Just when you thought it was safe to pass the ketchup, the 40-year marriage between McDonald's (MCD 1.25%) and H.J. Heinz Co. has come to an end. After Heinz was acquired by Warren Buffett's Berkshire Hathaway and investment firm 3G Capital in June 2013, the company's executive suite got a makeover.
The new owners elected a new chief executive officer, Bernardo Hees, who was the former head of rival Burger King Worldwide (BKW +0.00%). The firm 3G Capital also happens to own a majority stake in Burger King. Company spokesman Miguel Piedra told Reuters that Burger King has also been a long time customer of Heinz and uses its products in its restaurants, which are in 80 countries and U.S. territories around the globe.
McDonald's commented on the management change and said it was working with Heinz to smoothly transition away its former ketchup supplier to over 34,000 restaurants. McDonald's locations in the U.S. are not big on Heinz ketchup; the condiment is served only in Pittsburgh and Minneapolis restaurants. So, the change will mostly impact McDonald's overseas locations .
McDonald's may be seeking greater distance from Burger King
In addition to previously using Heinz ketchup, McDonald's has an in-house ketchup formula that until now it has used primarily in the U.S., known as "fancy ketchup." It will be interesting to see if consumers abroad notice any difference in the ketchup flavor added to the menu items they purchase and if sales will be affected.
In the third quarter, McDonald's had flat comparable sales in its major markets – U.S. comparable sales increased 0.7%; Europe's comparable sales rose 0.2%; Asia/Pacific, Middle East, and Africa declined 1.4% . The weakness of sales in Asia was attributed to the challenging economic environment in the region, which interestingly did not impact rival Burger King in the same way.
By dropping Heinz, McDonald's may be trying to create greater distance between itself and its biggest rival. Fast food companies have plenty of proprietary information surrounding their products and ingredients that gives them competitive edges in the market. Maintaining the "secret sauce" secret, especially when it's popular with customers, is one way of maintaining and taking away market share from a close competitor.
Burger King wants to satisfy with new French fry
Burger King's long-standing relationship with Heinz may help the company with its latest product launch – Satisfries. The company's new fries have 40% less fat and 30% less calories than "the leading French fries," alluding to McDonald's world famous fries . Since their launch in early October, the fries are believed to be the reason behind a greater number of customer visits. The product, however, is not expected to turn results around for Burger King, as its current operating environment is challenging.
The new fries will be offered in the U.S. and Canadian markets, which have struggled with soft sales. The third quarter saw a 0.03% drop in U.S. and Canada comparable sales, compared with a 1.6% rise in the same period during the prior year. Burger King's has shown greater growth potential in the Europe, Middle East, and Africa (EMEA) segment, as well as the Asia Pacific (APAC) region.
In the third quarter, the EMEA segment's comparable store sales rose 2.4% and the APAC segment had comparable store growth of 3.7%. The company's adjusted diluted EPS for the quarter grew 20% to $0.21, as Burger King is approaching completion of its transition to a fully franchised business. After the transition, the company can better leverage its brand at a greater value to the company and its shareholders .
Does Heinz departure create an opportunity for one of its rivals?
There may be an opportunity for Heinz rival Hunt's ketchup, made by ConAgra Foods (CAG 2.38%), to provide the world's biggest fast-food chain with this all-important condiment. ConAgra's brands are found in 99% of U.S. households, and the company also provides commercial food products to restaurants and food-service operators.
Its commercial foods net sales for the first quarter of fiscal 2014 were flat, but the segment's net sales of $1.26 billion made up 30% of ConAgra's total net sales for the quarter. With its canned tomatoes product growing 4% during fiscal 2013, sales of Hunt's also grew in the first quarter of fiscal 2014. Hunt's was mentioned as one of the company's "most significant brands ."
Unlike Heinz, ConAgra has several brands under its consumer and commercial food segments. Its consumer goods segment also represents a larger part of the business than the commercial segment, so whether or not the company is willing or able to take on a client like McDonald's is unknown. However, a partnership with McDonald's could expand the Hunt's brand overseas.
My Foolish conclusion
Despite the severed relationship, McDonald's operations probably won't be affected by its change in ketchup supplier. Resorting to its in-house brand of ketchup, which it already serves, or reaching out to another supplier, like ConAgra Foods, are viable options for the fast-food chain. Meanwhile, Burger King has solidified its relationship with Heinz. Whether the condiment will help attract more customers to the chain's new French fries and other menu items remains to be seen.
