Bakers play to their strengths with capital spending
Feb. 1, 2014
by Dan Malovany
Firmly in the black. We’re seeing no ill effects. That’s how all the bakers on this year’s panel of experts described their company’s current financial position in Baking & Snack’s 21st Annual Capital Spending Survey.
Customer focused. Consumer centric. Cautious and calculating. Although our experts have taken decidedly different paths to grow their bottom lines, their focus on the fundamentals doesn’t allow them to stray far off the long road to success. They don’t necessarily control their fates, but they’re managing their businesses to best control their destinies in constantly changing times, according to exclusive interviews conducted by Kansas City, MO-based Cypress Research Associates in conjunction with the survey.
On the move. Expanding their operations. During the past three years, all of these businesses significantly invested in initiatives — or are currently engaged in major capital projects — designed to take them to the next level. Specifically, adding capacity for new and existing products remains the primary force behind future spending.
King’s Hawaiian Bakery West, Torrance, CA, is a perfect example of a bakery that’s stepping up its game. From 2003 to 2010, this producer of signature Hawaiian sweet breads, dinner rolls, sandwich rolls and buns steadily invested in upgrading its two West Coast bakeries on an annual basis, according to John Linehan, executive vice-president.
However, as the popularity for its iconic products expanded coast to coast, the company opened a $45 million facility in Oakwood, GA to increase capacity and lower shipping costs. Originally, King’s Hawaiian projected the facility would begin to reach capacity by 2015, but demand for the nation’s largest roll producer’s breads and rolls jumped as household penetration and frequency of purchase continued to rise beyond the company’s expectations.
As a result, Mr. Linehan said, King’s Hawaiian is “hugely increasing” its capital spending to triple capacity in its operation located just outside Atlanta. Last year, the company broke ground to double the size of its existing Oakwood bakery during the first half of this year. By 2015, King’s Hawaiian will open another facility — 120,000 sq ft in size — that will house an additional production line.
In all, the company projected it will spend $100 million on its Georgia hub since moving there in 2011. In the short term, Mr. Linehan noted, the expansion will provide capacity for existing products, but in the long run — three to four years down the road — the investments will support new product initiatives.
“There are a lot of areas for growth for small, innovative, unique products that are really, really good,” he explained. “We forget the importance of putting something in your mouth and saying, ‘Wow! This is really, really good.’ How often do you walk down the bread aisle and think, ‘Wow! That’s really good’? Not often.
“The growth potential is for really good-tasting products,” he added. “We’re about five times bigger than seven or eight years ago, and it’s because we make great-tasting bread. We don’t consider ourselves a bread company. We deliver irresistible Hawaiian foods with aloha spirit that families enjoy everywhere every day. So, our share of the key category has increased more than threefold in that period.”
Investing with a purpose
For Gold Standard Baking, it’s all about carpe diem, or seizing every opportunity that pops up on any given day, according to Yianny Caparos, president and CEO of the croissant and laminated dough manufacturer.
Over the years, the company has steadily invested in its 160,000-sq-ft bakery located on the South Side of Chicago. In fact, over the past decade or so, it’s added a new production line as it brought in new business and diversified into in-store bakery, foodservice, contract manufacturing and other channels of distribution.
In 2012, it spent $13 million on a third croissant line, which boosted its production to 10 million units a week. This June, Gold Standard plans to start up a second laminated dough production line — five lines in total.
But adding capacity is only part of its strategy. “We are increasing our investments to automate those areas where we operate manually today — both processing and packaging,” Mr. Caparos explained. “We’re upgrading pieces of processing and packaging equipment that are about 10 years old. We’re also upgrading PLCs from the technology side to make sure we’re current with technology, and we’re installing a new line to add new products to serve existing customers and attract new ones. A new customer has approached us with a commitment to do business with us.”
Riding the wave
Boulder Brands — producer of Udi’s and Glutino gluten-free baked good as well as a bevy of natural and better-for-you spreads and prepared foods — expects its 2014 capital investment budget to be nearly the same as last year — impressive considering its major plant consolidation in 2013.
Specifically, the Boulder, CO-based food manufacturer combined three leased manufacturing locations into a 187,000-sq-ft operation, noted Rick Stoecklein, Boulder Brands’ vice-president, manufacturing.
“Our platform for capital investment in 2014 is based on three things: cost reduction, expanding the breadth of our manufacturing capabilities and increasing capacity as the business grows,” Mr. Stoecklein said.
As the leader in the gluten-free market with its Udi’s and Glutino brands, Boulder Brands continues to proactively meet the demand for new and existing products manufactured in its dedicated gluten-free facility.
“We came to the point where scale and synergies caused us to consolidate into one facility,” Mr. Stoecklein said. “It also facilitated the installation of an automated bread line, which we believe is the highest output, dedicated gluten-free bread line in North America.”
Competition in this segment is expected to heat up when Fancy Pokket Corp. opens a 58,000-sq-ft dedicated gluten-free facility in Lancaster, SC. The $13 to $14 million investment is a big move for Mike Timani, president and CEO of the Canadian company, which produces pitas, pizza crust, bagels, tortillas and panini bread in its 45,000-sq-ft bakery in Moncton, NB.
The Lancaster bakery, which Mr. Timani called “the second-largest facility of its kind,” has been in the planning stages for more than two years. “It will be a first-class operation, all new machinery in place and highly automated,” he said.
The bakery will produce gluten-free sandwich breads, whole grain specialty breads, buns, focaccia, cookies, pound cake, banana bread and lemon poppyseed loaves. Initial plans called for a $6 million, 30,000-sq-ft plant, but Mr. Timani nearly doubled its investments in automation after learning that projected demand for the gluten-free items would outstrip original expectations.
“It is a tough market, and if we’re not competitive enough, we won’t survive,” he said. “Automation is one of the biggest ways we do this.”
Despite increased competition, Mr. Stoecklein of Boulder Brands remained bullish on gluten-free and other better-for-you products partly because the segment’s steep, steady growth trajectory benefits everyone, especially those who are investing in automation.
“We are going to continue to be aggressive in our capital investments in our gluten-free products,” he explained. “Our portfolio includes Smart Balance and Earth Balance with heart-healthy spreads. We have Glutino, Udi’s and Level, which is a diabetic product. Our mission is addressing consumer need states like heart-healthy, diabetic care and those wanting natural foods.”
Poised to invest
Unlike in the past, a greater number of bakeries today wait until they shake hands on a long-term deal before they commit to a major capital project, according to the survey. The move is not necessarily an aversion to risk but a more prudent approach to investing.
During the past two years, Canadian baker Pita Bread Factory consolidated production of its fresh and frozen pita bread, tortillas, bagels, naan, cookies and pies under one roof in Burnaby, BC.
“New customers and new products will drive our spending plans in 2014,” said Sid Hayek, operations manager. “And in 2014, we’re going to continue to drive growth in our existing lines with existing and new customers.
“In the next three years, we’ll look at further building expansions,” he added. “Currently, we have 75,000 sq ft in our facility, and we can expand into a warehousing space that is next to us. By just tearing down a wall, we will have access to another 50,000 sq ft.”
With the focus on tactical investing and partnering with customers, many capital spending budgets are not etched in stone. Nimble companies need to be proactive in the market, especially if they are contract manufacturers or private label producers.
“If plans work out with our developing interests, we’ll be installing a completely new line — production and packaging,” Mr. Hayek said.
But on the other hand? “If these plans do not work out, we’ll hold to the same levels as in 2013, which is 1% of sales for purchasing smaller machinery or smaller production lines,” Mr. Hayek said.
Reducing labor costs through systems automation remains another emphasis when it comes to capital spending. “Not only do we manufacture 10 to 15 different items, but they’re also all with different SKUs,” Mr. Hayek explained. “It’s difficult to fully automate with all the variety of sizes. But we’re still going ahead with two of our lines to reduce some cost. We’ve also now implemented a new computerized warehousing system that helps us with traceability of products and organization of our warehousing area. It creates a lot of efficiencies for our operation and efficiencies with our labor efforts. For example, instead of doing multiple short runs, we can now organize into single larger loads. We’ve been working on this for the past year and are working out the bugs now.”
During the past few years, consumer demand for Dave’s Killer Bread kept the Milwaukie, OR-based producer of premium, high-fiber, high-protein baked goods scrambling during production. The breads, buns and rolls, with such varieties as Killer 21 Whole Grains Bread and Killer Good Seed Bread, are now available in 13 Western states and Hawaii, and the company had big ambitions to expand geographically.
However, 2014 investments will actually be a bit less than 2013. Part of the reason is previous initiatives to keep up with company’s continued growth during the past few years. “We’re just going through a major plant update that increases our capacity significantly,” noted John Tucker, CEO. “So, our internal investment into 2014 isn’t as great as 2013.”
To enter new markets, Dave’s Killer Bread collaborates with a number of co-manufacturers. “We’re looking at investing in their operations in order to produce our products,” he said.
Likewise, Alive and Kickin’ (A&K) Pizza Crust, a contract manufacturer that operates three facilities in Green Bay, WI, will decrease spending in 2013 while it digests a “pretty sizeable expansion in 2013,” noted Randy Charles, CEO. “We’ll do maintenance and unique opportunities if they come to pass,” he said.
Again, that doesn’t mean that A&K is standing still. Rather, it’s ready to react when new business arises.
Like many companies today, the pizza crust producer doesn’t necessarily invest on a fiscal-year basis. “We do look at capital investing two to three years out,” Mr. Charles said. “We’re putting square footage in place and looking at product expansions. It actually happens within more of a one-year timeframe when a certain opportunity gets some traction, and we’re ready to go.”
Anecdotally, Mr. Tucker noted he is hearing “pockets of confidence in capital spending among those who want to get the advantage in the marketplace.”
For seasoned food manufacturers, it’s easy to spot those businesses poised for growth. “The well-run organizations — you can see it from their operations when you walk into their facilities — they’re investing to maintain their edge or advantage,” Mr. Tucker explained.
The confidence in the industry is a quiet one, muted by the tough times caused by skyrocketing commodity prices followed by the Great Recession several years ago. Caution is the “new status quo,” Mr. Caparos said.
“When all the issues arose, it caused businesses to tighten their belts and operate more efficiently,” he observed. “We’ve pushed people to operate better in every position within companies and maximize their abilities and job performance. From a labor perspective, we’re leveraging technologies and equipment to operate more efficiently. We’re now more cautionary about where and what we buy to maximize the impact. We’ll continue to operate under a higher capacity expectation, and that won’t change. This is the new way of business.”
In a market where it’s survival of the fittest, the successful companies thrive by changing tactics and playing to their strengths.