KANSAS CITY — Sales trends in the fresh bread category were weak once again over the past year. While the decline in unit sales was modest compared with earlier years and very modest in dollars, the nation’s largest baking companies have moved to reshape their businesses to remain competitive and successful in what has been a chronically flat market.
The realities of conditions in the U.S. bread market were bluntly described recently by Allen L. Shiver, president and chief executive officer of Flowers Foods, Inc., Thomasville, Ga.
|Allen Shiver, president and c.e.o. of Flowers Foods|
“We are realistic about the current marketplace as we’re seeing across the packaged foods category, overall consumption in the bakery category is down,” he said in an Aug. 10 conference call with investment analysts. “This is putting pressure on volumes, and our revised guidance reflects this reality. As a result, we are increasing the urgency of our cost-cutting efforts and our focus on product innovation.”
Fresh bread sales in the 52 weeks ended July 9 totaled $8,934 million, down 0.1% from a year earlier, according to Information Resources, Inc., a Chicago-based market research firm. Unit sales of 3,775 million were down 0.7%. Private label sales trends were weaker than the overall market once again, indicating that branded sales grew modestly during the year. With a 21% dollar share of the market, private label bread sales were $1,955 million, down 4.1% from the year before. Private label lost nearly a full percentage point of market share during the year. On a unit sales basis, though, private label’s share was 33%, even after the share erosion of the past year.
The largest two U.S. baking companies — Bimbo Bakeries USA and Flowers Foods — have been working aggressively to restructure their businesses to enhance their competitive positions. With combined retail sales of $4,248 million, Flowers and Bimbo account for 61% of branded bread sales in the United States.
While at different phases in their restructuring, both companies have undertaken massive efforts.
In the case of Bimbo, the company’s most visible moves have been around capacity rationalization, offset to a degree by plant modernizations and new plant construction. The closings largely date back to Bimbo’s 2011 acquisition of the fresh baking business of Sara Lee Corp.
At the time, Bimbo paid about $709 million for the Sara Lee business, including 41 baking plants and 4,100 routes. Sara Lee had closed a number of older plants in the years before the acquisition, but since 2012 Bimbo has closed about half of the Sara Lee plants. While declaring as early as 2014 that the plant closing phase of the company’s restructuring was nearly completed, additional shutterings have continued with two more announced as recently as July.
Plants have been closed by Bimbo in California, Illinois, Iowa, Kansas, Kentucky, Nebraska, Pennsylvania, South Dakota and Tennessee. Additionally, plants have been closed in Canada in Alberta, Nova Scotia and Quebec. The most recent announcements of closing (three plants) came in July.
In an April 2016 update of restructuring efforts, Fred Penny, president of B.B.U., identified numerous additional avenues for productivity improvement the company was pursuing, even after five years of plant closings and the restructuring of thousands of routes.
|Fred Penny, president of B.B.U.|
“We still have a lot of productivity opportunity across our entire supply chain, which we’re going to get at through bakeries running better, routes running more efficiently, lower return rates, etc.,” he said at the time. “That’s different productivity work than restructuring work that we’ve been doing in the past five years.”
He acknowledged at the time the company would likely find additional “opportunities to change our asset footprint” but insisted it would be “nothing of the scale that we were doing in the past five years.”
Instead, he said the focus would be on making the company’s supply chain “more efficient and effective.”
In more recent comments, Daniel Servitje, c.e.o. of Grupo Bimbo, said Bimbo is taking the long view when it comes to maximizing efficiency. He seemed to acknowledge that the capacity rationalization had extended longer than expected.
|Daniel Servitje, c.e.o. of Grupo Bimbo|
“This is a never-ending process,” he said in a July 26 call. “As we streamline and improve our efficiency within our plants, we are always looking at the cost-per-unit effect on all of our plants. And we’re always striving to do better. When we operate at a better rate, we can bring more volume to the most efficient plants. And if there is an opportunity to have a structurally better performing company, we will take that. And we are constantly opening lines in different parts of the world and shutting down lines or plants if we can do it. Because as we’ve always said, our intent here is not basically to work for a quarter or a year; we are long-term builder of a competitive advantage in our industry. And that requires us to look at the opportunities with the long-term purpose. So these closures are part of a plan that will continue to be implemented over time here and in all markets. In North America, basically the plants that are planned for closing or closed already are small plants, old plants. Most of them are one- or two-line plants.”
That restructuring rather than expansion is Bimbo’s principal focus for the United States is evident even in the company’s most recent acquisitions. Earlier in July, Grupo Bimbo announced it reached an agreement to acquire East Balt Bakeries from One Equity Partners for $650 million. A Chicago-based company with roots dating back to the 1950s, East Balt’s business is centered outside the United States, a point emphasized by Mr. Servitje. He said East Balt appeals to Bimbo because it provides an avenue toward increased geographic and product diversification.
“The company is one of the leading global food service-focused providers of baked goods to quick-service restaurants in 11 countries around the world,” Mr. Servitje said. “East Balt Bakeries enjoys decades long relationships with some of the world’s leading Q.S.R.s such as McDonald’s, Wendy’s, Burger King and KFC, among others. It operates 21 baking plants and employs about 2,200 associates.”
Similarly, Bimbo’s merger and acquisition activity in Canada paled in comparison to its efforts to rationalize production capacity there. In March, Bimbo announced a bolt-on acquisition of Stonemill Bakehouse Ltd., a specialty baker based in Toronto. Stonemill bakes slow-fermented craft bread baked in stone ovens using non-G.M.O. certified and organic ingredients. The company partners with Prince Edward County farmers for locally grown rye and spelt. The company’s bread products are sold under the Stonemill Slow Crafted brand and are available in several varieties, including Sprouted 3 Grains, 11 Whole Grains, Bavarian Light Rye and Sprouted Flax. Stonemill has about 100 associates and operates a baking plant in Scarborough (part of Toronto), in addition to a retail store in Toronto’s St. Lawrence Market.
Capacity reductions also have played a part at Flowers Foods in recent years, though in a very different way than at Bimbo. Flowers in 2013 acquired 20 bread plants that had been owned and operated by Hostess Brands until that company’s November 2012 abrupt bankruptcy. Flowers acquired the plants in 2013 together with certain brands and numerous depots, but quickly announced that most of the plants would not resume operations.
Since then, Flowers has modernized and reopened three of the plants — in Lenexa, Kas.; Henderson, Nev.; and Memphis, Tenn. Other Hostess plants Flowers acquired in 2013 included those in Birmingham, Ala.; Sacramento, Calif.; Denver; Jacksonville and Orlando, Fla.; Waterloo, Iowa; Hodgkins and Peoria, Ill.; Columbus, Ind.; Alexandria, La.; Biddeford, Maine; Boonville, Mo.; Rocky Mount, N.C.; Northwood, Ohio; Tulsa, Okla.; Memphis; and Ogden, Utah.
Between 2014 and 2016, Flowers has sold most of these properties, generating about $40 million in proceeds. While the company has not disclosed which properties it continues to hold, Flowers valued the remaining plants and depots it intends to sell at less than $5 million as of Dec. 31.
Flowers Foods is planning to present a major late-September review of Project Centennial and where its restructuring plan is headed, but in August, the company highlighted progress completed during its second quarter:
• Enhancing efficiency: A new organizational structure and initiation of a voluntary separation incentive program; progress toward reducing purchased goods and services spending by at least $45 million by fiscal 2018; “distributor enablement initiatives” to reduce stales; completion of a “first wave of continuous improvement pilot programs” that revealed efficiency savings opportunities in baking plants; launch of a process to rationalize the company’s manufacturing and logistics network; and after the quarter, announcement of plans to close a snack cake plant in North Carolina in early October.
• Strengthening the company’s core business: Progress in a brand rationalization effort, to be completed before the end of 2017; extended Dave’s Killer Bread into the breakfast segment with the launch of bagels and breakfast items; and engaged third-party platform to efficiently expand distribution of fresh products to new markets in the Upper Midwest.
• Expansion into adjacencies: Formulated strategy and began to identify opportunities to diversify brand portfolio into attractive adjacent categories.
The voluntary separation program was made public a month earlier. The plan has been offered to certain salaried employees meeting defined age, length-of-service and business function criteria. Participants will receive enhanced separation benefits. Flowers projected the program will be mostly completed by the end of the year.
“Currently, it is not known which employees will elect to participate in the V.S.I.P., so the company is unable to estimate cost, which will consist primarily of employee severance and benefits-related costs,” Flowers said. “An estimate of the amount or range of costs and benefit will be provided when a good faith determination can be made, which is expected to be in the third quarter of 2017.”
Also in August, Mr. Shiver described the value of moving away from a siloed approach to its business.
“The way we go to market with cake was basically by distribution method — warehouse and D.S.D.,” he said. “I think one important aspect of the new structure is moving to the business unit structure. It will allow us to combine how we look at our cake business. So that focus will change dramatically, and we’ll talk more about that in September at the Investor Day.”