On the precipice of great change
Sept. 23, 2011
by Josh Sosland
By all indications, the bread industry in September 2012 will differ greatly from the industry at present. Fundamental changes range from likely to imminent for each of the largest bread companies in the United States, creating an atmosphere of anticipation and uncertainty.
The pending change for these companies — Bimbo Bakeries USA; Flowers Foods, Inc.; Sara Lee North American Fresh Bakery and Hostess Brands, Inc. — looms at a time that is not a particular point of strength for the bread business.
Unit sales of fresh bread totaled 3,024,546,000 in the 52 weeks ended Aug. 7, down 3.3% from a year earlier, according to Infoscan Reviews from SymphonyIRI Group. Results include supermarkets, drugstores and mass merchandise outlets, excluding Wal-Mart.
The difficult aggregate sales trends were reflected in the results of the largest individual companies, particularly B.B.U.
Unit sales of Bimbo Bakeries USA, Fort Worth, Texas, the nation’s largest baking company, were 431,360,000, down a jarring 7% from the same period in 2009-10. The company B.B.U. is poised to buy, Sara Lee North American Fresh Bakery, the third largest U.S. bread baker, did not fare much better. At 244,189,300 units, sales were down 6% from the year before. Flowers Foods, Inc. bread sales were not down as much. At 264,260,200 units, Flowers bread sales were down 2.5% from the year before.
The only major baking company to achieve unit sales growth was Hostess Brands, Inc., Irving, Texas. At 237,926,500, Hostess bread sales were up 3.1% from a year earlier.
Still, even for Hostess, market conditions were anything but peachy. According to the SymphonyIRI data, Hostess took the smallest price increase of any of the largest baking companies over the past 12 months. The average unit price of a Hostess bread rose 1.5% in the 52 weeks ended Aug. 7, versus 6.4% for Bimbo, 3.2% for Sara Lee and 5.1% for Flowers.
Pressure on baking companies to raise prices has been intense. Baking ingredient prices, while holding within a reasonably narrow range in recent months, are considerably higher than prevailed a year ago.
The white pan bread index, as compiled by Milling & Baking News, was 212.2 as of Aug. 5, up 15% from a year earlier and up 31% from August 2009. The index, which is based on the standard formula for white bread, has been lifted by prices for most of the ingredients in bread: flour, shortening and sweeteners.
While tracking how the pricing environment is affecting Hostess Brands profitability is not possible because the company is privately held, news sources have suggested the company, formerly the nation’s largest baking business, is struggling.
On Sept. 2, The Wall Street Journal said Hostess has again hired restructuring advisers. During the days when the company was known as Interstate Bakeries Corp., Hostess spent several years in bankruptcy before emerging in February 2009.
The WSJ said Hostess has hired the law firm Jones Day and financial services firm Perella Weinberg Partners to negotiate with creditors and attempt to rework the Irving-based company’s finances. The WSJ noted that no restructuring appears imminent for Hostess, and adequate cash is available to operate in the near term
While not as severe as suggested in the Hostess situation, the difficulty of the current environment has been evident in financial results of other leading baking companies.
In the most recent quarter, the period ended June 30, Grupo Bimbo S.A.B. de C.V. net income was NP1,054 million ($90,725,000), down 16% from the same period a year earlier.
Operating income in the quarter fell 8% for B.B.U. and was down 10% for the first half of the year.
“Clearly, the raw materials environment was very challenging,” said Daniel Servitje, chief executive officer of Grupo Bimbo. “The basis of comparison was tough with the increasing commodity costs for a weighted basket of our key inputs at around 20% and 30% for wheat flour alone.”
Noting that Bimbo’s acquisition of the Sara Lee North American business had taken longer than expected, Mr. Servitje said the transaction should be completed by the end of September.
Flowers Foods net income has declined in the current fiscal year. Thomasville, Ga.-based Flowers said net income in the three months ended July 16 was $28,210,000, down 16% from $33,756,000 during the second quarter a year earlier. Flowers Foods shares have declined about 20% from the company’s 52-week high.
“Struggling” would not be an accurate descriptor for Flowers, but the company has called the current market environment challenging.
Allen L. Shiver, president and chief operating officer at Flowers Foods, said it is important to maintain perspective when assessing the current market situation for bread.
“We are upbeat about the outlook for the overall bread market, but we are cautious in our expectations of how quickly things will turn around,” he said. “Bakers are fortunate that bread is viewed as an essential and can be consumed at all meals. Bread’s longevity and its flexibility have helped it withstand everything from tough economies to diet fads.
“What we’re wit-nessing is continued financial pressure on the consumer, which has resulted in a behavior change. Consumers are making fewer trips to the supermarket, are more cost-conscious than in the past, are tending to use the entire loaf, and are making fewer impulse purchases. We’ve also seen that coupon usage is up significantly across all grocery categories as consumers look for ways to reduce their total food bill.”
Softness in the white bread category is nothing new, Mr. Shiver said, noting that Flowers focus has been to maintain market share in existing markets and gain share in new markets.
Over the past year Flowers has announced its most ambitious geographic expansion plans ever, targeting penetration in 75% of the United States within five years. At the time of the announcement, the company was at 50%.
A few weeks later, Flowers announced plans to acquire Philadelphia-based Tasty Baking Co. for $175 million in cash. While the move was in the snack cake rather than bread category, Flowers said the acquisition will help the company reach its penetration goals in the markets served by Tasty. Mr. Shiver said the integration is proceeding apace.
“We will leverage our Nature’s Own brand across the mid-Atlantic and into the northeastern portion of the United States,” he said. “By serving this important area with Nature’s Own bread and rolls, we will reach 61% of the U.S. population with our diverse line of bakery products delivered by our D.S.D. (direct-store delivery) network, moving toward our 5-year target of serving 75% of the U.S. population through D.S.D. The integration of Tasty Baking is well under way and right on schedule, as expected.”
Regional bakers fared reasonably well in the SymphonyIRI data. Lewis Bros. Bakeries, Inc., Evansville, Ind., and Aunt Millie’s Bakeries, Inc., Fort Wayne, Ind., each posted solid gains in dollar and unit sales.
Another regional baker somewhat satisfied with current market conditions is Alpha Baking Co., Chicago.
“Business in general is good, though it’s just difficult making any money at it,” said Michael Marcucci, c.e.o. “A lot of it is commodity related. It’s more expensive to do business this year than a year ago, but we are very busy.”
Regarding the changes under way at the largest U.S. baking companies, Mr. Marcucci does not foresee a major effect on Alpha or other regional bakers.
He explained, “Why should there be a major impact? We compete with all of them now.”
The positive results at Alpha stand out given the company’s historical focus on food service rather than supermarket customers. Mr. Marcucci noted that a number of Alpha’s customers have experienced sales declines because of economic weakness.
“We remain more of a food service supplier than a grocery supplier, and for a variety of reasons, some of our customer base’s business is down,” he said. “We’ve been fortunate to pick up business in other places that made up for the shortfall. In the food service business, there are a thousand companies. So you’re constantly showing samples. You’re constantly churning. Right now, we’ve hit on a couple.“
Expanding on the impact of commodity costs, Mr. Marcucci described the challenges of passing along higher ingredient costs, calling it “easier said than done.”
“Sure, you try to pass it along where you can, and where you can’t, you eat it, hoping things turn around eventually,” he said. “On the food service end, you can’t always get the pricing you need.
“If you go to your customer and tell them wheat prices are up, you immediately put the business in play. Sometimes that’s riskier than it’s worth.”
One change among food service customers in the recent past is demand for whole grain products, Mr. Marcucci said.
“Our research and development people are very busy, he said. “Many of the restaurants want something unique. They’ve always wanted something unique, but the whole grain phenomenon is new. It’s been gaining momentum at the food service level.”
Longer term, Mr. Marcucci is hopeful about prospects for bread industry growth in the markets served by Alpha Baking.
“People we do business with are going to continue to need bread products,” he said. “Burger King is a large customer of ours, and I don’t see a Whopper served with a knife and fork any time soon. The people we serve will continue to be there.”
Mr. Shiver of Flowers offered upbeat thoughts on prospects for restaurant business, while acknowledging the road has been a difficult one.
“The food service segment is definitely one that has been impacted by the sluggish economy,” he said. “Consumers just aren’t eating out as often as they previously did, and when they do, they’re tending to spend less money.
“Recently, we’ve seen some encouraging news related to food service, albeit minimal. In January, Technomic forecasted 2.4% nominal growth rate for total food service for 2011. However, in May they forecasted a slight uptick to 2.8% versus the prior year with improved forecasts in limited service/quick service (currently forecasted at 3.5% growth for 2011) and beyond restaurants (e.g., institutional sales), currently forecasted to grow 3.1% in 2011 versus 2010.
“As we announced during our second-quarter earnings call, Flowers’ year-to-date sales for food service have been relatively flat. However, looking at recent weeks, we are showing an uptick in our food service business, driven primarily from new business from existing customers. “