In a difficult operating environment such as exists in wholesale baking, it could be expected a company’s management would take a step back and “batten down the hatches” in order to weather the storm. Flowers Foods, Inc. is taking nearly the opposite approach in the environment.
While the company’s earnings have slipped amid intense competitive pressures and rising costs, Flowers has moved at a rapid pace in its efforts to reach long-term goals for geographic expansion.
The most recent move occurred in July 2012 when the company completed an acquisition of Lepage Bakeries, Inc., of Auburn, Maine. The purchase, which included two baking plants in Maine and one in Vermont, gives Flowers a firm foothold in New England and New York.
Thomasville, Ga.-based Flowers said it expected Lepage, which bakes a variety of bread and rolls, to accelerate Flowers’ penetration in the Northeast of its Nature’s Own bread brand.
The Lepage acquisition followed by 15 months another major move by Flowers in the Northeast — its acquisition of Tasty Baking Co., Philadelphia.
Flowers said Tasty, which baked and marketed snack cakes under the Tastykake brand, would grow the number of consumers reached by Flowers’ products by 24 million. The company’s products are sold mostly in Delaware, Maryland, New Jersey, New York, Ohio, Pennsylvania and Virginia.
Flowers has an objective of serving 75% of the U.S. population by 2016. The Tasty acquisition alone brought the company to 61% from 53% before the transaction. The Lepage acquisition and other geographic expansion nudged Flowers to 70%, closer still to its 2016 target. Flowers is the second largest U.S. baking company, but even as it pursues ambitious geographic growth, the company remains far smaller than Bimbo Bakeries USA. In the most recent quarter, B.B.U. generated sales of $1.6 billion, versus $682 million at Flowers Foods.
While Lepage and Tasty each represent the acquisition of an old, established northeastern baking company, the differences between the transactions are stark.
Flowers paid $165 million for Tasty Baking, a company with annual sales of roughly $170 million. For Lepage, Flowers paid $370 million for a company with annual sales of $166 million.
In acquiring publically-traded Tasty, Flowers acquired a company that had struggled for years trying to profitably expand its business. A major reworking of the company’s production base in Philadelphia failed to achieve a rapid turnaround the company had sought.
While Lepage was a privately held company, George E. Deese, chairman and chief executive officer of Flowers, suggested the company was anything but struggling at the time Flowers made the acquisition.
“They have the latest in technologies,” Mr. Deese said in early September at the Barclays Back to School Conference in Boston. “They offer fine quality products, and they have an experienced team. Their operating margin is among the highest in the industry. In other words, Lepage is best in class in the baking industry, and we’re proud they’re with us. And we’re excited about the growth that we will continue to have in New England and as we stretch from our Tasty Baking home base of Philadelphia through the Northeast.”
At the Barclays conference, Mr. Deese spelled out how the acquisitions of mature northeastern baking companies will help translate into growth in the years ahead. Flowers currently holds a 10% market share of brands in the United States and 2.5% of store brands, he said.
“Our market share is strongest in our core territories throughout the South, where we have some 25% share of branded and another 6% of store brands,” he said.
Mr. Deese used the market share in the South as a “bar” or target toward which to aspire in other markets.
“We have significant room to grow our share by leveraging the power of our brands and the effectiveness of our distribution system,” he said.
Market share in many of the geographies Flowers has entered in recent years is modest, but Mr. Deese expressed confidence growth would come.
“We’ve proven we can do that as we leverage the power of our brands and operating strategies,” he said.
Elements in those strategies include acquisitions and new products. Flowers’ Nature’s Own also has been an engine for growth at Flowers. The brand itself has grown double digits with great consistency since it was introduced in the late 1970s, Mr. Deese said.
“Nature’s Own is approaching the $1 billion mark at retail value, and the growth continues,” he said. “Our strategy has been to acquire independent bakers as we grow. Typically these bakers have a strong regional white bread brand, and we’ll layer on top of that Nature’s Own to the acquired distribution system.”
Even as the company moves to expand geographically, Flowers has not escaped the pressures hitting other bakers.
For the first six months of fiscal 2012, the period ended July 14, net income was $66,323,000, or 48c per share, down 4% from $69,371,000, or 51c per share, in the same period a year ago. Sales rose 9% to $1,579,767,000 from $1,444,421,000.
The company said its margins were under pressure because of increased ingredient and packaging costs, “most notably an increase in flour and sweetener costs.”
With wheat prices in mid-September hovering around $10 a bu, it was unclear whether any relief would be forthcoming. In late September Flowers announced it had hired Craig S. Parr to the newly created position of chief risk officer. Mr. Parr brings 20 years of risk management experience to his new position.
Higher costs were not the only force creating difficulties for Flowers.
“Ongoing pressure on consumers has affected our industry much as it has other food categories, and softer volumes in the fresh breads, buns and rolls category is driving more competitive activity in the near term,” Mr. Deese said. “Our team continues to work on improving efficiencies and cost controls.”