Bread market remains challenging
Sept. 17, 2013
by Josh Sosland
Even as the bread and rolls category has remained under pressure over the past year, conditions have not been as severe as was the case a year earlier. The improving trend emerged in a year of extraordinary change for the commercial baking industry.
Scanner data issued recently by Information Resources, Inc., a Chicago-based market research firm, show unit sales of fresh bread and rolls in the 52 weeks ended Aug. 11 totaled 5,841,893,000, down 0.78% from a year earlier. In the case of fresh bread alone, unit sales were 3,820,665,000, down 1.32% from the year before. The data were gathered from supermarkets, drugstores, mass market retailers, military commissaries and certain club and dollar retail chains.
While the bread and rolls decline of 0.78% was hardly something to celebrate, the shrinkage was smaller than the 1.7% drop in 2012 or the jarring 4.2% decline in 2011. Additionally, while bread and rolls stood out as among the worst performing categories in 2011, the results in 2013 do not make the category an outlier. Unit sales of milk were down 1.3%, ready-to-eat cereal was down 1.77% and frozen dinners/entrees were down 3.49%.
The smaller decline has occurred against a backdrop of many other challenges in the bread market, including continued ingredient market volatility and the progress of the gluten-free movement.
The directional improvement has been noted by Flowers Foods, Inc., Thomasville, Ga., said Keith Aldredge, vice-president of marketing, direct store delivery bread.
“We’re encouraged by this trend reversal and view it as positive news for upcoming periods,” he said. “Millennials continue to play an increasingly important role in helping to drive fresh bread sales. In fact, retail bread pound sales with millennials is positive versus the prior year. As more millennials start their families, demand for bread should continue to grow, especially at retail.”
Also encouraging from a supermarket bread perspective, Mr. Aldredge cited Technomics data indicating millennials are eating in restaurants less than they were five years ago.
“That’s a trend that bodes well for increased bread sales at retail,” he said.
Taking a longer view at contributors to a decline in bread consumption was Harry Balzer, chief industry analyst and vice-president of NPD Group, Port Washington, N.Y. Changes in dinnertime food preparation holds a key, he said.
“We are eating main evening meals that tend to have fewer foods in them,” Mr. Balzer said. “Side dishes tend to get thrown out in this equation. The fourth most popular side dish in America at dinner is a piece of bread. Having bread with an evening meal is one of the fastest declining items in the diet.”
For the baking industry, the decline of bread as an accompaniment may trigger a sense of déjà vu, Mr. Balzer said.
“I have been seeing a long-term slide in bread consumption for many years,” he said. “First it was in breakfast. Toast was the fastest declining product in America for a long time. There was a major shift away from breakfast at home.”
This shift largely was toward food service, where breakfast sandwiches have a commanding market share, Mr. Balzer said. In many cases, the sandwiches feature baked foods other than sliced bread.
Similarly he said sandwiches are the top main dish served for dinner at home, whether it is a sandwich made from sliced bread, rolls or buns.
“But sandwiches account for only 11% to 12% of dinnertime meals, so there is plenty of upside opportunity for bread,” Mr. Balzer said.
In terms of the growth in food service breakfast sales, he said while 48% to 49% of away-from-home breakfast selections are a sandwich, only 2% to 3% of home breakfasts includes a sandwich.
“There is a lot of room to replace cereal, but it probably is not going to be a sandwich produced at home,” he said. “It either will be food service or frozen food.”
The bread business itself has been shaken up in the past two years, principally by two developments of epoch proportions. The first was the acquisition in 2011 by Grupo Bimbo S.A.B. de C.V. of the fresh North American business of Sara Lee Corp. The second was the dismantling over the past 12 months of Hostess Brands Inc. Taken together, the developments have radically shaken up the ownership of wholesale baking capacity in the United States.
New roster of top brands
As recently as 2007, the top three fresh bread vendors in the United States were Interstate Brands Corp., Sara Lee Bakery Group and George Weston Ltd. In 2013, none of these companies was a significant bread baker for the U.S. market.
Additionally, the consolidation has created a cliff between the largest and other baking companies very different than the past. While in 2007 the fourth largest U.S. baking company was Flowers Foods with retail sales of $518 million, the fourth largest baking company in 2013 is Lewis Brothers, with $130 million in sales.
From a bread perspective, developments over the past year were highlighted by the November 2012 cessation of operations at Hostess Brands followed by the July announcement by Flowers Foods that it had completed the acquisition of 20 Hostess baking plants and related assets for $355 million. Earlier in the year, Flowers had been named the stalking horse bidder for most of the bread assets.
Only a few months before that in October 2012, Flowers agreed to purchase Sara Lee assets in California from Grupo Bimbo. The transaction was part of an agreement between Bimbo and the Department of Justice allowing Bimbo to complete its acquisition of Sara Lee first announced in 2010. The Bimbo divestiture deal gave Flowers baking assets in California and Oklahoma. In California, Flowers acquired perpetual, exclusive and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced bread, buns and rolls, a business with annual sales of about $134 million.
In recent months, Allen L. Shiver, Flowers president and chief executive officer, has offered a number of updates on how the company will change with its acquisitions and how the integrations are progressing.
Earlier this month, Mr. Shiver said the Wonder, Merita, Home Pride and Butternut bread/roll brands of Hostess would be returning to supermarket shelves beginning in late September and into October. Speaking at the Barclays Back-to-School Conference held Sept. 3 in Boston, Mr. Shiver said the brands would allow Flowers to generate “incremental sales.”
“Each of our bakeries has a specific plan that takes into consideration the strength of our acquired brands as well as the incremental volume we’ve gained since Hostess exited,” he said. “Many white bread consumers are brand loyal so we have calculated the incremental volume we expect once these brands are available again.”
Mr. Shiver predicted Hostess assets would be most beneficial to Flowers in the company’s new markets, rather than its stronghold in the South.
“Our expansion markets offer the greatest potential for incremental sales,” he said. “As we’ve entered new markets without acquisitions, we’ve used Nature’s Own effectively.”
‘High regard’ for Wonder brand
The best known of the Hostess bread brands represent an important piece in the puzzle for Flowers, giving the company a strong white bread brand, Mr. Shiver said.
“Our research shows that Wonder, Home Pride and the other brands we are acquiring will help fill that need,” he said. “Our research shows that consumers have a high regard for the Wonder brand. In fact, 74% said that Wonder is a legendary part of the American diet. Home Pride and our other acquired brands also tested very well.”
Although Flowers has a multi-million dollar supply agreement with Grupo Bimbo S.A.B. de C.V. to source from the existing facility in California, establishing its own production for supplying California is an important focus for Flowers, Mr. Shiver said, adding the July acquisition of a Modesto, Calif., high-speed bun bakery plant “is one step in that direction.”
Mr. Shiver also offered a further glimpse into the impact the Hostess bankruptcy has had on Flowers’ business, even before the acquisition of the plants and brands.
“Our team has been keenly focused on serving the needs of our customers and the marketplace, and we are seeing the results of our efforts,” he said. “First-quarter sales were up 25.9%, driven primarily by new business gained following Hostess’ exit from the market in November 2012 and by incremental sales from previous acquisitions.”
For now, the 20 baking plants Flowers acquired as part of the Hostess acquisition remain closed, and Mr. Shiver has said reopenings will be considered if and when the plants fit into the company’s ongoing long-term geographic expansion or when capacity tightens in markets where the company already operates.
“Our plans are to continue expanding to parts of the country where we do not currently have distribution,” Mr. Shiver said in March. “As we do so, we expect to introduce Hostess bread brands to those new areas.”
He noted that Flowers for many years has pursued a growth strategy of “methodical” expansion into new regions from existing Flowers bakeries.
“As we enter new regions we will build access to retail and food service customers in those new markets,” he said. “We’ll set up appropriate distribution systems. We’ll re-open bakeries as consumer demand for our products grow. As we continue to expand, this strategy will continue. We intend to expand in the new regions from our current territories, growing sales and then add or re-open production capacities for that growth.”
In August, Mr. Shiver said production capacity utilization has been rising because of the volume the company has added since Hostess stopped operations.
“Since November, we have reopened some idle capacity in Brattleboro (Vt.) and other bakeries to help address the need,” he said in connection with second-quarter financial results. “We also commissioned a new bread line in the quarter at our Oxford, Pa., bakery that was part of our Tasty acquisition.
“In keeping with our strategy to constantly improve processes and use new technologies, the Oxford bread line includes several innovative new technologies that make it among the most efficient in the country. The Oxford start-up was smooth, and the new line is well-positioned to serve our expansion markets in that region.”
In addition to the start-up of the new bread line in Oxford, Mr. Shiver said the integration of Lepage Bakeries and the Sara Lee brand in California “continues to be on track.”
“As expected, Lepage is a great complement to Flowers, and now their New England markets offer Nature’s Own and Tastykake as well as Lepage’s Country Kitchen and Barowsky's organic brands,” he said. “The Lepage integration is going well and is on schedule.”
Solid market share in California
The company is making progress in California, with its takeover of the Sara Lee business from Bimbo Bakeries USA, Mr. Shiver said.
“In mid-June we completed the last phase and now offer fresh bread and rolls available throughout the state,” he said. “Our team in California continues to do a great job building our business on the West coast.
“Before the Sara Lee California acquisition, our brands had a 2.4 dollar share in California. With the roll-out, Flowers’ brands now have a 12.5 dollar share of the California market according to the I.R.I. reports in mid-July. This is in line with what we told you to expect. As we continue to gain consumer acceptance for our brands in California, we will achieve steady growth for years to come. We are also working to establish our own production capacity for California as evidenced by our July acquisition of a high-speed bun bakery in Modesto, Calif.”
Change of ownership in Northwest
Also in the West during the year, United States Bakery, Inc., Portland, Ore., bought the bread assets of Hostess Brands in the Northwest United States. The deal for $28.9 million included 4 baking plants, 14 depots and several regional brands, including Sweetheart, Eddy’s, Standish Farms and Grandma Emilie’s.
B.B.U. sees progress on margins
For B.B.U., enhancing profitability has stood out as a principal area of focus as measured by marketplace developments, the company’s lagging metrics in this area and remarks by company executives.
According to the I.R.I. data, Bimbo raised its average price per unit by 2.5% in bread over the 52 weeks ended Aug. 11. The increase compared with a 1% increase for the bread market overall and a 0.6% increase for private label. The B.B.U. price increase was greater than any of the other major U.S. baking companies, several of whom lowered average prices over the past year. Flowers Foods raised prices 0.5%. The steep price increases may have contributed to a 4.11% drop in unit sales (versus only 1.32% for the bread market overall), though the company’s aggregate also would have been affected by the forced divestiture of assets in California and other markets in connection with its Sara Lee acquisition.
Still, a look at the company’s individual brands suggested that a higher pricing strategy has exacted a toll on B.B.U.’s market share. For example, B.B.U.’s Brownberry was the only top five bread brand, as catalogued by I.R.I., to show a unit sales decline (1.2%) and also showed the highest per unit price increase (4.7%) of the top five brands. Even more severe were unit sale drops of 12% for Sara Lee Soft & Smooth and 18.8% for Mrs Baird’s — both B.B.U. brands. Price increases for the two in the 52 weeks ended Aug. 11 were 2.4% and 7.5%, respectively.
In the most recent quarter (period ended June 3), B.B.U.’s operating margin widened to 7.4%, versus 5.5% during the second quarter of 2012. The margin was far narrower than the 11.6% Grupo Bimbo earned in Mexico during the same period and lagged the 8.3% consolidated margin for the company. “Pre-Sara Lee,” second-quarter operating margins for B.B.U. were 9% in 2011, 9.2% in 2010 and 9.7% in 2009. The 7.4% margin at B.B.U. compared with an EBIT margin at Flowers Foods, Inc. of 9% in its most recent quarter (ended July 13).
With its acquisition of the Sara Lee business, Grupo Bimbo established a goal of raising EBITDA margins to between 10% to 11% by 2015. Fred Penny, who became president of B.B.U. this past April, said the company was on track toward those objectives.
“We continue to work hard on achieving the synergies on our asset restructuring and the key projects that are going to drive the improvement that we’re looking for,” Mr. Penny said during a July 24 conference call with analysts to discuss second-quarter results. He acknowledged the return of bread and cake brands of Hostess would have a near-term impact.
“It clearly is going to make the market more competitive both in sweet goods and ultimately in bread as the brands re-emerge,” he said. “How that’s going to happen remains to be seen, but we’re prepared to compete going forward in the new market structure that we’re going to have.”
Daniel Servitje, chairman and chief executive officer, said during the conference call that B.B.U. objectives in 2013 would be reached with steps that include accelerating momentum in new products, continuing to aggressively grow brands in order to expand market share gains, and accelerating regional assets restructuring projects and supply chain optimization in order to drive greater efficiency.
In August, B.B.U. said it will close its baking plant in Easton, Pa., by the end of the year. The plant, which employs 200, makes hamburger and hot dog buns. The announcement came a little more than seven months after Bimbo purchased 30 acres of land in Macungie Township, Pa., to build a new $75 million bakery that will bring more than 100 jobs to the area and produce bread and buns for the Northeast. The Macungie bakery is expected to begin operation in early 2014.
Hostess waves felt at Pepperidge Farm
Reverberations from the Hostess closing extended well beyond Flowers. In a presentation earlier this year, the top executive at Pepperidge Farm, Inc. described how the company has participated in marketplace changes in ways it had not expected.
Irene Chang Britt, senior vice-president of global baking and snacking at Campbell Soup Co. and president of Pepperidge Farm, said about seven points of bread market share suddenly went “up for grabs” when Hostess shut down.
“As a non-national premium player, our fair share should have been less than 0.5 percentage point, but we managed to achieve more than double that amount along with significant shelf space gains,” she said. “This achievement was a combined effort of our sales team and our network of flexible, dedicated, independent distributors, who make more than 5 million store visits per year.”
In the presentation, she said Pepperidge was “well positioned” going forward.
“We will continue to maximize the space gains we have made in the store, the relationships we have built with retailers and the appeal of our cut-above portfolio of quality bread,” she said.
Also during the past year, Pepperidge announced plans to close its baking plant in Aiken, S.C. The nearly 40-year-old plant will be closed in phases, starting in September with complete closure expected by March 2014.
“The bakery industry in the United States is becoming increasingly consolidated and competitive,” said Bill Livingstone, senior vice-president of supply chain and operations. “We recently reviewed our operations and identified excess capacity in our bakery network. As a result, we evaluated a number of different options to address this. We made the difficult decision to close our plant in Aiken. It is a very good bakery with great people, but it has limited production capabilities, and we’ve recently discontinued a product that accounted for a significant amount of its volume.”
The discontinued product was Goldfish bread, which was introduced in the summer of 2011.
Other products made at the bakery include Pepperidge Farm Italian, Farmhouse, Rye and Deli Flats bread. The majority of bread production is expected to be shifted from Aiken to Pepperidge’s plant in Lakeland, Fla., the company said.
'No better' category than bread
Despite its challenges, Mr. Balzer said “there is no better category” than bread, in part because of its vast size.
“The changes in sandwiches over the last 20 to 25 years have been remarkable,” he said. “There is a beauty to how bread brings together lots of products, and a sandwich becomes the meal. Hummus may be growing faster, but I’d rather be in the bread business.”