'Baking & Snack' 20th annual capital spending survey
by Dan Malovany
If there were a sign of the times for the baking industry, it would probably read, “Caution: Watch your step. Beware of volatile commodity costs. Raise prices at your own risk. Look out for health care reform.” Or, “Warning: Declining volume for packaged sandwich bread.” These are some of the concerns and words of wisdom expressed by a panel of industry experts interviewed by Kansas City, MO-based Cypress Research for Baking & Snack’s 20th Annual Capital Spending Survey.
When it comes to capital expenditures, there is no such thing as a sure bet, but bakers now are looking for the next best thing by taking out as much of the risk as possible.
“Caution continues,” noted Scott Anderson, vice-president operations, JSB Industries. Chelsea, MA. “We’ll certainly make sure we see substantial return on investment (ROI) before we put any capital up. We’re not taking as much risk on certain machinery or capital investments. We are making sure we have purchase orders (POs) and sales in hand before spending any capital.”
The producer of muffins, bagels, cookies and other baked goods opened a second facility in Lawrence, MA, three years ago but continues to invest, believing that even the most conservative of bets could result in a big payback in the long run. “We’ve always been a reinvesting company — always putting back some amount for growth,” Mr. Anderson explained. “We’ve grown steadily the past 15 years and want to stay competitive and grow moving forward. We’re grabbing the small profits right now and hoping to reap the larger benefits in the future.”
For Tyson Mexican Original, the No. 1 concern for 2013 involves the price of commodities, which are at all-time highs, according to Richard Irvin, complex manager for the Fayetteville, AR-based tortilla and Mexican food business. Rising ingredient costs coupled with the food industry’s inability to raise prices places pressure on profits. Despite signs of a slowly improving economy, bargain-hunting consumers remain focused on value, and many continue to resist paying more for snacks and bakery foods, putting a pinch on most retailers’ and foodservice chains’ bottom lines.
“Our customers are asking for new bids and quotes from us in an effort to get a cost reduction, but it’s not that easy,” Mr. Irvin said. “If I have a customer that I know isn’t going to keep coming back to me to ask for more cost reductions, I’ll make capital investments to better serve them, but we will not build it first and then expect customers to come. We’ll only build when we have customers to support those investments.”
For years, Mr. Irvin added, the tortilla industry has been bullish when it comes to capital spending. Even despite the deep recession and the slow recovery that followed, most tortilla manufacturers enjoyed robust growth and have taken a business-as-usual approach with new players entering the market and existing businesses spending money to boost their share.
As everyone in the baking industry knows, however, the good times don’t last forever. Eventually, those who make the biggest of bets end up paying the piper. “In 2013, I honestly think some bills are going to be coming due,” Mr. Irvin said. “We’re at a point where increased commodity prices have to be absorbed somewhere. Some people will be in trouble this year. With the tortilla industry, there is not a lot of caution here. They’re like [in the movie] ‘Field of Dreams.’ They believe, if you build it, they will come. At some point, the check is going to come due. We’ll start to see that a bit. Our company is more cautious — we sell it, then we build it. It could be why we’re still in a healthy situation.”
Anteing up for the long run
Because of the way bakeries operate these days, plants cannot afford to sit idle. For many businesses, downtime is just a lost opportunity to maximize their assets. “Investments will have to be made because of the demands we’re putting on equipment in the industry,” said Bill Zimmerman, president and CEO, The Long Co., Chicago. “Plants are always working. We work 168 hours a week. We have to make sure the ovens are up and running, and there is product always moving through them.”
Some baking companies, he added, have no choice but to invest in today’s competitive environment to minimize maintenance, enhance efficiencies, eliminate bottlenecks and boost operating capacity. “I don’t think there’s a single factor out there that doesn’t influence capital spending,” Mr. Zimmerman said. “There’s very little, ‘We’re doing it because we want to.’ We do it because we have to do it.”
As the saying goes, if you’re not moving forward, you’re likely falling behind. In the baking industry, companies can’t even afford to stand still. That’s why New Horizons Baking invested around $15 million during the past three years to upgrade and expand its Norwalk, OH, bakery. During the wake of the recession, the company replaced its antiquated conveyorized proofer-and-oven system, which had been initially installed in 1964. Additionally, it retooled its bun line from mixing through packaging to increase capacity from 3,900 doz buns an hour to 5,200 doz, as well as lower operating costs and enhance product quality.
“We made up our minds to grow the business and did necessary investments to do that,” said John Widman, New Horizons’ senior vice-president of operations. “The things we did made us more efficient. A lot of investments hadn’t reduced headcount, but we gained throughput and controlled costs that way.”
In fact, the company added 32 employees as it more than doubled the size of the bakery to 125,000 sq ft. It also added an English muffin line and installed much-needed freezer capacity. Most of the business’ growth is coming from its Genesis Baking division, which targets new customers in a broader array of channels beyond its core quick-service restaurant accounts.
Even though its capital spending will be down in 2013 from the heights of its expansion, New Horizons’ previous investments make it easier and more affordable to do future upgrades. Some thoughtful planning continues to pay dividends in the long haul.
“We’re pushing the capacity of our new freezer, but now all we have to do is add shelves and some fans, and we can double its capacity,” Mr. Widman said. “We set it up to expand, and now are doing just that.”
Betting on momentum
Over the past three years, Pan Pepin, Bayamón, PR, updated its fleet with new vehicles and handheld distribution systems. Last year, the bakery installed a new proof-and-bake system to pump up capacity and heighten product quality.
This year, Pan Pepin plans to increase its capital spending significantly, perhaps by 50%, according to Mario Somoza, president and CEO. The bakery continues to refurbish its existing bread and bun lines with new sheeters and moulders.
“It’s mostly about maintaining and improving the quality of the products we’re making now,” he said. “We needed to invest to put forth a quality product to the consumer.”
In the near future, the bakery also is looking to expand its portfolio, and those undisclosed initiatives will target new and existing customers with a wider array of baked goods.
“In our case, we’re a bit more bullish,” Mr. Somoza said. “We’re looking in greater detail at other segments we’re not operating in right now, where there is an opportunity. We produce fresh buns and rolls, mostly for retail. There are good trends in related segments that we’re looking at, and I know some colleagues are looking at them as well.”
Part of Mr. Somoza’s bullishness can be attributed to the market Pan Pepin serves, which is partially insulated from the 50 states’ economy. “In Puerto Rico, we get the impact of the US economy, but it is tempered by the local conditions,” he explained. “There is a slight improvement. Unemployment is going down, and there are more business startups.”
The Puerto Rican market is challenging, Mr. Somoza added, but the outlook is improving. “There is more consolidation by the larger players,” he said. “It’s becoming a bit harder for medium and small bakers to compete in smaller markets. Industrywide, I hear a lot of talk about new products or new investments in plants from larger and medium-sized bakers. All in all, the outlook for the industry is positive.”
While the trend lines for packaged sliced sandwich bread in the retail channel remains troublesome as volume sales continue to decline in the bread aisle, those bakeries that are branching into new markets, using alternative channels of distribution or entering additional product categories see investing as a relatively safe bet.
Bakers cite single-serve sweet goods and individually wrapped items for convenience stores, schools, prisons and other institutions as potential growth vehicles.
Catering and in-store bakeries and delis provide ample opportunities, especially for bakers who see bread and rolls as an integral component in the meal replacement phenomenon. Even the freezer case, with microwaveable panini, wraps, breakfast sandwiches and other handheld items, provides additional expansion opportunities for bakeries willing to explore beyond their core markets.
“I can tell from our own business perspective, our business is very sound,” Mr. Widman said. “People are looking to buy more prepared foods that are assembled and frozen. It seems to be trending more that way.”
Several bakers expressed concern and uncertainty about the economy. The last-minute legislative patchwork and incessant haggling between the White House and Congress to avoid the fiscal cliff at the beginning of the year didn’t instill any trust in the federal government. In fact, it created greater uncertainty for the future. That said, many panel members expressed confidence about their companies and their business plans.
“Regardless of the economy, we’re in the business to grow,”
Mr. Irvin said.
At Tyson Mexican Original, he added, customer demand now exceeds capacity. “The majority of our capital we spend on replacing old equipment with new upgraded technologies,” he explained. “The industrialization of tortillas is relatively new compared with breads and buns. For our business, we have to keep investing to stay up with new technologies.”
While new products drive investments for many bakeries and snack manufacturers, Pan Pepin spends capital on enhancing its existing line of baked foods. “We didn’t want the equipment to hurt our quality,” Mr. Somoza said. “We’re upgrading and improving our equipment so we can improve the products going to market.”
Likewise, JSB Industries focuses on streamlining its operations to lower the costs of the products it currently sells. “Most capital is spent on producing existing items and trying to satisfy customer needs more efficiently due to higher ingredient costs — get faster or more efficient to keep some of the profit margin,” Mr. Anderson noted.
Erring on caution
Despite the big bets it made over the past three years, New Horizons, like other companies, needs to soundly justify any future investments. “Most companies regardless of size — large or family businesses — need to look at what will give you a return and how fast it can provide that return,” Mr. Widman said. “Investments with very slow paybacks are not happening as much. Companies are not into taking big risks. You make investments that make a lot of sense.”
Many years ago, some companies thought long-term, even giving the green light to a project with a 10-year ROI, according to Mr. Zimmerman. “Now, if you’re over two years on ROI, everyone is saying, ‘Are you sure you need this?’ With that in mind, there are a number of things people will look at that they feel they need to have, but then they are told to choose one or two projects because they can’t afford to do it all,” he said.
The knowledge base of a company’s workforce also may play a role in the type of investments it makes. “When you’re shopping for equipment, you have to consider who’s going to operate and maintain it,” Mr. Zimmerman noted.
Mr. Anderson expects the economy to improve in 2013, but he’s hesitant about being too optimistic because of the fluctuation in commodity prices. In the private label market where JSB competes, several manufacturers have exited the segment because of ingredient and labor costs putting increasing pressure on already razor-thin margins. “If they raise prices, they can price themselves out of the market,” he observed. “Their ability to stay in the market is shrinking.”
Overall, managing a business has become increasingly difficult because nobody knows what tomorrow will bring. As a result, the safest bet involves focusing on what a company does best and discovering different ways to operate even better to add more predictability to their business models.
“We’re just concentrating on making ourselves more efficient and anything else to help lower costs,” Mr. Widman said.