Bakers seek more than bottom-line strength

by Josh Sosland
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Signs of vitality have been emerging from the nation’s largest bread companies.

After several years of industry wide upheaval, signs of vitality have been emerging from the nation’s largest bread companies. Financial results released during 2015 so far have indicated profitability rebounding nicely.

For example, operating income of the U.S. and Canada business of Grupo Bimbo S.A.B. de C.V. in its most recent quarter, climbed 47% from the same period in 2014. Year-to-date operating income was up a heftier 65%. Net income of Flowers Foods, Inc. in its most recent quarter was a record $51.8 million, up 23%, and six-month net income was up 10%.

While top executives at both companies were cheered by the strong bottom-line results, baking industry executives have been rattled by continued overall weakness at the top line. Even as profitability has improved, sales volume of baked foods, including bread, has been flat to weak.

Sales of fresh bread in the 52 weeks ended Aug. 9 totaled $8,871,372,800, an impressive figure but down 0.6% from the year before, according to data from I.R.I. Infoscan Reviews. The data cover sales from supermarkets, drug stores, mass market retailers, military commissaries and certain club and dollar stores. Bread unit volume was 3,823,356,160, down 1%.

The weakness in the bread market was not evenly spread across the industry. Particular pressure was evident at B.B.U., which is broken into numerous different “vendors” in the I.R.I. data. Earthgrains sales volume fell 6%, B.B.U. was down 2.8%, Arnold Products sales fell 5.8% and Orograin Bakeries sales tumbled 6.8%.

Flowers Foods, by contrast, enjoyed a sales gain of 4.8%, as that company continued to revive the bread brands the company acquired from the bankrupt Hostess Brands Inc. Most notably, the company’s sales of Wonder Bread jumped 96% over the past year. The company also enjoyed success with its leading Nature’s Own brand of variety bread. Unit sales were up 1.8%, while dollar sales rose a more modest 1.1%.

Other leading baking companies experienced mixed results, with Pepperidge Farm, Inc. sales volume up 1.8%; Aunt Millie’s Bakeries, down 2.2%; Lewis Bakeries, down 1.4%; and United States Bakery, up 5.1%.

To a great degree, the sales gains or declines appeared to correlate with pricing strategies. For example, B.B.U. lost share after prices for Brownberry brand bread rose 3c per unit from a year earlier, Sara Lee prices rose 2c and Oroweat was up 7c.

By contrast, Nature’s Own average unit price was down 2c, and Wonder was down 1c.

The broad pressure to which bread sales have been subject was highlighted in recent comments by Daniel Servitje, chief executive officer of Grupo Bimbo, and Fred Penny, president of the U.S. and Canada business of Bimbo. Mr. Servitje’s comments appeared to affirm the negative impact higher pricing has had on the company’s sales.

“In the United States there was pressure on volumes, which mostly mirrored the actions in our trade spend programs as well as the price increases in the mainstream business implemented since the end of the first quarter,” Mr. Servitje said in late July.

Profitability at Bimbo was helped both by the higher pricing but also by the wind-down of the restructuring work Bimbo has done since acquiring the fresh baking business of Sara Lee Corp. in 2011. Restructuring expenses were down 67% in the second quarter from the same period a year earlier, and the company has benefited from $80 million in savings year to date, related to the restructuring. Mr. Servitje said further efficiencies may be harvested as the company works to optimize its direct-store delivery network. He said the company would benefit from “boosting promotional effectiveness and optimizing the product portfolio through real-time tools and enhanced analytics.”

Discussing pressure on sales, Mr. Penny drew a line between what he described as “mainstream” bread and the company’s premium products. His positive assessment of premium brands like Oroweat and Arnold appeared at odds with the I.R.I. data suggesting the brands were under pressure.

“I would say the following on the volume pressures, primarily we have seen it in mainstream bread, traditional bread led really by private label,” he said. “We are a major provider of private label and private label has continued to trend negative in the category. So that has been one of the volume pressures. And on the branded side it has really been in our mainstream branded business where we — as I said in prior calls — have been working on getting more efficient trade promotions in the marketplace, which is both about depth and frequency and also some frontline pricing that we took at the end of the quarter.

“That’s against a backdrop of I would say a soft consumption category. The overall bread category is trending 2% to 3% down depending on what part of the U.S. you look at. So I think it’s going to take some time for the category and the consumer to adjust, and we are watching that closely.

“Having said that, our premium bread business, Arnold, Brownberry, Oroweat brands are solid, and we look for improvement out of that segment of the business. And as Daniel noted, sweet baked goods and breakfast have continued to grow well for us and are performing well. So on balance we have seen some softness, but it has really been driven on the mainstream side. And we are just going to have to work our way through that in the coming quarters.”

The largest baking companies have taken different approaches to shore up their positioning in the specialty bread market. Grupo Bimbo has highlighted its product innovation. Flowers is moving forward with a major acquisition.

Flowers' launch of its Healthfull brand was part of the company's effort to put forth more better-for-you products.

“We launched the Healthfull brand and Nature’s Harvest brands nationally,” Mr. Servitje said following the last fiscal quarter. “Both of these innovations come as part of our portfolio development meant to expand our better-for-you products.”

While Flowers took several steps to pave the way for organic sales growth, including the opening of a new baking plant in Lenexa, Kas., it was on the acquisition front that the company made its most dramatic move.

On Aug. 13, Flowers Foods said it reached an agreement to acquire Dave’s Killer Bread for approximately $275 million in cash. Dave’s Killer Bread is the largest organic bread company in the United States. The company produces 17 varieties of whole grain, organic products that are distributed throughout the United States and Canada.

“This is a well-positioned, fast growing company with excellent brand equity and an on-trend organic portfolio that appeals to today’s consumers,” said Allen L. Shiver, president and chief executive officer of Flowers. “The Dahl family and Goode Partners have built a great brand with a commitment to quality and community, two attributes that Flowers values tremendously. We are especially pleased to welcome the Dave’s Killer Bread team members who will bring expertise and experience to our company.”

Dave’s Killer Bread employs 300 and has one bakery in Milwaukie, Ore. Once thie transaction is complete, the business will be run as an independent subsidiary, according to Flowers Foods.

The decision to acquire Dave’s follows a move in 2014 to restage the Flowers’ Cobblestone brand to appeal to a new generation of consumers. Similarly, Mr. Shiver said Flowers was attracted to Dave’s because the brand is not just like others already on supermarket shelves.

“The Dave’s Killer Bread team bakes bread that is truly unique,” he said. “We see strong growth potential across our direct-store delivery and warehouse businesses as we leverage our strengths to offer Dave’s Killer Bread products to Flowers’ existing customers nationwide.”

More recently Flowers announced plans to acquire Alpine Valley Bread, another baker of organic bread (see related story on Page 11).

Bimbo was not completely on the sidelines over the past year. In July, the company said it acquired Italian Home Bakery Ltd., a family-owned Canadian baker of fresh artisan bread and rolls as well as frozen baked products.

In July, Grupo Bimbo announced the acquisition of Italian Home Bakery Ltd., a Canada-based baker of fresh and frozen artisan bread.

I.H.B. operates a 70,000-square-foot, HACCP approved, ISO 22000 and kosher certified baking plant in Etobicoke, northwest of Toronto. Among roughly 60 products baked by I.H.B. are spacatto, or “split,” Italian bread and rolls. Additionally, it offers an array of bread varieties, including a Calabrese line; ciabatta and Hearth & Health Selections.

Pepperidge Farm, Inc., the nation’s third largest baking company, also is taking steps to refresh its baked foods portfolio. In July, top executives from Campbell Soup Co., Pepperidge’s parent company, described a decision to shift the entire Campbell Soup product portfolio toward faster-growing categories. They said this move will mean a different look, and taste, for a number of its popular grain-based foods products. Changes include the removal of high-fructose corn syrup from certain bread. In addition to plans to revitalize the company’s cookie and Goldfish cracker lines, Pepperidge is seeking to fuel momentum in the Pepperidge Farm fresh bakery portfolio by investing in the Farmhouse brand. New bread, buns and roll varieties are planned for Farmhouse.

Bakers already with a strong presence outside the sliced bread market have benefited from the shift away from bread perceived by consumers as “conventional.”

“From our perspective at Turano Baking Co., the specialty bread segment continues to grow as consumers around the country demonstrate that they expect more variety,” said Joseph Turano, president of Berwyn, Ill.-based Turano Baking. “They expect more product variety, they expect unique product offerings. You see even in the bread aisle that regular sliced bread and buns and rolls are being reintroduced into more premium offerings.”

Going forward, Mr. Turano said consumers at retail will become even more demanding, turning away from what he called “run of the mill, standard bread offerings.”

Joseph Turano, president of Turano Baking

“I think they really want to see unique products, bread with inclusions, whether it is grains or seeds,” he said. “They want more fermented dough types, more natural products. Organic and now we see sprouted wheat and sprouted grains, coming somewhat mainstream. I wouldn’t say sprouted is mainstream just yet. Certainly organic is though.”

Another large part of Turano’s business is food service, an area Mr. Turano described as “coming back with sales strong overall.”

“Some smaller segments may not be performing as they were,” he said. “Casual dining is certainly thriving in these times. Consumers are dining out more often once again.”

The product lineup at food service may not be changing as quickly as is the case for retail.

“The general offering in that category (food service) has been table breads, dinner rolls and premium sandwich offerings,” Mr. Turano said. “That’s where the sliced bread category isn’t as strong and really never has been in general restaurant dining. I think it’s more premium sandwich carriers as well as table breads. That’s where we see that industry continuing to grow and coming back strong.”

Recent data from the U.S. Department of Agriculture suggest demand for whole wheat flour may be slipping. By contrast, the Whole Grains Council recently issued a survey showing the two thirds of Americans have increased whole grains consumption either “some” or “a lot” in the past five years (see related story on Page 20). From Mr. Turano’s perspective, demand for whole grains products has been growing but just modestly.

“For our company and the premium segment we tend to produce for, whole grain and whole wheat are trending upward, but not on a sharp increase, just a gradual increase over time. We’re certainly seeing the percentage of our business that is whole grains increase, but I would say it is growing between 5% and 10% per year.”

While declining to call bread baked from sprouted wheat “mainstream,” Mr. Turano tipped his cap to Angelic Bakehouse, a sprouted bread specialist, he described as an “up and comer.”

Based in Cudahy, Wis., in metropolitan Milwaukee, Angelic Bakehouse has been growing rapidly. Earlier in the year, the company said it had reached agreement to sell its product across the four Ahold USA divisions (Giant Carlisle, Giant Landover, Stop & Shop New England, and Stop & Shop New York Metro), as well as D’Agostino and DeCicco Family Markets. In all, Angelic Bakehouse said an additional 265 northeastern retail outlets now will carry its products. The company’s Angelic’s Flatzza and Flatzza Buddy, the first packaged sprouted grain pizza crust, are available at 128 locations under the Ahold USA umbrella, including 63 Stop & Shop locations, 27 Giant Landover locations and 38 Giant Carlisle locations. Ahold operates supermarkets in 10 states — Virginia, Maryland, Delaware, Connecticut, Massachusetts, Rhode Island, New Jersey, New York, Pennsylvania and West Virginia.

Many of the currents driving shifts in consumer preferences favor the kinds of products being baked at Angelic Bakehouse, said James Marino, executive vice-president and chief operating officer of the company. Mr. Marino and his wife Jenny are the owners of the business.

“We’re bullish on the natural and organic space,” he said. “Retailers certainly have acknowledged the movement toward natural and organic. Consumers and a younger generation are looking for more unique products such as our sprouted bread, and are willing to pay a premium for products with higher quality. That’s what the whole movement toward craft is all about. Millennials want quality whether its whiskey, wine or bread.”

Angelic bread is baked from sprouted wheat.

While Angelic bread, baked from sprouted wheat is neither organic nor gluten-free, Mr. Marino said both trends seem to be helping his company.

“The gluten-free movement was the rejection of traditional bread,” he said. “Our product is not gluten-free, but we see people coming back to bread if the ingredients are right.

“One of the subtleties we‘ve seen in the marketplace is that consumers are more responsive to non-G.M.O. products than they are to organic. I do feel as though it is an emerging trend. I think organic ingredients are in short supply. So there is real price pressure. They aren’t mainstream for the masses. People aren’t going to pay $7 for a loaf. Non-G.M.O. is a sweet spot. It screams health without having to go to the price for organic.”

Even though all wheat flour is non-bioengineered, most bread offered on supermarket shelves is not G.M.O. free, yet, Mr. Marino said.

“In most commercial bread on the market, there are too many ingredients to make a non-G.M.O. claim,” he said. “You’ll see the larger companies moving toward non-G.M.O., though.”

While Mr. Marino said the Angelic Bakehouse is still in its early stages of growth, the company has at least some distribution in nearly all parts of the United States.

“We’ve targeted higher end retailers, who will have more customers interested in our products,” he said. “Whole Foods is a no-brainer, but we also target higher end retailers who are reputed to be innovative. For example in the Midwest, we sell to Mariano’s Fresh Market, a high end retailer.

“I think we’re just starting to scratch the surface. It means more to consumers today than last year and the year before are interested in sprouted wheat but not nearly what it will mean in the future. Many feel it is the next big thing now that gluten-free is starting to settle down. There’s nothing gimmicky about it. Raw whole grains in the purest form, applying a natural process so it germinates. Naturally supercharged. There is a big benefit for what we do in our craft around taste and texture. You don’t get negative flavor attributes that are embedded in whole
grain flour.”

The production differences between most commercially available bread and the product baked by Angelic Bakehouse is greater than may generally be appreciated. While Angelic’s bread is a wheat-based product, it uses very little flour.

“We buy bulk grains,” Mr. Marino said. “We grind the grain directly into the dough.”

While flour milled from germinated wheat is available from the milling industry for the production of sprouted wheat bread, Angelic takes a different approach.

Skipping the milling step, Angelic bakes bread from wheat that is soaked and then run through a grinder.

“Only a very small percentage of flour is incorporated into our dough,” he said. “We take seven grains, soak them so they germinate and hit our attributes. In addition to grinding this in the dough bowl, we add vital wheat gluten, a small amount of flour, yeast, honey and molasses and salt. Hard red winter wheat is the main ingredient, and we use other ancient grains as well — seven grains in total.”

Mr. Marino said grinding the soaked and germinated wheat berries produces a better bread.

“I’m biased toward sprouted grain,” he conceded. “But when you try bread baked from sprouted grains instead of flour, most people will never eat regular bread again. When I’m out of town, I eat our competitors’ bread that is baked from flour milled from sprouted wheat.”

While he declined to disclose customers, Mr. Marino said Angelic Bakehouse is making inroads in the food service market. He noted that Panera recently introduced sprouted grain bagel flats and rolls.

From Mr. Turano’s perspective, bread baked directly from a sprouted wheat mash is not and will not be the mainstream approach for the next couple of years.

“When you talk about sprouted grain without the flour component, I don’t believe that’s very mainstream yet but demand will grow as time goes on,” he said. “When you see sprouted grain bread in 2015 and probably going into 2016, it is still very retail oriented, meaning grocery stores. We aren’t seeing that trend yet in restaurants, but I’m sure in the next few years that will start to migrate into food service as well. That kind of product will become more mainstream as time goes on.”

With the economy improving and commodity markets stabilized, factors he said “lend to a healthier industry,” Mr. Turano’s principal concern from an industry-wide perspective is a consumer demand.

“I’m concerned about overall consumption,” he said. “People generally appear to be eating a little less bread than in the past.”

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