Cap Ex gets back on track
by Dan Malovany
After years of heightened spending on streamlining operations and slashing overhead in response to a faltering economy, new products returned as the dominant driving force for investing in 2011 and should continue to do so in 2012 as bakers and snack producers remain much more customer focused, according to Baking & Snack’s 19th Annual Capital Spending Survey.
Looking at 2012, 41% of respondents selected new products as most important reason for capital spending, followed by economic pressures (22%), increasing capacity/efficiencies (19%), commodity costs (10%) and food security (8%). Those percentages were statistically similar to last year’s survey.
By contrast, only 31% in the 2010 survey listed new products as the primary force behind capital expenditures, followed closely by responding to economic pressures (29%), offsetting high commodity prices (22%) and then a host of other reasons. During the recession, new product activity tumbled by as much as one-third in many food categories as skittish companies retrenched until the economy showed some signs of leveling off.
Just because new products have become the primary push behind capital spending doesn’t mean food companies have stopped searching for further ways to improve productivity, according to Marjorie Troxel Hellmer, president, Cypress Research Associates, Kansas City, MO, which conducted the survey in November and December. Rather, the justification for capital expenditures has become more balanced between businesses seeking out new opportunities to bolster their sales base and companies identifying operational efficiencies to protect their bottom lines.
“The commodity pressure is there and so are economic pressures, but they are not as much of a driver as in the past,” she said. “That’s because some of the trepidation is falling away. Companies are getting back to business and keeping an eye on their budgets.”
According to the survey, the new normal involves identifying new avenues for growth but doing it as prudently as possible. In fact, improving product quality/consistency as well as food safety/sanitation rated 6.1 out of 7.0, or “very important,” in how executives will determine their capital spending in 2012. Improving process capability/flexibility — such as increasing yield or decreasing changeover time — received a 6.0 rating, followed by decreasing labor costs with a 5.9 ranking of importance.
Reducing labor costs is no longer the proverbial lowest of the low-hanging fruit, possibly because bakers and snack producers have addressed this issue consistently over the years, according to Ms. Troxel Hellmer. Moreover, as companies search for ways to grow their businesses, they reallocate skilled labor to new lines or into new positions within their operations instead of just focusing on reducing headcount, according to a panel of industry veterans interviewed by Cypress Research Associates.
Broadening product portfolios
For Shearer’s Foods, creating new products for existing customers ranks right along with developing items for new customers. “We use a little bit of both strategies: investing for existing customers and using it to attract new customers, but also investing for specific new business projects,” said Scott Smith, president of the Brewster, OH-based salted snack manufacturer.
Shearer’s Foods, he noted, offers branded and private label products, and it contract manufactures for key customers. Most of the company’s newer products address the better-for-you trend in the form of baked, whole grain or portion-controlled snacks.
“We might have an idea for a branded product and eventually make it for our private label customers,” Mr. Smith said. “Sometimes we’ll make an investment around a line or piece of equipment for a very specific opportunity. Sometimes we invest for current customers and hope to get additional new customers. It all depends on the opportunity.”
Ozery Bakery, a flatbread producer based in Toronto, ON, focuses on creating niche products that fill in gaps in the bread and snack aisles. “Me-too” is not in its lexicon, said Alon Ozery, a partner with the company, which moved into a new, larger facility last year and invested in equipment for creating new products and improving its processes to reduce costs and add capacity.
“We not a typical business,” he explained. “Our philosophy is that we don’t compete with existing products,” he added. “We try to look at what’s out there and what’s missing to see what needs that we can fill. Whatever business or product we go into has no known growth potential. We wouldn’t go into an already saturated market. This reflects on who we are as a company: a smaller, artisanal company based on innovation and new product development.”
In 2012, he noted, look for Ozery Bakery to roll out a line of snack foods that will be different from any currently in the market.
Making it special
Many companies continue to invest in technology for the white-hot sandwich thins and flatbread segments, according to John Anthony Orlando, vice-president of operations for Orlando Baking Co., Cleveland, OH. Additionally, he suggested higher-end specialty, artisan breads and rolls are gaining traction, even in a soft economy, as retailers and restaurants try to differentiate themselves from the competition.
“We’re producing more and more ciabatta bread and rolls and improving the positioning of our existing products such as offering upscale hamburger buns,” he said. “Consumer interest is driving growth in these categories.”
Joseph Turano, operations manager, Turano Baking Co., Berwyn, IL, also noted heightened demand for high-quality, upscale artisan breads and rolls in both the food service and retail channels. “We are focused on meeting those demands with these particular product lines by continuing to produce our artisan breads and rolls using the most efficient processes and relying on innovation,” he said.
Another artisan bread baker, Tribeca Oven, spent three years developing a proprietary process to create frozen par-baked ciabatta, baguettes and other breads and rolls through a multi-million-dollar investment that more than doubled the size of its bakery in Carlstadt, NJ, to 160,000 sq ft last year.
George Erasmus, Tribeca Oven’s executive vice-president, innovation, noted the company takes a longer-term approach when it comes to capital spending. “We consider investments probably a bit differently,” he said. “Initially, we looked at our expectation of growing our top line of our business. At that particular point three years ago, we weren’t capacity constrained, but we knew we would [eventually] be. After we made a decision to expand, we then began to question how to improve our quality.”
Many bakers talk about investing in quality, but in reality, the emphasis is more intently focused on increasing throughput and improving efficiencies because costs and pricing continue to put a pinch on margins, according to Mr. Erasmus.
In an effort to streamline production and increase throughput, many artisan bakeries significantly change their processes — everything from increasing batch sizes and reducing floor time to standardizing proofing times — and have created a generation of artisan breads that are more homogeneous in texture and flavor. As a result, he observed, a greater number of artisan-style breads have become more commodity than specialty items.
With its expansion, Mr. Erasmus acknowledged, Tribeca Oven invested in greater efficiencies, adding capacity, improving product consistency and enacting lean manufacturing practices. However, he stressed product quality remained the main impetus and never got compromised, even if the bakery’s return on investment proved longer than what many companies would have deem acceptable.
In addition to par-baked breads and rolls, which allow a specialty bakery like Tribeca Oven to distribute its products nationally, so-called “take and bake” programs have become increasingly popular. Typically, Mr. Erasmus said, supermarket in-store bakeries will place six frozen, unbaked rolls in a bag and place them on the shelf for consumers to bake off at home. Tribeca Oven plans to invest in a roll production and packaging line to expand into new products in the near future.
Big bets, sure bets
To differentiate itself in the market, Orlando Baking invests in new products but in a way that minimizes risk, according to Mr. Orlando. “We wait to make our capital investments until we have new customers,” he said. “We’ll make improvements for our existing customers because we can sell it.”
For The Kroger Co., the most significant investment during the past two years involved expansion of its cake operations at Country Oven Bakery in Bowling Green, KY, according to Dave Hipenbecker, director, network strategy and project engineering for the Cincinnati, OH-based company. Kroger also expanded and upgraded its bread production capabilities in Bowling Green and elsewhere during the past couple of years.
Since joining Kroger four years ago, Mr. Hipenbecker noted, capital spending has remained steady with the company following a fairly disciplined and straightforward strategy. “There are two buckets that are evenly split — where we have capacity constraints and where we have productivity opportunities,” he said. “That’s what drives our investments.”
In 2012, Kroger plans to focus on productivity. “We’re continuing to drive costs out of the manufacturing process,” he explained. “[Investment is] pretty evenly split between equipment and infrastructure. As plants get older, we have to make updates. We’re talking about replacing roofs and air and ammonia compressors, and looking at what efficiencies we can get going forward. We’re looking at parking lot improvements. We’re tearing out outdated control systems and replacing them with new ones.”
Bill Quigg, president, Richmond Baking, Richmond, IN, noted that the private label cookie producer is making a significant investment to boost capacity in 2012. “Ancillary goals are efficiency and labor usage, but they’re not the main drivers,” he observed.
Because it contract manufactures cookies and other products, investments by Richmond Baking tends to be in reaction to customers’ requests. “I can’t tell yet what will drive us in the future. Our position in the market isn’t such that we can do multiyear plans,” Mr. Quigg explained. “We have to be flexible to our customers’ needs. We are prepared financially, but how we deploy those assets is no more planned out than 12 months. This is due to our positioning in the market more than anything.”
In the end, when it comes to capital spending, bakers and snack producers are reinventing themselves, according to our experts. They’re re-examining how to best invest in their businesses, and they’re focusing not only on returns on investments but also on how those investments will allow them to respond to changing market trends in the future.