IBIE Perspective: Amid challenges, opportunities persist
September 1, 2013
In terms of industry change, the years between the 2010 and 2013 International Baking Industry Expositions have been as eventful as any in the history of baking. For the most part, the period placed the industry in a stronger position than in many years. This must be reckoned as a highly desirable situation, given the abundance of challenges as well as opportunities that baking continues to face.
Perhaps the greatest transformation for baking since the last Expo — indeed,
since the past several Expos — is the consolidation involving a large proportion of the industry’s capacity. This shift means baking is now led entirely by companies with strong track records in the business. That alone is hugely different from the not-too-distant past when the industry included large companies owned and/or directed by entities with little, or no, baking experience.
As part of the consolidation, the uncertainty overhanging the industry because of the financial woes of Hostess Brands has been lifted with the successful liquidation of the company during 2013. While it remains to be seen how the competitive picture in baking fills out in the months ahead, it is hard to imagine a more promising outcome than now on the horizon for what has been a difficult, nagging story.
Better, but plodding, economy
Among other positives for the industry is the more benign ingredient market picture. Even as the overall wheat supply situation remains tight — mostly because of persistent dry conditions in the southern Plains States — the bright outlook for the 2013 corn and soybean crops represents great recovery from the drought-devastated outturn of the past year. As a result, the US Department of Agriculture’s July forecast for new-crop wheat prices predict a decline of as much as $1.30 a bu from the year before.
As is the case with the other positives for baking, plenty of cause for concern remains in commodity markets. Prices are still well above historical averages, and market volatility continues creating severe challenges for the industry.
The July 2013 employment level of 144.3 million was solidly higher than the 138.4 million figure when the 2010 Expo was held. Similarly, the July unemployment rate of 7.4% represents significant progress from the 9.5% jobless rate in 2010. Personal incomes are improving, and the housing market prompts much enthusiasm about the outlook.
Even with the improvements, cross currents are at play in baking that pose numerous challenges. In terms of the economic picture, the employment level remains 2 million jobs shy of the November 2007 peak of 146.6 million. Similarly, the July unemployment rate, while better than in 2010, is still a higher figure than all pre-2010 Expos but one since the late 1970s (7.9% in 1981). Against this backdrop, increasing pressure to cut back on government spending, most notably the Supplemental Nutrition Assistance Program, a.k.a. “food stamps,” is a worrisome development for an industry that looks to serve the entirety of the US population.
Capital, energy and labor
Among the many economic forces of interest to bakers with the approach of Expo, none is greater than the accommodative policies of the Federal Reserve Bank that for several years have helped create and maintain an atmosphere conducive to capital spending. Even though bond markets appeared to have jumped the gun in their summertime fears that the Fed was about to begin winding down its Quantitative Easing program, bakers must know that the potential for tighter monetary policies ahead and higher interest rates represent a greater risk than has been the case for many years.
In other words, it is very likely that the cost of capital will be significantly higher when Expo is next held in 2016 than is the case today, providing an unusual incentive to undertake capital programs that are soundly based. From the cost of money perspective, capital spending in baking is attractive today in a way that may not be repeated for many years to come.
Energy markets and labor costs represent two major areas of concern for baking. In the case of labor, the need to contain costs is heightened by uncertainties surrounding the pending implementation of the Affordable Care Act, or Obamacare. The risks for baking are heightened because the industry remains among the most labor intensive in the food sector. In 2011, bread baking accounted for 13.8% of the labor force in the food processing industry but only 5% of the value of shipments, according to Labor Department data.
Consumption: trending positive
When it comes to consumption levels, the picture for grain-based foods may not appear favorable, but even here, signs may be cited of trends moving in a generally positive direction. Bread and rolls are among a wide range of staple food categories that saw overall volumes decline in 2011, at least within the principal channels tracked by Information Resources, Inc. Overall, 14 of the Top 20 food categories experienced decreases in 2011, a figure that narrowed to 10 a year later. In the case of fresh bread and rolls, the gaping 4.2% drop in sales in 2011 shrunk to a more modest 1.7% in 2012. New data indicating January-June 2013 US flour production at record levels reinforce the sense of grain-based foods’ resilience.
The retail marketplace itself has presented baking with more difficulties as well as opportunities than in a long time. Super-sized stores appear to have lost their retail leadership as an increasing number of companies focus on outlets centered on convenience and smaller size. Foodservice growth, in face of difficult economic times, and expanded attention to convenience foods for home preparation have brought new attention to innovation.
It is the new products with new features that capture the attention of consumers who continue to focus on weight reduction and healthful eating. Little change has been observed in the power of these forces in winning retail attention, a consideration for bakers as the industry contemplates the chances of regaining some of the market share lost during the prior recession.
Still, the industry must face up to challenges from those who, for a never ending variety of reasons, question the healthfulness of grain-based foods. Most recently, the traction gained by advocates of gluten-free eating, even for the vast majority of the public free from celiac disease, represents a hurdle that must be overcome. Through public advocacy, the pursuit of greater efficiency and a heightened commitment to product innovation, bakers will find real cause for optimism as they look ahead to IBIE 2013 and beyond.