Sounds of optimism
Feb. 1, 2015
by Dan Malovany
Since the Great Recession, bakers have been singing a familiar tune — one of cautious optimism — when it comes to predicting capital spending. Maybe it’s a bit of “fool me once, fool me twice.” Even baking and snack executives who were privately bullish on their own companies’ futures felt compelled to publicly temper their enthusiasm in Baking & Snack’s annual capital spending reports during the last few years.
Additionally, these notes of caution were inspired by the constant drumbeat of negative news about stubbornly high unemployment, lingering underemployment, stagnant wages, sluggish spending, deal-seeking consumers, political uncertainty or simple fear of the unknown — those uneasy feelings that kept too many bakers awake at night.
This year, however, feedback from a good dozen bakers and snack producers interviewed recently by Kansas City, MO-based Cypress Research Associates had a different ring to it, according to Marjorie Troxel Hellmer, Cypress president.
“The tone this year is decidedly different,” she observed. “In past years, we had some equivocation. Many executives held their planning close to the vest. This year, we heard steady comments from various sizes of companies, ‘We’re spending, and we’re going to continue to keep on spending for the next three years.’ ”
Tempo increases for investing
That’s certainly music to the ears of many industry observers who have gotten used to hearing a chorus of consternation from this fiscally conservative industry. When it comes to capital spending, most bakers and snack manufacturers typically sought returns of two years or less in their budgets. Anything greater than that payback period usually involved geographic expansion and often required backing from a significant customer before companies would commit to allocating resources on a major project or a big-ticket item.
Now, Ms. Troxel Hellmer said, the tempo is substantially more upbeat, with several experts expressing that they plan to expand their facilities — or build new ones — if they’re unable to meet their customers’ demands within their current confines. “The main thing we heard is an upswing in spending,” she said. “We’re going to see modest increases year-after-year in capital investments for the next three years.”
She stressed, however, that all executives interviewed by Cypress Research resisted making any projections about capital spending beyond the next 36 months, noting that anything outside that time frame was merely a crapshoot. For the long run, the outlook for investment is still “call me, maybe.”
As David Hays, owner of Bodacious Foods, a Jasper, GA-based snack producer, chimed in, “I’m not prepared to project spending past three years because I don’t have a crystal ball.”
That overtone reflects the unpredictability of the future, a quiet uncertainty about the economy, rumblings of potential hikes in interest rates and even the 2016 presidential election — believe it or not, the race for the White House is starting already. Definitely, the inability to predict — let alone project into the distant future — silences any thoughts of irrational exuberance. “We want to see certainty and understanding as to where the economy is going, but we live at a time where things rapidly change,” said Marc Schulman, president and CEO, Eli’s Cheesecake, Chicago.
So what does the future hold for the industry? Scott Kolinski, president of Lantmännen-Unibake USA, Lisle, IL, observed that several market research firms forecast a realistic 2 to 3% growth over the next two to four years in frozen, par-baked bread and pastry categories for the foodservice and in-store bakery channels.
That may not seem like much, but for specialty producers of premium baked goods, any sustained growth in these multi-billion-dollar segments provides ample room for optimism. “There continues to be so much opportunity for providing high-quality products,” Mr. Kolinski said. Specifically, he cited fast-growing regional retailers as prime targets for Lantmännen-Unibake USA.
Among larger players in the industry, Rich Scalise, chairman and CEO, Hearthside Food Solutions, Downers Grove, IL, predicted steady single-digit growth in capital investments — not double-digit, he stressed. That’s primarily due to the popularity of between-meal snacking and the heightened interest in higher quality products by foodies influenced by popular specialty food shows and, specifically, the Food Channel.
“Consumer trends are changing relatively quickly,” Mr. Scalise said. “The good news is snacking continues to grow. The diversity of bread products continues to expand. We’re seeing a trend with consumers wanting products with more flavors and different textures, and this movement is really driving the industry.”
Remixing golden oldies
From a macro-economic perspective, among the myriad factors fueling capital investments is the influence of overseas companies such as Grupo Bimbo and Aryzta AG, which have dramatically expanded their footprint in the Americas. “There is a lot of interest from foreign and domestically based companies to expand their businesses over the next three years,” noted Mr. Kolinski, who heads the North American division of Lantmännen-Unibake, a Danish-based company.
Ms. Troxel Hellmer added that many of these multinational companies — as well as an increasing number of private equity firms entering the baking industry — are putting money in newly acquired businesses to bring them up to speed. “They have to make capital investments that the previous owners had been deferring for a long time,” she explained.
Aging manufacturing equipment is not unique to the baking and snack industries. Ms. Troxel Hellmer pointed to a Sept. 3, 2014, Wall Street Journal article that decried the state of equipment used by US manufacturers. Quoting economists at Morgan Stanley, the report noted that the average age of industrial equipment is the highest it’s been since 1938 — more than 10 years old on average.
While some bakers may chuckle that 10-year-old equipment is still relatively new — it’s not unusual to see rebuilt mixers and ovens that are twice or three times that old in many facilities — there seems to be a pent-up demand for investments that have been put on the backburner for years, noted Jim Kline, Baking & Snack contributing editor and president of The EnSol Group, an Erwinna, PA consulting firm. “What we’re seeing right now within the industry is that a lot of projects that have been held are coming forward,” he said.
Scaling down to a more micro-economic view, Ms. Troxel Hellmer observed that nearly all of the executives that Cypress Research interviewed projected capital spending growth in the near term primarily for a number of reasons. They include initiatives to expand or build new facilities, to update major equipment for greater efficiencies through automation and to offset increases in wages and benefits.
In response to market demand, Lantmännan-Unibake USA recently invested $8 million into its artisan bakery in St. Petersburg, FL, to replace an old manual bread line that had 10 aging rack ovens with a new four-deck oven and to upgrade an inefficient freezing system. “We’ve made dramatic improvements,” Mr. Kolinski said. “We can now make demi-loaves as well as full-sized loaves, and we doubled our capacity for producing brioche buns.” This year, he added, the second phase of the project will involve upgrading its packaging system.
That’s an area many baking and snack companies have flagged for its potential to take costs out of their operations. “Bodacious Foods is investing more on the packaging side to improve efficiencies and capacity,” Mr. Hays noted. “Bottlenecks need to be opened. We are also expanding some new offerings with new packaging concepts.”
Pretzels, Inc., the Bluffton, IN, contract manufacturer for many of the nation’s largest snack companies, found a new opportunity by putting pretzel rods in single-serve packages similar to those used for beef jerky or taffy sticks. The company saw the concept at a packaging show two years ago, purchased the equipment and started sending out prototypes to its clients.
“We have had a lot of excitement, and it’s sparked a lot of interest from our customers,” said Chip Mann, president. “It’s a single-serve rod that comes in a 2- or 3-pack, and we’re now testing other concepts.”
When it comes to capital spending, many executives look at it as a continual improvement process with an occasional blockbuster project every few years.
La Petite Bretonne spent $8 million last year to install a new chocolate croissant line in its Blainville, QC, bakery and another $4 million in robotics and vertical packaging systems. Dominique Bohec, vice-president of sales and marketing, noted its recent investment will provide enough capacity for the next two years, but the company is bullish on the croissant market, especially in the US where Mr. Bohec sees a tremendous opportunity for growth.
Currently, the US accounts for about 40% of La Petite Bretonne’s production. Mr. Bohec projected exports to the US to be 60% of the company’s volume and cited an increased presence in Mexico. “If our presence in the US and Mexico continues to grow, we may have to build a plant in the US or buy a company that can produce for us in that market,” he said.
Turano Baking is replacing older lines and upgrading operations at its Bolingbrook, IL, bakery while adding a new production line in its Orlando, FL, plant. “We’re mirroring the industry,” said Joe Turano, president of the Berwyn, IL-based company. “In the next 12 to 24 months, we’ll stay at a steady pace of reinvestment.”
Specifically, he noted that investments are across the board, from upgrading makeup equipment to advancing the IT system. “We’re also looking for better quality packaging to enhance the appearance of our products and further automate that part of the process,” Mr. Turano said.
In addition to expanding capacity, Mr. Scalise said Hearthside is exploring new ways to lower overhead and make its bakeries more efficient — vital movements for the long-term success of one of the nation’s largest contract manufacturer of snacks and baked goods. While he expected modest increases in capital spending during the next two years, Hearthside may become even more aggressive in its investments by 2017 as it discovers new processes — such as a more sophisticated blending system — that provide greater throughput, reduce changeover time, enhance flexibility of the operation and provide more consistency in product quality.
“Standardization brings better products to the marketplace with greater consistency,” Mr. Scalise explained. “We’re looking to standardize ovens, wrappers and other equipment with new technologies that will improve our operations and reduce the number of replacement parts.”
For example, Hearthside has begun replacing its existing motors with variable-speed ones and switching out current lighting with more efficient LED bulbs that have an ROI of two years but still provide ongoing, long-term cost savings. “I like to say, ‘green is good,’ but green has more meaning than just the environment. It’s green for the company in terms of dollars,” he said.
Last year, Blue Coast Bakers purchased a 200,000-sq-ft warehouse in Ormond Beach, FL, that it’s transforming into a wholesale bakery and commissary. The company produces cookies, muffins, scones and other sweet goods as well as ready-to-eat sandwiches and quiches for foodservice chains and retailers.
Kambiz Zarrabi, Blue Coast’s managing director, noted the company plans to make major investments during the next 24 months, including two lamination lines, a muffin line, mixers and packaging equipment. The bakery is also modifying the facility to install a tunnel oven and expanding the operation to accommodate its specific production needs.
“We’re figuring out how to optimize the space we have,” Mr. Zarrabi said. “We added an extra 30,000 sq ft to add a tunnel oven and processing at the front of the line. While we can fit our packaging within our existing space, we’re adding new machinery to optimize the process.”
Starting up a brownfield bakery is not always as glamorous as it sounds, but the investments often have quick payoff in both ROI and product quality. Blue Coast Bakers is improving air-conditioning in the warehouse to increase air flow throughout that department — something that’s critical for a bakery located in Florida. Like Hearthside, Blue Coast also is upgrading lighting, adding energy-efficient motors and replacing boilers. The company received tax incentives and subsidies from the state to help with environmental improvements.
“Our main goals aren’t in labor savings,” Mr. Zarrabi pointed out. “Labor remains the same, but production will be higher and more efficient.”
Eight years ago, Alvarado Street Bakery moved into its current facility in Petaluma, CA, because it outgrew its previous one. In the past, the employee-owned cooperative added a new oven and divider to replace antiquated equipment and build capacity for its signature organic, whole wheat, sprouted and other natural specialty breads, according to Michael Girkout, president and CEO.
This year, it will replace its intermediate proofer and may add a second packaging line, including a slicer, bagger and casepacker, to remove a bottleneck in the operation. The bakery is also adding new equipment for grinding sprouted wheat berries into the dough. “It’s all about food quality and getting consistency for our organic sprouted grain breads that our current equipment isn’t giving us at this time,” he said.
However, Mr. Girkout tended to take a holistic view of the operation, stressing that many investments often involve enhancing working conditions or are just part of the cost of operating a bakery. They may include repairing the roof, recoating the floor or replacing delivery vans. Or they may be other smaller ticket items, such as two large TV monitors for educating its team. “We do a lot of independent training,” he said. “We don’t use DVDs. Rather, we rely on live streaming of food safety [seminars] for teaching best practices for hygiene and HACCP programs,” he said. “The wall-mounted TV monitors allow us to upgrade our training program in a fairly inexpensive way.”
As part of its budgeting process, Alvarado Street Bakery reviews each department to make the necessary investments to take the overall company to the next level.
“We’re not trying to do everything in one year,” Mr. Girkout said.
A choir of compliance
Several executives listed food safety as another ongoing cost of doing business because it mandates perpetual investment to keep up with customer audits and regulatory requirements. It doesn’t matter what type or size the company is. “It’s a significant investment, but it is part of our SQF certification process,” Mr. Girkout said. “It really comes down to compliance. We must measure up to these standards that are being adhered to by food companies.”
Mr. Mann called the onslaught of audits and regulations the “necessities in the new world” that divert funds that normally would go into purchasing equipment for new products or expanding capacity. “Pretzels, Inc. is increasing spending in a variety of new ways to become more efficient with new packaging tools, material handling and finished goods tools,” he said. “Unfortunately, the negative part of cap ex is a direct correlation to the continued stringent compliance regulations, especially those processes and equipment that were deemed sufficient for manufacturers in the past but are now a red thumb in operations. SQF is driving us to make additional capital expenditures to maintain those areas.”
The new requirements, which include proprietary audits by retail customers, are especially challenging for family-owned manufacturers like Pretzels, Inc. “If you don’t have the money, the programs, the processes and the ability to comply with these requirements, you’ll be out of business,” Mr. Mann said. “It’s hard on many family-owned businesses to lure the talent and build the programs they need, and the cost of compliance is continuing to grow over time.”
That’s because food safety requirements have become more technical and more detailed with the advent of the Food Safety Modernization Act (FSMA), prompting bakers to invest in everything including software that tracks traceability from farm to fork.
“We’re all held to a higher standard, which impacts capital investments,” Mr. Schulman explained.
In addition to new laws and regulations, efficiency, quality and flexibility are the major drivers for capital investment because many companies, such as Eli’s Cheesecake, partner with customers to develop new products at an attractive price point. “We’re very responsive to working with our customers in brand development,” Mr. Schulman said. “We need to make pretty quick changes to our processing and packaging to do that. A lot of our investments are in response to being flexible and modifying a line to make a new product.”
One of the consequences of a robust capital spending environment is the tendency for long lead times for getting equipment, noted Gerard Law, senior vice-president and assistant to the president, J&J Snack Foods, Pennsauken, NJ. That can be frustrating for nimble bakers and snack producers seeking to quickly respond as new product opportunities arise. Moreover, it’s especially true in the foodservice channel.
“In retail, you can be more planned, but in foodservice, you can’t be last to market,” Mr. Law said.
He added that consumers want more choices and fresh products, especially in the foodservice channel. “They want to create their own sandwiches on the spot,” he noted.
Procuring the new equipment to respond to these changes in the market can be a challenge. “The problem is that J&J Snack Foods is pretty dynamic,” Mr. Law said. “As the industry changes, we need to figure out how to make our existing equipment respond to these fast-moving trends. We can’t wait six months for new equipment. If I had a magic wand, shorter lead times would be my wish.”
In the long run, Mr. Kline noted that mid-size and specialty bakeries — not necessarily the industry’s largest players — are spurring capital spending.
Mr. Bohec predicting capital spending may wane in the distant future, which he described as five years or longer. For the immediate future, he said, let the good times roll.
“The reason is that everyone is investing in the short term — buying plants, expanding their facilities and investing in automation,” he said. “This creates a ton of capacity in the long run. Sure, companies will continue to invest in their businesses, but the big money is happening now.”