Is bread baking really a defensive business?

by Morton Sosland
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No one enjoys a kind word about baking or the broad food manufacturing business more than this magazine does. Similarly, no one likes less any and all demeaning criticisms of industry prospects. Expressing that thinking in turn leads to a feeling of great urgency to understand how best to regard prospects for grain-based foods at this particular point in the fast-moving domestic and global economies. That is especially the case when thoughtful analysts in recent days have expressed strikingly different opinions about the relative virtues of investing in the industry at this moment. Making an assessment becomes critical in light of the many uncertainties ruling on the outlook for business in general, not just in the balance of this year but for this second decade of the 21st century. Will baking’s results follow or not the trends in the general economy?

Those uncertainties are heightened when sharply contrasting views are voiced about the very same baking business. Widespread rumors, neither denied nor confirmed, are that the Sara Lee Corporation is moving to separate its wholesale bread baking business, which is largely what it acquired as Earthgrains some years ago. For one analyst, Sara Lee is doing the right thing to rid itself of a business that does not have a promising future, which is a mild way of interpreting what this analyst said. This very same adviser, though, expresses doubt that any other food company will want to acquire Sara Lee’s bread business in light of the great difficulties it faces. And Sara Lee itself has been going through a difficult time, disposing of non-food businesses that would make divestment of baking at variance with what had been perceived as a corporate strategy focusing on food.

In contrast with this dour prognosis of where baking is heading are other analysts who have reached a much different conclusion on the driving force behind Sara Lee’s rumored sale of its baking business. Here the view is that Sara Lee is seeking to sell baking because of excellent demand. That is ascribed to bread being a core food business ranked as a “defensive asset.” Many investors, these observers say, want to acquire such businesses as protection against volatility in the economy as well as in equity markets. This approach assumes that any problems facing an individual baking business is countered by the expectation that a “double-dip” recession like some are forecasting for the American economy will find baking a good place to be as penurious consumers tighten their belts and buy essential foods like bread.

Indeed, this “defensive asset” argument has been put forward to explain several other offerings of major food companies that are considered likely this year. Similar to Sara Lee’s taking advantage of the demand for “defensive business” is the apparent decision by the private equity owners of United Biscuits to want to sell that company as well as a similar plan aimed at liquidating a major holding in Yoplait, a leader in French yogurt. According to the Financial Times, these businesses are attractive to equity buyers because they proved their resilience during the recent recession.

Neglected in any enthusiasm about the marketplace’s appetite for these companies is that baking and other aspects of food manufacturing did not really fare well during the recent recession. For one of the few times in history, baking’s performance was not much different from firms in industries that truly struggled. Sure, baking and the food business enjoy steady consumer demand, but as these industries have sought to innovate and to introduce higher value products as the way to bolster both profit margins and positions at retail, they also have exposed themselves to fluctuations of the overall economy. While it would be a wonderful example of “having your cake and eating it” to be considered both defensive and innovative, that is not the likely outcome of strategies most baking companies have decided to pursue.

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