A case study in common repeated board room stupidity... HJ Heinz quarterly results.

[sao123]

I see this everywhere in the newspapers lately, and I cant believe how often this same stupid routine done everywhere. These supposed intellectuals who are hired to run a company, cant see the connection between 2 soup cans, despite there being a long string between them.
Pardon my pun...

i present to you, the postgazette article on HJ Heinz quarterly findings:

Efficiency moves hurt Heinz quarterly profit
Friday, November 18, 2011
By Teresa F. Lindeman, Pittsburgh Post-Gazette
http://www.postgazette.com/pg/11322/1190866-100.stm
The H.J. Heinz Co. said this morning that charges it is taking to improve productivity and manufacturing efficiency globally, including closing some plants, helped drive down profit in the second quarter to $237 million, compared to $251 million in the same period a year ago.
Excluding special charges, the Pittsburgh food company said profit grew 4.4 percent to $263 million in the quarter ended Oct. 26, with sales up 8.3 percent to $2.83 billion.
But Heinz noted challenges continue to hit the developed markets that where it does business -- including low consumer confidence, rising commodity costs, high unemployment and economic uncertainty -- and said it plans to take additional steps to streamline its manufacturing operations. The company's board this month approved the closure of three more factories worldwide, although the company did not offer specific locations.
New product launches also reflect the needs of strapped consumers. Heinz said U.S. consumers will see a 10-ounce version of Heinz ketchup in a stand-up pouch retailing for 99 cents as well as a new one-pound version of Ore-Ida french fries at a suggested price of $1.99. The company also will launch Heinz Home Style Beans in varieties priced just above $1.
The company said European consumers will also see new product packages meant to be available at lower entry-level price points.
The company's earnings per share of 73 cents compared to 78 cents in the same quarter a year ago. Excluding special charges, that would have been 81 cents per share, exceeding analysts expectations of 80 cents, as calculated by Thomson Financial.
Heinz said it is on track to hit its fiscal year projection of earnings per share in the range of $3.24 to $3.32 on a constant currency basis, with sales growth of 7 to 8 percent.

I have bolded and italicized 2 specific passages within this piece.

They cite their profits being down because of economic hardships from
1) low consumer confidence
2) rising commodity costs
3) high unemployment
4) economic uncertainty

Their solution to this problem is to streamline manufacturing, close plants, and layoff workers. So to combat reduced profits caused by the above, they are going to take steps which create more of the above? So you can have to do this vicious cycle all over again next quarter?

Workers losing their jobs or absorbing pay cuts causes:
1) low consumer confidence
3) high unemployment
4) economic uncertainty


Profits margings lessening caused by 1,3,4 causes other companies to:
2) rising commodity costs


Does anyone see the contradiction in this logic? This is an abysmal decision, not just by HJ heinz, but by all major corporations.


The only way our current depression is going to end, with consumer confidence rising, is to artifically boost the workforce, not weaken it.

So... let me into the board room and ill fix all their problems with a simple statement... "a strong workforce causes strong consumption, and strong consumption causes strong profits."

/end of my rant for the day.

 

[Ns1]

A company's responsibility is to it's stakeholders, and stakeholders want profits.

What are things that a company can control?
- manufacturing costs, PP&E costs, employment costs

What are things a company can't control?
- consumer confidence, commodity costs, economic uncertainty

 

[theeedude]

It's modern day capitalism, ignore externalities, focus on short term profits to pad your bonus.

 

[PokerGuy]

Apparently, you don't have any clue how the real world works. Companies don't do things as a collective. Each company makes decisions based on it's specific circumstances. One company can not impact the world economy in terms of consumer confidence, it cannot control commodity costs, it can't significantly affect high unemployment, and it can't control economic uncertainty.

Thus the company does its best to do the things it can control - control costs, increase efficiency and look for new revenue sources. All perfectly logical.

Yes, when all companies do this, you get a spiral effect (hello economic downturn), but each individual company is doing exactly what it should do.

 

[Londo_Jowo]

Damn, I wonder how this may affect John Kerry. Did he tell Teresa this could be political suicide for him?

 

[Ns1]

nm

 

[MagnusTheBrewer]

I see this everywhere in the newspapers lately, and I cant believe how often this same stupid routine done everywhere. These supposed intellectuals who are hired to run a company, cant see the connection between 2 soup cans, despite there being a long string between them.
Pardon my pun...

i present to you, the postgazette article on HJ Heinz quarterly findings:



I have bolded and italicized 2 specific passages within this piece.

They cite their profits being down because of economic hardships from
1) low consumer confidence
2) rising commodity costs
3) high unemployment
4) economic uncertainty

Their solution to this problem is to streamline manufacturing, close plants, and layoff workers. So to combat reduced profits caused by the above, they are going to take steps which create more of the above? So you can have to do this vicious cycle all over again next quarter?

Workers losing their jobs or absorbing pay cuts causes:
1) low consumer confidence
3) high unemployment
4) economic uncertainty


Profits margings lessening caused by 1,3,4 causes other companies to:
2) rising commodity costs


Does anyone see the contradiction in this logic? This is an abysmal decision, not just by HJ heinz, but by all major corporations.


The only way our current depression is going to end, with consumer confidence rising, is to artifically boost the workforce, not weaken it.

So... let me into the board room and ill fix all their problems with a simple statement... "a strong workforce causes strong consumption, and strong consumption causes strong profits."

/end of my rant for the day.

This is exactly what happens when you manage a company from the bottom line. It has never made sense. The only thing doing so ever guaranteed was going broke slowly. It is the job of accountants to support management through information and analysis. Making them managers is outside the scope of their abilities.

 

[Ns1]

This is exactly what happens when you manage a company from the bottom line. It has never made sense. The only thing doing so ever guaranteed was going broke slowly.

notsureifsrs

the only reason a for-profit company exists is...to make a profit.

 

[sao123]

Apparently, you don't have any clue how the real world works. Companies don't do things as a collective. Each company makes decisions based on it's specific circumstances. One company can not impact the world economy in terms of consumer confidence, it cannot control commodity costs, it can't significantly affect high unemployment, and it can't control economic uncertainty.

Thus the company does its best to do the things it can control - control costs, increase efficiency and look for new revenue sources. All perfectly logical.

Yes, when all companies do this, you get a spiral effect (hello economic downturn), but each individual company is doing exactly what it should do.

this is exactly why laissez-faire capitalism fails.

 

[PokerGuy]

This is exactly what happens when you manage a company from the bottom line. It has never made sense. The only thing doing so ever guaranteed was going broke slowly.

Hellooooooo. This has nothing to do with managing from the bottom line. When times are tough you have to do the things you can control to stay in business. You can't control the economic environment, you take on the things you can control.

 

[PokerGuy]

this is exactly why laissez-faire capitalism fails.

No, it doesn't fail. There are cycles in the economy, sometimes up, sometimes down.

 

[MagnusTheBrewer]

notsureifsrs

the only reason a for-profit company exists is...to make a profit.

You make a profit by staying ahead of the curve while controlling costs NOT, by reacting to what has happened before. There is a huge difference between learning from the past and repeating it. Accountants are severely hampered by the nature of their job. They can only look at "snap shots" and trends of what has happened in the past. While their advice should be listened to, blindly following or, worse, making them managers with responsibility for creating policies is a recipe for disaster.

 

[janas19]

Good point OP, way to break it down! I'm learning something about businesses!

 

[MagnusTheBrewer]

Hellooooooo. This has nothing to do with managing from the bottom line. When times are tough you have to do the things you can control to stay in business. You can't control the economic environment, you take on the things you can control.

It is that kind of thinking that has led to outsourcing, downsizing and, all the other cost saving measures that have worked so well.

 

[Gonad the Barbarian]

This is what happens when businesses confuse accountants with economists.

Good post and breakdown OP.

 

[Fern]

This is exactly what happens when you manage a company from the bottom line. It has never made sense. The only thing doing so ever guaranteed was going broke slowly. It is the job of accountants to support management through information and analysis. Making them managers is outside the scope of their abilities.

Why are you blaming accountants for this?

It looks exactly like management's response to accounting data, and that's what you suggest be done anyway.

Fern

 

[Fern]

A case study in common repeated board room stupidity... HJ Heinz quarterly results.

You must consider the matter of "perspective".

Example: As regards voting, from the 'big picture' perspective it's logical and desirable that every individual capable to vote study the issues and make informed decision and then vote.

From the individual's perspective it is entirely rational to save your time and energy and not bother to study the issues or vote since your single can't change a damn thing.

Likewise, this company appears to be acting entirely rational/logical from their individual perspective. If they keep plants open losing their money the effect on the entire economy is so infinitesimally small as to be nonexistent. That makes no sense.

Fern

 

[MagnusTheBrewer]

Why are you blaming accountants for this?

It looks exactly like management's response to accounting data, and that's what you suggest be done anyway.

Fern

It pisses me off that one tiny aspect of business is given so much power to change the direction of a company. I suggested paying attention to what financial experts say NOT, blindly following it. Our country is in serious trouble and corporations continue to act like they're the only game in town and they're just trying to "stay in business and be responsible to shareholders." Bullshit.

 

[PokerGuy]

It is that kind of thinking that has led to outsourcing, downsizing and, all the other cost saving measures that have worked so well.

Are you completely unaware of a concept known as game theory? Each individual company (each participant) is acting logically in it's best interests, but that's not necessarily the best course of action as a collective. You can't fault each company for making rational logical decisions.

 

[Throckmorton]

Heinz keeping factories open doesn't increase consumer confidence enough to make a difference... That's like telling people they need to spend more to help the economy. I'm not going to spend more because my spending alone doesn't make a difference, yet it hurts me.


This is why government has to stimulate. The private sector can't.

 

[Fern]

This is what happens when businesses confuse accountants with economists.

Good post and breakdown OP.

Your first sentence strike me as so bizarre I can't adequately comment on it here. Be aware that economics is an offshoot of accounting and couldn't exist without accounting in the first place. Secondly, you don't use economists to 'run a business'. Business will use forecast from economist in developing long range plans and goals. E.g., you may reconsider expansion plans if economists predict a down turn.

IF there's a problem here it would be how management sets it's goals and how, or if, they integrate them into their long range plans (assuming they have those and they are any good). But there's too little info available to even make an assumption. For all we know the plants facing closure were rapidly facing obsolescence and would have been replaced or majorly upgraded soon anyway but the lack of demand in a poor economy mandated closure atm. Heinz is a huge company. They have enormous resources to studied this 'six-ways to Sunday'. I highly doubt the decision was simply 'we demand x amount of profit, do what takes to achieve it. Damn the LT impact/effects'.

The fact that they have calculated the closings to cost $26 million should alone indicate that they have studied this thoroughly and concluded the LT (or medium term) benefits substantially exceed the $26M or they never would have done it. Afterall, unlike the fed govt, these people are 'playing' with their own money so you can be sure they took it quite seriously.

Fern

 

[Londo_Jowo]

Teresa Heinz & John Kerry = Evil 1%ers

 

[MagnusTheBrewer]

Are you completely unaware of a concept known as game theory? Each individual company (each participant) is acting logically in it's best interests, but that's not necessarily the best course of action as a collective. You can't fault each company for making rational logical decisions.

I'm very aware of game theory and the situation you describe is why I studied it. As with most logical exercises it tends to polarize thoughts and actions which corporations love because no one wants to spend the time it takes to understand the issues when the shareholders only have the attention for sound bites anyway.

The problem comes from no direct attachment or responsibility to the communities where factories and offices are located. CEO's and Boards if Directors viewing those relationships as the separate concern of the PR department. Meanwhile, they lap up the utterances of the CFO like mana from heaven.

"We're just doing what we have to to survive" like there is no relationship to the economy in which they 'inhabit.' The real "bottom line" is that you grow a company by leading it not, by pushing behind policies created by paper pushing financial accountants/analysts whose only concern is meeting their self created metrics for their next bonus.

If the company fails or loses serious market share, why we can just retire or move on to another company because no one EVER holds the individuals responsible because, after all, it's a corporation.

 

[Fern]

It pisses me off that one tiny aspect of business is given so much power to change the direction of a company. I suggested paying attention to what financial experts say NOT, blindly following it. Our country is in serious trouble and corporations continue to act like they're the only game in town and they're just trying to "stay in business and be responsible to shareholders." Bullshit.

I thought you were not from the USA?

Where do you get the idea companies are acting as you say?

Both management and economists are doubtful of the future. There is no optimism. I don't see how one can fairly say such decisions are merely based on any accountants' "snap shot" of current conditions. This decision strikes me as one that fits perfectly into long range economic predictions, and corporate strategies developed with that in mind.

IIRC, I just saw a poll where 64% expect economic conditions to get worse. If so, these closings seem entirely logical/expected.

I think most companies have already responded thusly. I do not expect to see much more. The other thing to do in such times is push for more efficiency: Make more with less. Here again this has been going on for some time. But in the face of falling, or very slow rising, demand that's about your only option for improving the business; and that's what these people are paid to do.

Unfortunately, this bodes poorly for getting back to pre-recession employment levels, and that is widely conceded by those actually in business.

IMO, the last 'real' economic growth we had was from Intel/Windows/Internet which drove a huge increase in productivity, and until we get something similar to drive economic growth we're going to flounder around. We need something to help really grow the 'pie' and not just fight over who gets what size slice.

Fern

 

[PokerGuy]

Sorry Magnus, you don't appear to have a grasp of the reality of how business processes work.