Fred Penny says bread category competitive as ever

by Josh Sosland
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MEXICO CITY — Despite the exit of a major competitor and the related shutdown for several months of considerable production capacity, the U.S. bread market remains highly competitive, a fact unlikely to change any time soon, said Fred Penny, president of Bimbo Bakeries USA.

Mr. Penny was asked repeatedly during an April 26 conference call about the competitive landscape of the U.S. bread market. The conference call with investment analysts was conducted in connection with the release by Grupo Bimbo S.A.B. de C.V. of first-quarter financial results.

“I would say generally speaking the bread category in particular is as competitive now as it has been,” Mr. Penny said. “And as you likely know, bread in the U.S. is as much a regional business as a national business. And so you can go market to market and find very different competitive conditions. So I haven’t seen any material change in the competitive nature of the category.”

Pressed on what has changed with the exit of Hostess Brands, Inc. from the marketplace, Mr. Penny said private label has gained share in some cases while remaining flat in other markets.

“Again, there’s not one easy answer to that because it varies as you look across different markets,” Mr. Penny said.

When asked whether the intensity of competition in bread may ease at some point in the future, Mr. Penny said he “wouldn’t speculate” about what may unfold but intimated that any easing or intensifying of the competitive pricing may be customer driven rather than baking industry driven.

“In bread, in large part the consumers and the customers determine the level of promotional activity,” he said. “It’s a competitive marketplace, and I would suggest that on any given day of the week you can go in any part of the U.S. market and find that to be the case. And I don’t see that changing any time soon.”

The fact private label has a large share of the bread market also is a contributor to the overall level of pricing and promotional activity, Mr. Penny said.

Commenting on the overall health of the U.S. bread market, Mr. Penny cited small improvements in trends.

“What we’ve seen is that the overall fresh bread category is in tonnage about flat to slightly down, depending on the timeframe you pick, whether you pick 12 weeks or 26 weeks or 52 weeks,” he said. “I'd say it’s a very, very marginal improvement from where we’ve seen it in the longer term over the past few years. So you might argue that it’s a bit better, it’s a bit healthier. But it’s overall at best flat on a tonnage basis.”

Also during the call, Bimbo executives were asked about the company’s ingredient market coverage in the United States. Guillermo Quiroz, chief financial officer, said the company on average is covered through December.

“I understand the U.S. is hedged basically to the end of the year,” he said. “And the expectations generally in commodities, and we included that, is that they may continue to come down. We don’t speculate on that, but if that happens, yes, we will start getting some benefits by the end of the year.”

He said B.B.U. commodity costs essentially will be flat between 2012 and 2013.

Elaborating a little on the major commodities Bimbo purchases, including wheat, oils and fats, cocoa and sugar, Mr. Quiroz said oils and fats in particular have been soft.

Armando Giner, who heads investor relations at Grupo Bimbo, estimated that 5 or 6 of the company’s largest 10 commodities were declining in price while the remaining 4 or 5 were advancing.

In prepared remarks earlier in the call Mr. Quiroz said profit improvement at B.B.U. reflected the success of Sara Lee integration efforts, including plant closings, sourcing and distribution changes and headcount reductions.

“Productivity initiatives, such as waste reduction, combined with the synergies, yielded a $32 million benefit in the quarter, putting on some pace to achieve our synergy objectives in the next two years,” Mr. Quiroz said.

Expenses related to integration totaled about $24 million in the first quarter, Mr. Quiroz said, nearly exactly on pace for the $100 million budgeted for the year.

“As regards to our margins, I would simply say that we were more productive as a company this quarter than we were last quarter,” Mr. Penny said. “We have fewer bakeries, we had a 6% reduction in our total workforce and we’re going to continue to work hard to take our costs down and become more productive and improve our margins going forward.”

Asked whether B.B.U. would be able to retain market share captured with the Hostess closing, even after the brands come back on the market, Mr. Penny chose not to answer the question directly.

“I would say that at B.B.U. we’re working very hard to serve our consumers and our customers across all categories where we’ve picked up business with the Hostess divestiture,” he said. “And we’ll continue to do that and monitor the marketplace as those businesses, if and when they come back. But I feel comfortable that we’re doing everything that we need to do to serve our customers and ensure that we retain as much of that business as possible.”
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