The Odd Couple At Heinz

Can a cost-cutting exec meet his flamboyant CEO's goals?

The Tony O'Reilly show is proceeding in Pittsburgh's ornate Heinz Hall as it does every September. The chairman of H.J. Heinz Co.--media baron and former rugby idol--has the shareholder audience in his pocket. In his rich Irish baritone, he wanders off-script to crack jokes and compliment an elderly questioner on her beauty. But this year, something is different. O'Reilly, who has stood alone atop Heinz for 17 years, orders another podium wheeled onstage and introduces a younger, American colleague to read a dry summary of Heinz's operating businesses. At 60, Anthony J. O'Reilly appears to be grooming a successor.

The plain-talking William R. Johnson, named Heinz president and chief operating officer in June, will never be mistaken for the bon vivant O'Reilly. That's probably a plus, ensuring that he won't eclipse his spotlight-loving boss. But what Johnson's chance at the top job really depends on is making the numbers--and at Heinz, that means registering double-digit earnings growth. It's a tough task, given the company's pantry of mature brands. "Americans are not going to treble their consumption of ketchup," O'Reilly admits.

So the 48-year-old Johnson, who made his name slashing costs and squeezing profits out of Heinz's tuna and pet-food divisions, must wring higher margins from the entire $9 billion company. For growth, he'll look abroad, pushing baby food in India, Weight Watchers classes in Brazil, and ice cream in Japan. This means entire months away from Pittsburgh, where he is barely settled, and from his wife of 24 years, Susan, and their two teenagers. But the potential payoff is rich. Johnson holds 1.6 million stock options. If he can meet O'Reilly's goal and push Heinz's stock from its current 35 to the mid-40s, he'll make as much as $20 million--and go a long way toward securing the CEO slot.

Although the two men seem strikingly different, they share one trait. Former rugby player O'Reilly says he wishes he had been able to try American football. Johnson is the oldest son of Bill "Tiger" Johnson, Y.A. Tittle's center on the San Francisco 49ers and later head coach of the Cincinnati Bengals. Both tend to use sports terms, like "putting points on the board," to describe business and life.

Still, the contrasts between the two are stark. Johnson, who lived in suburban Cincinnati for eight years while running Heinz Pet Products and Star-Kist Foods Inc., calls himself a "quintessential Midwesterner" of simple tastes and style. O'Reilly, who owns newspapers in Ireland and Australia as well as industrial companies and $250 million in Heinz shares, spent more than $2 million this year to buy one of Jackie Onassis' diamond rings for his wife of five years, shipping heiress Chryss Goulandris. More important, the two approach business from different angles. O'Reilly's strength is as a marketer, since his early days in Ireland, when he wrapped butter in golden paper and dubbed it Kerrygold. Johnson is first and foremost an operations man who earned his spurs shaving cents off the cost of a can of cat food.

THE SIX PILLARS. Now, as the two embark on a tour of Europe and Asia, they're intent on rejuggling Heinz's portfolio. The idea, announced at September's annual meeting, is to sell off a host of mostly small, nonstrategic businesses and fortify Heinz around six pillars, from Weight Watchers to baby food. At first, this revamping would seem the domain of O'Reilly, who's still in charge of what he calls "the big picture." But increasingly, his strategic thinking revolves around Johnson's specialty, operations.

To cut manufacturing costs--a key part of the plan--the men are pursuing alliances that would mean sharing factory space with overseas rivals. "You have to be mad to build more factories when factories already exist," says Johnson. He won't give particulars but acknowledges that the two are meeting with executives at Unilever and Nestle.

Consolidating factories is old hat for Johnson, who merged two huge businesses and shuttered three plants after Heinz's $725 million purchase of Quaker Oat Co.'s pet-food division in 1995. It was his triumph with pet food, where he doubled sales and quadrupled earnings in five years, that led O'Reilly to bypass managers of far glitzier brands and tap him for the No.2 job. Johnson's mission, says O'Reilly, is "relentless cost-cutting."

Growing up a coach's son in Palo Alto, Calif., Johnson learned about the rewards of being relentless--and the price of losing. "It was an environment where if you lost, it was pretty morose for a week," he says. In the late 1960s, he studied political science and economics at the University of California at Los Angeles, whose basketball lineups he can still rattle off. But it wasn't till he went to business school at the University of Texas that Johnson, who gave up sports after high school, found an outlet for his drive. Over the next eight years, he climbed through management posts at food companies Drackett, Ralston Purina, and Anderson Clayton.

In 1982, David W. Sculley offered him a job at the Heinz USA Div., and Johnson seemed to have found a golden connection. As Heinz reveled in the 1980s consumer binge, speculation swirled that Sculley, brother of former Apple Computer Chairman John Sculley, would one day succeed O'Reilly.

But colleagues could see that Johnson might not settle for No.2. "Bill had his goals set so clearly," recalls one. "You wondered how he'd take it if he was disappointed." As it turned out, it was Johnson the cost-cutter who was perfectly positioned for the austere 1990s. While Sculley saw his hot-growth portfolio--especially Weight Watchers International Inc.--stumble, Johnson was in Cincinnati instituting "price-based costing." His idea was that in certain markets, among them pet foods and tuna, consumers rule. So Johnson calculated the prices shoppers would pay and drove costs down accordingly--reversing the usual cost-based pricing. With Heinz's Amore cat food losing out to Friskies, for example, Johnson asked "how we could sell our product at two for 79 cents," says one executive. He leaned on production, packaging, and marketing till he ensured that Amore could undersell Friskies and still make money. Similar tactics lifted Star-Kist's market share 15 points in two years.

"NO TURF BATTLES." In 1992, O'Reilly named Johnson to head operations in the Pacific, a vital growth market. In China, he struggled with brand pirates and a primitive infrastructure. At the same time, though, he boosted exports from a New Zealand subsidiary, Wattie's Ltd., into Japan, while lifting ketchup sales there by 64% in 1995. Last June, a week after Sculley left to start a venture-capital fund with John and another brother, Arthur, Johnson got his promotion.

The news stirred rumors that O'Reilly, who has lost a lot of weight, was ill and preparing to retire. O'Reilly insists that he merely took his doctor's advice and dieted--on a steady supply of products from Weight Watchers and its rivals.

Like a quarterback parrying midseason queries about the Super Bowl, O'Reilly deflects questions about Johnson and the eventual succession. Instead, he focuses on the whole management team and how much they'll all make if Johnson hits his numbers. "All of the senior vice-presidents have more than a million shares in options," he notes. "There are no turf battles here." Just like his father the coach, Johnson can count on lots of support--as long as he's winning.

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