Growth in all directions
Sept. 1, 2014
by Joanie Spencer and Dan Malovany
For the past two years, the message has been resounding: The baking industry is experiencing fundamental change. From consolidation to shifting consumer demands to new trends in specialty products, change is what’s driving growth — growth that is once again apparent in the number and size of current construction projects.
Expansion for a bakery means more than adding square footage. It means adding product offerings, equipment, production lines and employees. Most importantly, it means revenue — for both the companies and the communities in which they’re growing. In this special report, Baking & Snack takes a qualitative look at some expansion projects and how they are affecting the bakery business, the economy and the environment.
Making a match
In early 2009, King’s Hawaiian along with a team of real estate experts began scouting out potential sites for a new bakery in a 300-by-500 mile area of the Southeast, eventually targeting specific sites in the Carolinas, Texas, Florida and Georgia.
“Georgia was the top state, but not necessarily in terms of economic incentives,” noted John Linehan, executive vice-president of the bakery headquartered in Torrance, CA. “Georgia won out based on community, quality of workers and appropriate collaboration of city, state and local officials.
“By appropriate, I mean they didn’t wink at ways to get around rules,” he added. “They had rules and regulations for permits that were very fair and very protective of the environment, clearly written — very black and white and not a lot of gray. They were very collaborative, not in getting around the regulations, but in helping companies get compliant with the regulations.”
The Hall County Chamber of Commerce does not enter into any collaboration lightly, according to Tim Evans, vice-president, economic development for the chamber. “We look at the jobs, the quality of the jobs, the investment made by the company, the benefits they can provide, the quality of the company itself and their financial strength,” Mr. Evans said. Hall County officials went so far as to visit the King’s Hawaiian Torrance facility.
Before making a final decision, Mr. Linehan and Mark Taira, King’s Hawaiian CEO, toured several locations via helicopter and became specifically interested in a 20-acre site in Hall County that had a partial building on the property. “It was actually a three-wall shell with a roof and a dirt floor,” Mr. Linehan said.
King’s Hawaiian began negotiating the deal in July 2010 and completed it in December. The first shovel hit the dirt March 2011, and the 120,000-sq-ft bakery began running test product in September before ramping up to full production by December.
Mr. Linehan credited county and state officials for expediting the project. “The chamber of commerce in Hall County is like no other that I have ever worked with,” he said. “They’re very proactive.”
Initially, King’s Hawaiian projected that the single-line bakery had enough capacity to supply its customers through 2015, but it became clear by 2013 that double-digit annual sales growth would require the company to not only install a second line in its existing facility in 2014 but also build a second 120,000-sq-ft bakery scheduled to open in late 2014.
King’s Hawaiian did not initially plan to build the new bakery adjacent to the Oakwood, GA facility, Mr. Evans recalled, but the company was having a hard time finding a community with a business environment that could match that of Hall County.
Like the existing operation, the new bakery will eventually house two production lines and include a new parking lot to accommodate somewhere in the neighborhood of 600 employees.
Power of partnership
It’s no secret that with a new construction project comes what seems like an insurmountable mound of red tape, hence the reason why partnerships among businesses and governments are so vital.
At Custom Foods in De Soto, KS, the company broke ground this summer on a 27,000-sq-ft expansion that will triple capacity and create a footprint that would increase sales by 600% over time. The frozen dough manufacturer relied on partnerships with the De Soto Chamber of Commerce and Economic Development Council (EDC) to navigate the process leading up the ground breaking in July.
The De Soto EDC assisted Custom Foods at both the local and state levels by guiding the bakery through the development process, including sharing contacts and resources and identifying any potential hurdles ahead of time. “By providing this support, Custom Foods was able to take advantage of specific incentives that the company might otherwise not been aware of,” said Sara Ritter, executive director of the De Soto Chamber of Commerce and EDC.
Custom Foods garnered significant, long-term tax benefits by working with local agencies. “We got a tax abatement for 10 years, and it adds up to about 75% of the tax over the lifetime of the incentive,” said John Khoury, Custom Foods president and co-owner. “The government here is always looking for growth, so they’re willing to work with businesses to get things done.”
The Kansas Department of Commerce also played an integral role in helping identify incentives for Custom Foods, revolving around the De Soto EDC. “Our connection with the Kansas Department of Commerce enabled the company to take advantage of sales tax exemptions on construction materials,” Ms. Ritter said, adding, “We worked together as a team to ensure the project would remain in De Soto and the state of Kansas.”
The importance of a good strategic partnership also comes into play when seeking financing. For example, King’s Hawaiian enjoys a long-standing relationship with GE Capital, Norwalk, CT. In 1997, GE Capital, Corporate Finance’s food division financed a processing line at the bakery’s facility in Torrance. Helping support King’s Hawaiian’s expansion efforts, GE Capital’s experience in financing for the food industry opened other doors for the bakery, such as making introductions with experts to help in site selection.
“When seeking financing to grow a business, a company should partner with a financial institution that specializes in that specific industry — for wholesale baking, the food industry space — with a solid track record with long-term references in that area,” said David W. Hasenbalg, managing director and food and beverage specialist at GE Capital, Corporate Finance.
It is also important, Mr. Hasenbalg noted, to ask a financial institution for examples of bakeries it has financed in the past, especially those projects that were from the ground up.
Jobs, jobs, jobs
In today’s shaky employment climate, states and local communities are chomping at the bit for the shot at job creation, and new a new construction project is like a pied piper for job seekers, for both construction and the completed facility. And where the jobs come, incentives will follow.
In Hall County, job creation is a primary love language. It has an unusually high concentration of food processing facilities, and with more than 10,000 people employed, this manufacturing sector accounts for almost 10% of the county’s workforce.
Many times, job creation is at the heart of incentive programs for new construction projects. In De Soto, any company that requests incentives is subject to a cost-benefit analysis to identify the number of jobs and direct financial benefit that will be created for the community.
“The city needs assurance that the return on their investment — the abatement or incentive — makes good sense for the community as well,” Ms. Ritter explained. “The community needs validation that the project will maintain the existing tax base, provide an economic benefit and create jobs. Most importantly, there needs to be proof that ‘but for’ the incentive, the project would not be feasible otherwise. Custom Foods worked with the city to provide the data that confirmed the project met the qualifications for financial incentives.”
A capable workforce is the linchpin to attracting businesses in Georgia, according to Philip Wilheit Sr., chairman of the board of regents of the University System of Georgia.
“You can’t have a quality economic development program without a quality higher education program and vice versa,” said Mr. Wilheit, president and CEO of Wilheit Packaging, Gainesville, GA. “When I have the opportunity to do something with King’s Hawaiian on economic development, I’m able to merge the two together.”
Mr. Evans agreed. “When a new facility opens, on Day One you need to turn on that line and have 100 or so people who know how to bake bread,” he noted. That’s where the Georgia Quick Start Training Program was able to provide customized training for King’s Hawaiian employees.
Under Gov. Nathan Deal, Georgia ranked as the top state for business and No. 1 for the quality of its workforce in 2014, according to CNBC. The state generated more than 250,000 jobs during the past four years, observed Mr. Wilheit, who serves as the governor’s campaign manager.
He called the state’s Quick Start program “the tip of the spear” for attracting new businesses. Training, which is done through Lanier Technical College, located about three miles from the King’s Hawaiian facility, is offered at no cost to the company.
Growth all around
When looking at expansion, it’s important to think beyond how high or wide the walls are. The investment — whether from governmental incentives or the bakery itself — can benefit myriad areas in a bakery operation.
For Custom Foods, it’s not so much the addition of lines that will take up the new space; it’s that the new space will allow the bakery to break up existing production in order to run multiple lines at once. That will contribute to projected triple capacity. “It’s about not only the building but also the equipment we’re putting in,” Mr. Khoury said. “It’s going to account for about 40% of the expansion.”
New equipment going into Custom Foods will include a spiral freezer, mixers and a dough chunker for the bread and pizza dough line. “We currently have the divider itself, but we’re going to be separating that off of the current freezer that it goes into. It will be in its own area,” he continued, “We’re upgrading our refrigeration, which is a huge expense in itself, and we’re expanding our holding freezer, which will increase freezer storage capacity by 400%.”
Expansion does not have to take place within the walls of a facility to benefit the company — and the community.
At King’s Hawaiian, once construction on the new facility is completed, the company anticipates more than 300 jobs will be added, requiring a substantial amount of parking. To make that happen, the access road needed to be realigned and the elevation adjusted. “Because King’s Hawaiian was creating so many jobs, we had an opportunity to apply for some grant funds to help with the relocation of that road,” Mr. Evans said. “We were able to make a good arrangement to help make the site work when it was not originally intended to do that.”
The road improvements will positively impact surrounding properties as well as improve sight lines and overall safety. “All those things had an impact on our grant application,” Mr. Evans said. “We can eliminate some future problems, and all that played into the road grant application.”
How green is green?
Sustainability is one of the biggest buzzwords in construction and economic development today. Whether it’s a matter of political correctness, governmental incentives or good old corporate responsibility, bakers are thinking green.
But what exactly constitutes “green,” and what does it take to get there? While many facilities are going for Leadership in Energy and Environmental Design (LEED) Gold certification, such as Mile Hi Bakery’s recent expansion in Denver, LEED design isn’t for everyone. “We’re not getting a lot of people coming to us saying, ‘This facility must be LEED,’ ” noted Jim Kline, owner of the Ensol Group, Erwinna, PA, and Baking & Snack contributing editor. “But we get people who say, ‘When we go through this design process, we want to evaluate what is the cost-effective approach to going green.’ ”
Mr. Kline suggested that when a bakery is ready to invest, the question to ask should be, “What will benefit the world and us?” It’s important to remember, he emphasized, that a bakery doesn’t have to necessarily have a LEED Gold certified building to be mindful of its sustainability efforts. Sustainable design is more about evaluating all options and making a responsible and informed decision than it is about having the “right” certifications or products.
“All you can do is make the best decision you can,” Mr. Kline advised, and that goes for a “greenfield” bakery built from the ground up or an existing “brownfield” facility converted into a food-safe operation.
As the industry continues to evolve, bakers should remember that growth doesn’t just happen in the bricks and mortar; it extends far beyond the walls of a facility, and growth for the bakery means growth for the community at large, as well.