Moody's sees tighter baking margins in Northeast

by Josh Sosland
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NEW YORK — While baking margins will shrink in the Northeast because of ongoing consolidation, larger players will gain strength and smaller ones will lose share, according to Moody’s Investors Service.

Moody’s on Feb. 23 issued a special report, “North American bakery companies: Competition rises in the Northeast.” The ratings agency noted the nation’s two largest baking companies, Flowers Foods, Inc. (which has a Baa2, stable rating) and Grupo Bimbo S.A.B. de C.V. (Baa2, stable) each made acquisitions over the past year that will expand market shares in the Northeast, and “pressure weaker competitors, including Hostess Brands (unrated).”

“Although relatively small at $172 million, Flowers’ acquisition of Philadelphia-based Tasty Baking gives Flowers access to Tasty’s 474 routes that reach over 24 million new customers in densely populated, high income areas such as New York, Pennsylvania and New Jersey,” Moody’s said. “Grupo’s (Bimbo’s) $959 million purchase of Sara Lee’s North American fresh-bakery business adds 4,700 distribution routes, and builds on its share in the Northeast as it expands Sara Lee’s products into the region.”

Brian Weddington, vice-president and senior credit officer at Moody’s, said Flowers stands as the likely big winner from the consolidation.

Flowers’ gains will come “largely at the expense of Grupo and rival Hostess Brands,” he said.

“Grupo (Bimbo) will increase net market share, too, but we don’t expect the company to generate as much earnings growth in the region since Sara Lee's bakery products are weighted toward lower-margin mass market varieties, in comparison to Flowers’ premium breads and buns,” Mr. Weddington said.

Moody’s said that Hostess, which filed for bankruptcy in January, will lose the most market share.

“Hostess is likely to come under more earnings pressure as Grupo and Flowers increase their presence and may need to sell assets to survive,” the agency said. “Other smaller regional private label bakery companies could also see already-thin profits turns to losses if a price war breaks out or wheat prices rise.”

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