JUPITER, FL (Oct. 6, 1999) -- A true salesman, Henry J. Heinz was only eight years old when he began selling produce from his family's garden to neighbors. The year was 1852. By 1900, Mr. Heinz was a recognized marketing and sales guru. He solidified his prodigal reputation when he had the first monster-sized electronic advertisement constructed and raised in New York City. The advertisement was a giant pickle.

Over the years, Heinz's company has been in a pickle itself at times. Now the biggest pickle isn't a 40-foot billboard, it is a question: How can Heinz management grow the $16 billion food company which generates 24% of its $9 billion in annual sales via sauces and condiments (two high-margin niches, granted) at a consistent market-topping pace?

Like all giant food companies, Heinz has several ways to boil its own stew, so to speak. It can grow through acquisition; it can grow via steady if slight price increases; it must have product innovation to bump new sales; it typically should continue to promote itself through creative promotion and jump sales (Heinz didn't advertise ketchup for a stretch of five years recently); and a company can grow via reorganizing the business and cutting costs. Heinz partakes in all of these activities.

The consensus estimate is for Heinz to grow its earnings per share (EPS) 10.49% annually in the long term. This number is a little suspect, however, given that EPS growth of only 6% is expected in fiscal 2000, and the company has grown sales only 5.7% annually the past five years, with sales growth of less than 1% annually the past three years. This monster is big. This monster needs a lot of food to grow. It apparently isn't getting enough.

In its pursuit of growth, last week Heinz announced that it would combine all its U.S. grocery and food services businesses into one large company based in the beloved Steel City of Pittsburgh. At the same time, Heinz will combine the sales forces of Heinz U.S.A., StarKist Seafood, Heinz Pet Products, and Heinz Frozen Food into another single company called Heinz Sales Co. Combining its key North American businesses -- from ketchup to cat food -- should improve the company's operating efficiencies and at the same time maximize the company's growth potential.

Consolidation of North American operations isn't novel or unusual at large food companies, especially of late. Campbell Soup (NYSE: CPB) recently announced it would combine its Canadian and U.S. soup operations. Other than lowering expenses, consolidation (presenting a "unified front") can lead to greater pricing leverage with distributors.

Given that consolidation can lower costs and increase "ooomph," the consolidation bandwagon is rolling through America's food leaders. Gigantic food companies are taking every step possible in hopes to grow during this low-inflation, strong U.S. economic period. Two factors working against the companies are 1) the strong U.S. economy encourages people to eat at restaurants more often (as does our unfortunate "hurry up" lifestyle), and 2) overseas currencies have devalued international sales.

Heinz's restructuring will cut employees at the company by up to 4,000 over the coming years, and it will lead to the closing or sale of up to 20 factories. The employee cut is significant. Headcount at the company was 38,600 in fiscal 1999, which was flat with the company's headcount as long ago as 1987.

When we reviewed Heinz in 1997, the company had a market value of over $21 billion, well above the current $15.7 billion value. It had about $2.5 billion in long-term debt. It has a bit more now. It had less than $200 million in cash, same as now. The business looked much the same, except Heinz recently sold its Weight Watchers unit for nearly $800 million. The company sells over 5,700 products, making it one of the most diversified food leaders in the world. Product sales categories break down as follows:

Fiscal 1999 Heinz Revenue
                     $million   % of total sales
Condiments, sauces    2,231           24
Frozen foods          1,399           15
Pet products          1,287           14
Soup, beans, pasta    1,117           12
Tuna                  1,085           12
Infant foods          1,040           11
Other                 1,141           12
Total                 9,300          100
(This really does add to $9.300 billion -- no rounding.)

Impressively, Heinz achieves over $1 billion in annual sales in six product categories and it leads the market in several, holding the top brands under its wing. Heinz Ketchup holds over 55% U.S. market share. Star-kist Tuna has nearly 50% U.S. market share. Other giant products are Ore-Ida potatoes, commanding about 45% of its market, and 9-Lives cat food, which has an estimated 23% of the immense cat food market's share. (The market is immense, not the cat. As far as I know, there isn't a cat food targeting full-figured felines.)

In addition to the aforementioned products, Heinz's other big brands are Heinz 57, Ken-L Rations dog food, The Budget Gourmet frozen meals, Kibbles N' Bits pet food, Jerky Treats, Amore cat food, Cycle pet food, Earth's Best baby food, John West tuna (the leading brand in the United Kingdom), and a number of country-specific brands throughout the world. U.S. markets are mature and slow-growing, so Heinz is partnering, acquiring, and expanding internationally. Markets other than the United States now account for nearly 50% of total sales. As international currency markets improve, Heinz, like most international giants, will benefit.

Tomorrow we'll look at performance numbers. For a company this large and relatively slow-growing to be attractive to us, it needs to generate a significant return on its capital -- it needs to consistently earn well over its cost of capital. Numbers at Hershey Foods (NYSE: HSY) were not strong enough for our investment dollar (although we love how charitable the company is, and that alone makes us a supporter of the company's mission). We have seen strong enough numbers to interest us in Wrigley (NYSE: WWY), PepsiCo (NYSE: PEP), and Coca-Cola (NYSE: KO), our three finalists so far.

It will take an exceptionally strong business at the right price for us to make a new investment, and our interest is rising as the stocks of our three finalists are falling. Can Heinz join the list? To get a leg up on its numbers, visit our initial overview of the Heinz company. To discuss Heinz, please visit the Drip Companies message board.

Fool on!