestion of all sorts of toxic substances that hitherto they have assumed were not present in their food.
Proposition 65 in California, on the other hand, is a classic example of overkill. California has seceded from the rulings of the FDA. Soon we’ll see an FDA for Californians that will dictate the tolerance level of carcinogens in each product. Then we’ll have a label for California, a label for Idaho, a label for Iowa and a label for Mississippi. It reflects an enormous upsurge in people’s awareness that we are slowly poisoning the universe.
Won’t it be easy for protectionists to hide behind the label of food purity?
This is what they call-the Japanese are masters of it-nontariff protection. I didn’t think that the fidelity of the Japanese monetary or import system was threatened by our ketchup, and yet they managed to exclude our ketchup by the subtle business of abandoning all quotas hut almost trebling the tariff.
The Europeans are no slouches at it.
Oh, absolutely perfect at it. The Americans have picked up on it, too. You won’t see too many New Zealand dairy products around here in the U.S., despite the fact that New Zealand can produce at half the price of an American farm. So, they shelter behind veterinary regulations, etc. But I was in the milk industry in the early 1960s and you had no chance of getting around any of these barriers. At least now, you have a chance. Irish farmers will be supplying milk into Great Britain in the not too distant future. Dublin could easily supply it at a very much lower cost. Hitherto, there were all sorts of regulations. But they’re going to go.
How much further can you reduce operating costs? I recall the anecdote about your eliminating the back label from the ketchup bottle to save $1.5 million. What do you do for an encore? Eliminate the front label?
You would be absolutely amazed at what cost savings can be accomplished. Our North American task force now looks on North America as an entity. It’s rather like the unification of Germany in commercial terms. We just see the 20 million Canadians as an extension of the U.S. market, and we’ve found, to our surprise, that many things are substantially cheaper in Canada than they are in the U.S. So we are supplying quite a lot of our packaging now from Canada to the U.S. Their costs are lower, which surprised the hell out of us. It may be that their suppliers were prepared to accept a lower profit margin. It may be that they are actually more efficient. Canadians are supplying our U.S. factories now. That may change. So we are very much now globalized by the power of satellite television and by the political and cultural integration of Europe and North America. If you ask, where do we get growth from? We get growth from our power brands like Weight Watchers. We assiduously try to expand our share of ketchup and sauces and Ore-Ida brand potatoes. We took an initiative on dolphin-free tuna, which has a great deal of approval by the public. And while it may cost us a little more in sourcing, I think it will expand the market for tuna.
What does it cost to be seen as an environmental good guy?
The costs are quite significant, or could be quite significant because we walked away from one ocean, we walked away from a source - the eastern tropical Pacific, which contributes 20 percent of our total catch and is adjacent to our largest plant, our cannery in Puerto Rico. So we know there are going to be some cost increases for the raw material. Fundamentally the environmentalists won the battle. And they won the battle particularly with the young consumer, the kids. This particular cause is unique in that Flipper was part of American folklore.
It may seem clever to ride the green marketing wave, but what will you do when animal rights activists declaim against hamburger consumption and put your ketchup business at risk?
Well, at the end of the day, you have to decide. Society has its own particular agenda, and there are many agendas that can rally a cause. But I can’t imagine that will ever be a universal cause in this beef-loving land.
You’ve got task forces looking into Eastern Europe-Poland and the U.S.S.R. What might we expect to see there?
My response would be all or nothing. I mean, you could see us in the U.S.S.R. making a range of our products. You can see us in Poland, which is the largest apple producer in Europe and the largest potato producer. You can see us.. in both areas that we are very big in. We’re very big in juices for children and we’re very big in frozen French fries.
So obviously, we have the capacity to go into both countries to satisfy what we’ve identified to be consumer needs, We think we can help improve the diet in both Poland and Russia. The problem is that there is no convertibility with their currency. And unless we can get convertibility, we will not go in I don’t want rusty razor blades, and I’m not sure I want to he the world’s largest battleship vendor.
Having been selected by your peers as chief executive of the year confers a kind of most valuable player status. What advice would you give other CEOs who compete internationally? What do they most have to get right to face the challenges of the 1990s?
The globalization of markets is not a future dream; it’s a daily reality So the first thing they’ve got to do is to realize that they have enjoyed the security and prosperity afforded them by the first great experiment in common marketing, which is the United States of America, and that now the world is a much m