NEW YORK — The decision to embark on a major restructuring program emanated from the management team at Flowers Foods, Inc. rather than from the board or external pressures, said Allen L. Shiver, president and chief executive officer.
In a Sept. 27 Investor Day presentation at the New York Stock Exchange, Mr. Shiver offered considerable color into the dramatic transformation under way at Thomasville, Ga.-based Flowers Foods. In addition to significant cost cutting, the program is expected to result in a marked increase in marketing spending at the company.
As previously reported, Flowers will reduce its management headcount by 15% as part of Project Centennial, the restructuring initiative launched ahead of the company’s 2019 centennial.
|Allen Shiver, president and c.e.o. of Flowers Foods|
“Project Centennial is a comprehensive, company-wide program to streamline operations, drive efficiencies and invest in strategic capabilities,” Mr. Shiver said. “This is a management-driven initiative that has the 100% support from our board. Very important. This is our leadership team driving Project Centennial. We began Project Centennial last year with an evaluation of our brands, our product mix and, also, our organizational structure. We then developed strategic priorities to help us capitalize on those retail and consumer changes that I mentioned earlier.”
In addition to discussing staffing cuts, R. Steve Kinsey, chief financial officer and chief administrative officer, offered details in his presentation of other cost savings Flowers is pursuing — purchased goods and services and supply chain optimization. He described a “mindset change” at the company, looking like never before at opportunities large and small for cost savings.
|R. Steve Kinsey, c.f.o. and chief administrative officer of Flowers Foods|
“In the near term, we’re going after savings with our purchased goods and services program,” he said. “After a thorough benchmarking, we’ve reduced discretionary spend with third-party suppliers using a mix of price, specification and consumption. This is a complex project. We have more than 4,000 vendors, and we’re addressing roughly 50 expense categories, most with meaningful savings opportunities. We’ve made substantial progress this year updating policies and negotiating agreements. We are on track with our $45 million run rate P.G.&S. savings target that we provided you earlier this year for 2018. In addition to the near-term savings, we’re adding new roles and capabilities in our new centralized procurement team in Thomasville to leverage our scale and continue to focus on driving value.”
While P.G.&S. is focused on external spending, Flowers’ efforts in supply chain optimization are inward looking, Mr. Kinsey said. The program seeks to “reduce operational complexity and improve ongoing productivity,” he said.
“Under S.C.O., we’ve put a formal continuous improvement process in place at our bakeries to drive efficiencies, and we’re reconfiguring our manufacturing network as we fine-tune our supply chain model,” he said.
The decision to close the Winston-Salem, N.C., snack cake plant was an outcome of this initiative, he said.
Between staffing changes, supply chain and purchased goods and services, Flowers has upped its targeted savings to between $70 million and $80 million per year by the end of 2018. Up to $30 million of gross savings will be captured in fiscal 2017, Mr. Kinsey said.
Fundamental to how Flowers will utilize savings generated by cost cutting is the belief that investment in Flowers brands will pay off, Mr. Shiver said.
“Put simply, consumers will pay a premium for products with a very meaningful point of difference,” he said. “Currently, Flowers spends about 1% of revenue on R.&D. and marketing. Our margins, however, are above average compared to peers with a similar level of investment. This comparison reinforces a key point — consumers see a value in differentiation that our brands offer.
“Our research in the fresh package bread space also found that incremental brand investment can deliver innovation, drive additional sales and provide an attractive R.O.I. We are using a disciplined strategy that distinguishes between what we call established and high-potential brands. This strategy will guide marketing investments as we move forward. It will also impact how we allocate resources and maximize the long-term value of our brand portfolio.”
Mr. Shiver said this distinction does not mean “established brands” do not bring value to the company.
“Our established brands, they provide scale to our operations, they strengthen our product assortment, and they contribute consistent cash flows,” he said. “Store brands, some of our regional name brands in our commodity food service business fits squarely in this role. Today, we’re leveraging these established brands to support the growth of our high-potential brands. Our high-potential brands have strong consumer appeal, products with a point of difference, and opportunities to grow market share. Dave’s Killer Bread, Nature's Own, Wonder and Tastykake are all high-potential brands, and we’ll support them with increased innovation and increased marketing investment. We’re significantly upgrading our internal marketing capabilities. In 2018, we will make meaningful incremental investment in our top brands. We’ll be putting more dollars into advertising and new products. We’ll carefully track the R.O.I. on these investment dollars.”
Asked by an analyst how much marketing spending may increase at Flowers, Mr. Kinsey suggested the upside was considerable.
“Today we spend less than 1% in sales on marketing,” Mr. Kinsey said. “Traditional C.P.G. companies are probably north of 5% or higher. We’re not looking to become a bleeding edge company, but we are expecting to have a significant increase next year.”
Mr. Shiver highlighted repeatedly in his presentation the success Flowers has achieved with Dave’s Killer Bread, noting that the brand is No. 1 in the organic category and that Flowers has a 48.5% market share of the category. Flowers will seek to generate the kind of excitement propelling growth of Dave’s Killer Bread to the company’s other brands, Mr. Shiver said. He used Wonder as an example.
“I think the consumer unaided awareness on Wonder is about 98%,” he said. “The exciting thing about the Wonder brand is that it fits so perfectly with growing households. If you look at the consumption of traditional white bread, it's all about younger families. So that also gives us a lot of confidence that Wonder will continue to grow. As we move down the formulation road with Wonder, we also continue to work to simplify and reduce the overall complexity of the ingredient legend to, again, appeal to these millennial consumers that are reading every ingredient legend, and so forth. Because of the changing consumer demographics, Wonder is a brand that we feel like that we can generate growth moving forward.”
While the company’s Alpine Valley brand has struggled to gain momentum, Flowers remains confident about its capacity to make inroads in the in-store bakery area of supermarkets.
“The acquisition that we made in Maine a few years ago, the Barowsky brand, really has given us a good example of how brands can be relevant in the in-store bakery,” Mr. Shiver said. “They’re not only traditional bakery categories that we’d be interested in, but they’re also acquisitions in some of those perimeter items that we’re also looking at. So I think you can see the consumer’s shopping patterns are pushing to the perimeter of the store, and there are some very unique bakery items that, number one, are primarily branded bakery items, but also being sold at a nice premium. I don’t want to disclose any of the specifics that we're looking at, but there are a lot of opportunities there for us.”
The growth of e-commerce food sales does not pose a threat to Flowers’ margins, Mr. Shiver said, noting that to date the margins have been in line with Flowers’ margins in general.“E-commerce comes back to the strength of the individual brands, which, in my opinion, is very healthy for this category,” he said. “If a consumer is going to order on-line, whether it’s Amazon or whoever it may be, they’re going to be looking for brands like Dave’s Killer Bread, is a great example, which by the way, is doing very well with Amazon. So as far as margins, as we look at these other particular channels of distribution, they are pretty consistent with where we are today.”