State of the industry: Grain-based foods

by Josh Sosland
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Bread basket
 The baking industry has been striving over the past year in search of avenues for growth and improved profitability.

KANSAS CITY — With numerous fad diets still popular that shun bread and other baked foods, the baking industry has been striving over the past year in search of avenues for growth and improved profitability.

Data from Information Resources, Inc., a Chicago-based market research firm were discouraging. In the 52 weeks ended Aug. 7, unit sales of fresh bread and rolls were down 1.3%, including fresh bread down 1.6%, buns down 1.1% and pita bread down 4.5%. Measured in dollars rather than units, the news was not quite as dispiriting. The bread and rolls market overall was $13.3 billion, up 0.5%, including fresh bread at $8.9 billion, up 0.4%; buns at $2 billion, down 0.2%; and pita at $115 million, down 4.8%. The all other baked foods category, which includes croissant and specialty buns, was up 2.5%, at $2.1 billion. The weakness was in line with sales trends of the last several years.

Also as reported by I.R.I., the three largest U.S. bread companies experienced sales declines while the next three enjoyed gains. Each of the “big three” bakers sustained a decline smaller or in line with the overall category — 0% for Grupo Bimbo S.A.B. de C.V., 0.5% for Flowers Foods, Inc., and -1.3% for Campbell Soup Co.

Bimbo Bakeries, Flowers Foods, Campbell Soup Pepperidge Farm bread
The three largest U.S. bread companies experienced sales declines.

The next three largest baking companies were Aunt Millie’s Bakeries, up 2.8%; Lewis Bakeries Inc., up 1.6%; and United States Bakery, up 5.2%.

Perhaps the most dramatic shift was a whopping 5.2% drop in private label bread sales. The drop was far wider than the 1.8% drop in 2014-15 and 0.7% in 2013-14.

While extreme competitiveness across the bread market was cited by industry executives over the course of the year, bread prices overall tracked modestly upward — up 1.9% for the category overall, including 1.1% at Bimbo, 0.6% at Flowers and 0.2% at Pepperidge.

Oprah Winfrey - 'I love bread'
Per capita flour consumption was down, despite Oprah Winfrey's bread endorsement.

Among signs of softness is the principal barometer of the health of the flour-based foods industry — per capita flour consumption. At 133 lbs in 2015 (it’s too early to estimate 2016) consumption was down from 135 lbs in 2014, which had been the norm the last few years. While off a fairly moderate 2 lbs, 133 lbs is at about the lowest use level since 1989, when it was 129 lbs. While the grain-based foods industry, mostly through the Grain Foods Foundation, has combated criticisms of the healthfulness of wheat foods (and despite expected effusive endorsement of bread from celebrity Oprah Winfrey), headwinds have been steady and intense. Early in the summer The Wall Street Journal published an article challenging how wheat is milled, and in mid-summer the New York Times published an op-ed piece making an impassioned case for low-carbohydrate diets, essentially the Atkins Diet. These were published even as a range of fad diets continued, including gluten-free dieting, the paleo diet, high-protein diet, and low-FODMAP and low glycemic-index diets. Certain large quick-service restaurant segments, including chains like McDonald’s and Pizza Hut, have experienced continued soft sales after long periods of growth.

Another indicator of concern to the industry has been production of whole wheat flour, which has shown signs of flattening in recent years. Over the first six months of the year, the U.S. Department of Agriculture estimated whole wheat flour production at 10.7 million cwts in the first half of the year, down 8% from 11.6 million during the same period last year. Whole wheat flour had been a singular area of strength during much of the 2000s with production more than doubling between 2002 and 2006. Production has not grown the last couple of years. The earlier period was one of an intense new push toward whole grains in the Dietary Guidelines for Americans, and baking and other food manufacturers capitalized on the attention with a range of innovative new products, including “made with whole grains” products (containing a blend of enriched flour and whole wheat flour). Innovation has flagged more recently. The Whole Grains Council has contended that overall demand for whole grains, as measured in part by the introduction of new products bearing the council’s seal, has continued to rise. Strong growth in grains other than wheat has been an important source of growth.

Whole wheat flour
Whole wheat flour has shown signs of flattening in recent years.

Despite the weaker flour demand indicators, the baking sector was not without areas of excitement and growth in 2016. Large investments have been made in organic baking, including the acquisition by Hain Celestial of Rudi’s Organic Bakery, and the acquisition by Flowers of Dave’s Killer Bread. And Bimbo has been expanding distribution of its Eureka! line. Over the course of 2016, Flowers moved to expand distribution of D.K.B. bread, converting its Tuscaloosa, Ala., plant to produce the newly acquired high end brands (Alpine Valley Bread as well as D.K.B.).

The case for growth in the organic bread market was made late in 2015 by Allen L. Shiver, president and chief executive officer of Flowers.

“Over 80% of American families include some organic foods in their shopping carts,” he said. “And the interest in organic breads in particular is broad, appealing to a wide variety of households, from millennials to boomers.”

Organic bread brands
Large investments have been made in organic bread brands.

He cited industry experts who were predicting solid low double-digit growth rates for organic bread going forward.

“One factor that supports the robust growth outlook for organic breads is that household penetration of organic breads is low when compared to other food staples such as produce and milk,” Mr. Shiver said. “We believe one of the limiting factors has been distribution. For the most part, organic breads have not been made available through an extensive and service-oriented distribution system. We will leverage Flowers’ distribution strengths in D.S.D. and warehouse to reach more retailers and additional consumers in new geographies.”

Another positive today in baking versus last year and earlier may be found in ingredient price trends. Wheat futures prices in early October were down $1 a bu from a year ago, hovering near contract lows. At about $4 a bu, wheat futures prices in early October were down roughly $1 from a year earlier. Milling & Baking News calculates an index of ingredient prices for a number of different baked foods categories, and the bread index as of early October was about 147, down from 154.7 a year earlier and the lowest mid-October figure in more than a decade. At 147.3, the pan bread index is down 38% from the peak of 236.3 reached in 2012. Indexes for other baked foods like crackers and cake have fallen at least as steeply.

Hostess snack cakes
Hostess Brands' distribution is now a 100% warehouse delivery model.

A very different development of interest in the past year or so has been the tussle between the two principal models of baked foods distribution — direct-store delivery and warehouse distribution. With the acquisition by Hostess Brands L.L.C. of the snack cake assets of the bankrupt Hostess Brands, Inc., the buyer shifted the company’s distribution to a 100% warehouse delivery model from direct-store delivery. The success Hostess has achieved exceeded expectations and prompted the company to begin delivering bread to specialty customers using its warehouse system. For both snack cake and bread, the company depended on the reformulation of its products to allow extended shelf life of duration beyond the industry norm.

In an interview early in 2016, William D. Toler, chief executive officer of Hostess Brands, said warehouse distribution of bread is suited uniquely well for convenience stores that maintain smaller stocks of bread.

“D.S.D. bread in a small-format store never works,” Mr. Toler said. “You’re either staling out or are out of stock. And warehouse is very consistent. You sold four last week, so you order eight for next week, and it has the code to still be on the shelf. It’s a much easier execution for the stores.”

Panrico crackers
In June, Grupo Bimbo completed its acquisition of Panrico S.A.U. in Spain and Portugal.

A new push into on-line food retailing by Wal-Mart and Amazon raised still further the prospect of warehouse distribution gaining a greater share of the fresh bread marketplace.

Acquisitions in the bread market have been limited over the past year. Grupo Bimbo in July 21 completed its acquisition of Panrico S.A.U. in Spain and Portugal. The acquisition includes 100% of the company’s shares but excluded the branded packaged bread category. The $209 million transaction was first announced in July 2015, but took about a year to gain approval from Spanish and Portuguese competition authorities. Also in 2015, Bimbo acquired an artisan baking business in Canada — Italian Bakery Home Ltd.

Following colossal bread market acquisitions earlier in the decade — Flowers acquiring most of the bread assets of Hostess Brands, Inc., and Bimbo buying the fresh bread business of Sara Lee Corp. — the baking industry has reached a level of consolidation that acquisitions of that scale should be limited in the foreseeable future. Flowers and Bimbo combined account for roughly half of the U.S. fresh bread business (more if you include their share of private label), and Pepperidge Farm, Inc. has about a 7% share. The remaining businesses either are regional baking companies or specialty bakers like Aryzta.

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