40 Years Later, Heinz Still Doesn’t Understand McDonald’s
Lessons in supplier-buyer relations and alpha dogs
You might have heard about this: McDonald’s dropping Heinz as a ketchup supplier because Heinz is now led by a former CEO of Burger King, not to mention that 3G Capital has stakes in both of the latter companies.
Much of the initial reaction, especially and understandably among the general public, was about the short-term considerations.
But this is a 40-year-old story, one whose background and details are essential to know if you’re to draw the right conclusions. These are lessons of supply chain efficiency and planning, of communication, of domestic and international markets, and of what can happen when a company doesn’t understand the nature of its relationships.
Some takeaways:
Your McDonald’s Ketchup won’t Taste Any Different (For Most of You). There are only two U.S. markets where McDonald’s franchisees carry Heinz ketchup — Minneapolis and Heinz’s home of Pittsburgh. Now, Heinz has worked hard to win international contracts, at nearly 4,000 restaurants outside the U.S., and losing those is certainly bad news. But McDonald’s has 34,000 worldwide restaurants, so it will be fine through what appears to be a planned phase-out, and Heinz’s business hasn’t been McD’s-dependent for decades. Speaking of that …
Heinz Didn’t Blow a Chance to Win U.S. Share with McDonald’s — not in 2013, Anyways. Heinz lost its 90% share of McDonald’s ketchup and pickle business 40 years ago, as numerous articles have noted. They cite John F. Love’s 1986 book on McDonald’s, which notes the company’s obsession with customized supply chains and suppliers who could meet — and prioritize — the chain’s need for specialization and volume. Heinz neglected to do that, and it’s never recovered. As Omar Halabieh notes in his review, quoting Love:
“McDonald’s also encouraged closeness with vendors by giving them enormous incentives to upgrade their operations. It did so by demonstrating early on that it could be just as loyal to suppliers that met its standards as it was tough on those that did not.”
And that desire, for whatever reason, was not appreciated by Heinz. It’s small consolation that the supplier was far from alone. As Love writes:
“Thus, while McDonald’s did not start out with a bias against the big name food suppliers, it wound up with one primarily because its demands were more than other restaurant chains were accustomed to making and more than large food suppliers were accustomed to answering. When McDonald’s wanted exclusive products, it found too many large processors unwilling to provide anything but the standard products they sold to everyone else. … But the problem went beyond economics. It also involved service. When McDonald’s wanted special attention it was the smaller suppliers who were willing to take the extra steps.”
In the 2000s, the company did work incredibly hard to win back McDonald’s, albeit with limited success, as this Wall Street Journal article notes. But the damage was done, and one wonders what courting Heinz has (or hasn’t) done in the seven years since that article.
Only a Few Saw This Coming — and Heinz Wasn’t Among Them. Heinz hiring as CEO ex-Burger King chief Bernardo Hees — who retained a BK board seat —didn’t escape the notice of analysts, but there doesn’t appear to have been much alarm. Incredibly, one possibility floated was that Heinz could hurt McDonald’s by cutting it off from its ketchup!
On the other hand, the Pittsburgh Post-Gazette, which knows that it can’t be behind on Heinz news, had analysts noting the troubling nature of Hees’ connections to Burger King, at least in terms of what McDonald’s might think. Another analyst it quoted didn’t think the McDonald’s-Heinz relationship would be altered, but only because he couldn’t imagine that 3G Capital would be so reckless. The article goes on to note the problems Burger King and PepsiCo. faced when simultaneously owning restaurants and suppliers.
Finally, it’s clear that, the early to mid-2000s aside, Heinz has never gotten how its relationship with McDonald’s works — McDonald’s is the king, and Heinz can share in the wealth, but only if it realizes it serves at the pleasure of the king. In 1973, it was Heinz prioritizing other buyers during a tomato shortage; in 2013, it was a structural and management overhaul that brought closer ties to McDonald’s biggest rival. To make matters worse, read this banal Heinz statement:
“All our food-service customers globally remain valuable to the company and are an important part of what has made the H.J. Heinz Co. what it is today,” said Michael Mullen, senior vice president of corporate and government affairs. “We continue to operate respecting every customer while upholding the high level of confidentiality and business ethics that the H.J. Heinz Co. has built with our business partners over the years.”
That is something less than a love letter.
What Heinz Should Do Depends on What It Wants to Be. Heinz is still a global leader; this is more of a psychological and public relations blow than a fundamental crisis. Still, it does reveal what Heinz thinks of itself as: the leader, the problem-solver, the agenda-setter. And this is not unfounded — Malcolm Gladwell in 2004 explored Heinz’s comprehensive product research, testing and marketing.
If Heinz thinks it is sacrificing its edge, its creativity or its formula for success by bending to the will of McDonald’s, then it shouldn’t do so. But recent events should teach Heinz that it can’t act against the interests of major customers and expect those customers not to react.
