NEW YORK — The prospective opening in a few months of a baking plant in Lenexa, Kas., will enhance the ability of Flowers Foods, Inc. to serve the Kansas City market and will “enhance further geographic expansion,” said D. Keith Wheeler, president of Flowers Bakeries.
Speaking April 14 during the Flowers’ Foods investors day presentation at the New York Stock Exchange to Wall Street analysts, Mr. Wheeler discussed the Lenexa plant as part of a broader presentation about the company’s progress toward gaining share in its expansion markets.
Flowers acquired the plant in Lenexa, a suburb of Kansas City, with its 2013 acquisition of most of the bread baking assets of Hostess Brands L.L.C. Mr. Wheeler said Flowers has been investing in the plant over the last several months and expects to open this summer. A bread line will be installed to serve the local market.
A map Mr. Wheeler showed the analysts of the distribution area from Lenexa appeared to indicate Flowers will be able to supply other regional markets, including Lincoln and Omaha in Nebraska and perhaps Des Moines in Iowa.
Shedding light on wide variances in Flowers’ market share in expansion areas for the company, Mr. Wheeler said the presence or lack of nearby production capacity represents a significant factor. Flowers has a 14% share of the bread market nationally, including 28% in its core market, suggesting considerable growth opportunity in expansion markets, he said.
“In the newer markets, we have share in individual markets ranging from low single digits to 15 or so market share,” he said. “(Certain of) our expansion markets have an opportunity to grow but relatively few nearby bakeries. Among the assets we acquired from the liquidation of Hostess, several facilities are well located in our expansion markets. As our share grows we can bring additional capacity with less capital at risk. While a greenfield bakery can cost in excess of $65 million, we’ve been able to utilize the acquired facilities at approximately a third of that cost.”
Emphasizing the company’s considerable experience in growing out from its core into new markets, Mr. Wheeler cited success in several areas — Lexington and Louisville, Ky.; Baltimore and Washington; Indianapolis and Oklahoma — as evidence.
“The growth from core out into expansion markets is nothing new for us,” he said. “It’s something we’ve been doing for years, and we’ve generated growth in several markets as a result.”
While incursions into new geographic areas are nothing new for Flowers, the addition of Hostess bread brands significantly changed the playbook for Flowers in these efforts, Mr. Wheeler said.
“With the acquisition of Wonder brands and others, we’ve gained an advantage,” he said. “Where before, we would grow out of our core markets with Nature’s Own and whatever white bread would most likely succeed, they were virtually unknown to the consumers in the market. As we acquired the Wonder, Merita, Butternut and Home Pride labels, it gave us the opportunity to introduce these labels into the market where they had some strength as well as introduce Nature’s Own with them.
“We were able to ride the wave of the reintroduction of the Wonder bread back into the market and grow our Nature’s Own and other brands as we acquired space at retail.”
He said the company is aided in its efforts by national retailers who know Flowers’ brands and “want them in their stores.”
This shift has yielded positive results for Flowers, Mr. Wheeler said.
“We’ve been able to leverage those brands along with Nature’s Own to accelerate growth in the new markets and enjoy really good results in a shorter period of time,” he said.
Applying this background to the decision to reopen Lenexa, Mr. Wheeler said Flowers currently is supplying customers in Kansas City from its Batesville, Ark., and Oklahoma baking plants. The company has enjoyed considerable success in its efforts to gain share in Kansas City.
“On the back of the strength of Wonder we were able to introduce Nature’s Own,” Mr. Wheeler said. “As volume has continued to grow in the Kansas City market as well as the St. Louis market, we have the need now for a production facility in that area.”
Bradley K. Alexander, executive vice-president and chief operating officer of Flowers, identified additional benefits of the Lenexa opening and emphasized the strength of the acquired Hostess brands.
“Stores set their space about twice a year,” he said. “So we need to grow sales, which we are; and have fresher bread to the market, which Kansas City is really going to help us get closer to the market. As you do that you get more space. Our new brands are continuing to grow. They are not flattening out.”
Asked to elaborate on the wide variance between the market share in Knoxville (29.6) and New York (3.8), Flowers executives offered a variety of perspectives.
“A 3 share in New York is very different from a 3 share in Knoxville (in) total units,” said Allen L Shiver, president and chief executive officer of Flowers Foods. “I’m encouraged by the growth we’re seeing. Some of the markets we’re moving into are some of the largest populated markets in the country. So, a 3 share in New York is a much bigger number than a 3 share in Knoxville.”
R. Steve Kinsey, executive vice-president and chief financial officer, emphasized access to production capacity.
“If you go back through history, and you look at expansion markets and what they contributed, those tend to lag until you get production to the market, and, as Allen said, build distribution as well,” he said. “When you get production right, you get distribution right and you really begin to see things accelerate. That’s what happened in the Midwest. We’ve been building out from Knoxville. Now we’re headed into Kansas City. That should really support that market support acceleration and growth throughout the Midwest.
“In the Northeast, New York is serviced from the north by our Lepage bakeries and from the south from Philadelphia. Production is not as close to the market as one would like. So over time, as we see sales velocities increase, you would expect to see production move closer to the market. That distribution is still being built.”
The widening period of time that Wonder remains unavailable in markets Flowers does not operate is not a matter of grave concern to Flowers, Mr. Shiver said. Asked by an analyst at what point the brand deteriorates, Mr. Shiver said there was no clear timeline for when a brand like Wonder is permanently impaired by its withdrawal from the market. The observation is in contrast to widely voiced concerns during the liquidation process in 2012-13 when stakeholders warned of imminent erosion to the value of the Hostess brands if the products remained off store shelves for too many weeks.“We’ve been very successful in the markets we’ve reintroduced the Wonder brand into — where the brand was actually off the market for over a year, year and a half,” Mr. Shiver said. “It takes generations to build a brand like Wonder that has that kind of consumer loyalty. We have really been pleased by the consumer response once we reintroduce Wonder even in markets where it actually has been out of the market for some time.”