Heinz CEO: Inflation Impacting Consumers

Bill Johnson on rising commodity costs, inflation risk in U.S.

NEIL CAVUTO, HOST OF “YOUR WORLD”: Well, shoppers getting grilled ahead of a busy barbecue weekend. Burgers, buns, ketchup, you name it; you are likely paying more for it.

And doesn’t Heinz know it? The company may have poured on the profits in the latest quarter, but higher commodity costs are putting on the squeeze, so much so that the company announcing 1,000 job cuts today, warning of higher prices to come.

Heinz CEO Bill Johnson here with me now.

What’s going on here?

BILL JOHNSON, CHAIRMAN & CEO, H.J. HEINZ COMPANY: Commodity costs, Neil.

Commodities are increasing all over the globe. And with fuel prices up -- and logistics costs are going up, so, virtually, the price of everything we put in our products has increased. And so we have to offset it. And the way we offset it obviously is to price up and take as much cost out of the business as we can to remain competitive.

CAVUTO: But you absorbed it in the latest quarter. And some were surprised by that. You just think that that’s tough to repeat?

JOHNSON: Well, we look -- I don’t look backwards. I look forward.

And it -- to remain competitive -- the market’s getting more difficult -- and so I think we have to continue to make changes. Business is like everything else. You have to evolve. If you sit still, they catch you. The goal is not to sit still.

CAVUTO: You know, Bill, you are closer to this than anyone on the Fed or any academic or economist. And they all tell us inflation’s not a problem, food inflation way overstated.

JOHNSON: They’re not talking to the people who go to the grocery store.

The consumer is adjusting to this probably better than they did maybe three or four years ago, but the reality is, with fuel prices up and food prices up, what I call personal inflation is having an impact. People are not going out to eat as much. They’re changing their shopping behavior.

So, regardless of what the Fed or the government says, the reality is that the average consumer, the average person is feeling a significant pinch in their pocketbook.

CAVUTO: Could I ask you a dumb question?

Do you know what’s in the government food basket? Because it’s not in my food basket.

JOHNSON: I don’t know what is in the government food basket, but it’s not the stuff I put in my shopping cart when I walk through the store.

CAVUTO: You don’t walk through the store?

JOHNSON: I actually do walk through the store.

CAVUTO: Do you really?

JOHNSON: Well, sure. I look at our products.

CAVUTO: Oh, OK.

JOHNSON: In fact, I’m known -- I’m known to leave messages to some of our people.

And when I leave voice messages to them saying I was just in certain - - either in Publix in Florida or Giant Eagle in Pittsburgh, all sorts of wheels start to turn...

(CROSSTALK)

CAVUTO: Oh, I bet they do. Oh, my God, the boss is on the line. Get out. Get out.

(LAUGHTER)

CAVUTO: I’m wondering, though, if the Fed and other powers that be in this country say inflation isn’t a problem, for whatever reason, what do we risk being behind the proverbial curve. Obviously, we have to raise rates eventually, but we -- but the economy is still dicey that, if you raise rates, the argument is you go into something worse.

JOHNSON: Well, I think rates are eventually going to have to go up. I’m not an economist, and for which I am very thankful, by the way. But I do think, from a business standpoint, we are seeing inflation.

And there’s simply no other way to cut it. The cost of everything we do is going up. Diesel fuel, the logistics is up significantly. And we have to find ways to offset it. Now, an unemployment issue like we have in the states, if costs continue to rise, unemployment’s going to get worse.

The jobs report today was not good. GDP is not particularly stellar. And so I think...

CAVUTO: We should explain. Jobless claims are still hovering very high, well over 400,000.

JOHNSON: Over -- well over 400,000.

CAVUTO: Very high, over 400,000.

Volatile as it is, the GDP report worried folks because it’s almost half what it was from the prior quarter, so, indicating things are slowing. Do you look at a double dip?

JOHNSON: I don’t that we’re going to see a double dip.

But I do think we have never really climbed out to the degree that people would like to think we have. Consumer confidence is still very low. The manufacturing index is not good. And if you look in the latest GDP, inventories were another key part of the growth in the GDP. That will eventually find an end. So, I think...

CAVUTO: We should explain -- you’re a genius at this -- when inventories build up, it’s just what dealers’ stores are putting on their shelves in anticipation. And if it doesn’t pan out, they’re screwed.

(CROSSTALK)

JOHNSON: Then you’re stuck with it, and then you have got another problem.

CAVUTO: I always argue, in a company like yours, Bill -- and correct me if I’m wrong -- people always have to eat. So there is always that safety in Heinz. So, you guys maybe don’t have to worry as much.

So, what do your customers do? Do they get the smaller bottle? Do they get the smaller size servings? Or do they eschew the products that they normally would get and go to the store brand? What do they do?

JOHNSON: Well, sometimes, they go to the store brand, but, sometimes -- we have a big away-from-home business that supplies the food service trade. And if they don’t eat out as much, we feel some pain there.

But then we pick up on the retail side, as people prepare more meals at home. So, I think, for a company like ours, with brands that have been around 140 years, we pretty much are resistant to much of the pain. But we have to stay ahead in terms of innovation both in product and packaging and make sure we continue to entice consumers with new things and exciting things and...

(CROSSTALK)

CAVUTO: Well, they like them abroad, right? They like the stuff abroad, right?

JOHNSON: Absolutely.

CAVUTO: In Asia, you’re booming. In fact, your last big purchase was -- was it a soy sauce...

(CROSSTALK)

JOHNSON: In China.

CAVUTO: China.

JOHNSON: But we just bought a business in Brazil that’s really sort of a mini-Heinz.

(CROSSTALK)

CAVUTO: Why not America? You don’t like -- what, is it the environments that you don’t like?

JOHNSON: No growth here, not much growth.

(CROSSTALK) JOHNSON: And I think, from an environmental standpoint, the opportunities in emerging markets, from penetration and cost control and productivity long term, are just so great. And there are 6.7 billion people outside the United States, and that’s a big market for a food company.

CAVUTO: And they’re hungry.

The right-to-work issue that Boeing’s dealing with, does that influence you at all?

JOHNSON: Well, I think, clearly, that is a big issue, because if it’s decided in one way or the other, then it obviously means American companies may push jobs offshore if you can’t move within states.

For example, some of the announcements we made today are not a reduction in jobs in America. They are just simply a relocation from one state to another. And if business is not allowed to do that, then I think you’re going to see those jobs leave the country.

And I’m very concerned about the oversized control over the states and what the states have the right to do.

And we just, interestingly enough, opened a brand-new plant in South Carolina and hired...

(CROSSTALK)

CAVUTO: This is a right-to-work state.

JOHNSON: Right.

CAVUTO: And you know there’s a move on the part of the NLRB, National Labor Relations Board, to first get the OK on that sort of stuff. You worried about that?

JOHNSON: We go to the states. We’ll still go to the states unless someone tells us the rules have changed.

(CROSSTALK) CAVUTO: Well, Boeing did that. But now it’s being...

(CROSSTALK)

JOHNSON: Well, Boeing did do that.

And I think Boeing is a company I don’t know that well, but I think in our case, we were very clear with our people that we were going to go to South Carolina, open a factory. The South Carolina government provided great incentives for us.

Just to put it in perspective, we hired 250 people. We had 25,000 applicants. So...

(CROSSTALK)

JOHNSON: Absolutely.

So, I think that...

CAVUTO: But you think that this environment changes if companies are sort of raked over the coals with this. They just say the heck with it and go abroad?

JOHNSON: Has to, has to, because we’re in the job of providing benefits to our shareholders and our employees. And, ultimately, all that works together.

So if we are precluded from doing things that are in the best interest our multiple constituents, then we’re going to look elsewhere.

CAVUTO: The debt ceiling issue, I always talk to CEOs about it. Does it affect you one way or the other?

JOHNSON: Well, it’s a concern as an American. And it obviously again plays into why we are all looking in emerging markets, where the problem doesn’t exist.

And, ultimately, it is going to require some revenue raising and some other things that will have an impact on consumerism.

CAVUTO: So, you think it’s inevitable that taxes go up?

JOHNSON: Inevitable.

CAVUTO: Really?

JOHNSON: Yes.

(CROSSTALK) CAVUTO: So you’re not confident we’re going to get spending under control?

JOHNSON: No, I’m not. You’ve got 200 years to prove that we haven’t been able to do it, and I don’t what’s going to change this time. CAVUTO: Well, aren’t you the toe-tapping optimist?

(LAUGHTER) JOHNSON: No, I don’t mean to be a Cassandra.

Our business is doing -- our business is doing fantastic.

CAVUTO: OK.

Bill Johnson, thank you very, very much. Always good seeing you.

JOHNSON: Thank you, Neil.

CAVUTO: The Heinz CEO.

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