When the baking industry and allied suppliers converge upon Las Vegas for the 2013 International Baking Industry Exposition Oct. 6-9, the complexion of wholesale baking will be markedly different than was the case in 2010 when the group last gathered for an Expo.

With the exit from the baking industry of Hostess Brands, Inc. and Sara Lee Corp., the industry’s structure has undergone as much change as in any three-year period in the history of commercial baking. Dial back time only a bit further to 2009 and the exit of George Weston, Inc. from the US baking market, and the industry today is nearly unrecognizable in many respects from the structure of the recent past.

This change transpired in an environment for baking that has been anything but stable. Sales of bread and rolls at supermarkets have been under incessant pressure in recent years. Meanwhile, ingredient market volatility has been relentless. Despite the difficult market conditions, though, leading baking companies remaining in the industry have slogged forward and enjoyed a modicum of success.

Shifting gears

Ownership change at the top of baking’s ladder has been remarkable. With the liquidation of Hostess Brands, following a second bankruptcy early in 2012 and a brief but internecine labor dispute late in the year, the company that traditionally led the baking industry was gone. Early in 2013, Flowers Foods, Thomasville, GA, emerged as the buyer for the largest part of the Hostess bread and roll business. A private equity group acquired most of the snack cake business.

Almost exactly one year before the Hostess liquidation, Mexico City-based Grupo Bimbo SAB de CV closed on its acquisition of the Sara Lee’s North American fresh bakery business. Originally agreeing to pay $959 million for the Sara Lee business, Bimbo reduced its purchase price to $709 million after the two companies reached a settlement with the Justice Department under which Bimbo agreed to sell assets in a number of markets around the country. The most prominent of these was California.

The two departed companies accounted for a large slice of the US baking business. When looking at the top five baking companies of 2010, when Expo last met, Sara Lee and Hostess were responsible for 34% of branded sales and 25% of all branded bread sales, according to data at the time from IRI, a Chicago-based market research firm (@iriworldwide). 

The figures are even more dramatic when accounting for the acquisition by Bimbo of the US fresh bakery business of Weston Foods, Inc. in January 2009 in a $2.5 billion transaction. The deal, which was not widely viewed as presaging the major transactions in the years that followed, catapulted Bimbo to the position of largest US baking company.

Adding the Bimbo/Weston transaction to the calculation, companies that accounted for 60% of the branded bread market have left the business. Looking at the top six baking companies at the time, the combined branded bread sales of the exiting business were $2.8 billion, or 65% of sales.

Taking the lead

With its acquisition of the Sara Lee and Weston baking businesses, Grupo Bimbo gained an unprecedented degree of leadership in US wholesale baking. Its dollar sales in 2012 totaled $2.5 billion, or 37% of branded sales, as measured by IRI. The figure included supermarkets, drugstores, mass market retailers and certain club and dollar stores.

Over the same period, Bimbo’s sales eclipsed private label sales of $2 billion, marking the first time since the advent of scanner data that any single company’s branded sales outshone the private label market. As recently as 2009, private label sales of $1.8 billion were well over double those of the largest baker of the time — George Weston, then at $752 million.

Bimbo’s sales in 2012 also more than doubled the $1.1 billion of Flowers Foods’ sales over the same period. That spread above the nation’s second-largest baker should narrow, though, as Flowers grows its business in California (acquired as part of a consent agreement between Bimbo and the Justice Department in the Sara Lee acquisition) and as Flowers begins operating Hostess Brands’ plants.

Being the largest did not make business easy for Bimbo in 2012. Bimbo’s dollar sales of fresh bread fell 3.5% from the year before, and unit volume sales slipped 2.9%. Other leading bakers enjoyed gains with the exception of Hostess. Flowers’ dollar sales climbed 4.5%; Pepperidge Farm, Norwalk, CT, rose 4.8%; Lewis Brothers Bakeries, Evansville, IN, grew 6.5%; La Brea Bakeries, Los Angeles, bumped 0.2%; and United States Bakery, Portland, OR, increased up 12%.

In many cases, sales gains were partly or largely attributed to Hostess’ demise. The overall bread market saw a 1.5% drop in dollar sales and a 2.5% drop in unit sales. Private label, too, lost ground — down 3% in dollar sales and 2.9% in unit sales.

For Bimbo, declining sales also were reflected in weaker income in 2012. The company’s US operating profits in 2012 were 1,118 million pesos, down 68% from 3,500 million pesos the year before. While under considerable pressure and reflecting weaker margins (1.4% vs. 6.5% in 2011 and compared with 11.2% the company earned in Mexico in 2012), the business was still far larger and more profitable than was the case in 2008 before the Weston acquisition. In that year, Bimbo operating profits totaled 128 million pesos in the US and sales were 18,049 million pesos (vs. 78,927 million pesos in 2012).

For Flowers Foods, the largest US-based publically traded baker, the last three years have been highly successful by a number of measures yet also more challenging. In mid-May, the company’s shares were trading on the New York Stock Exchange at $32.56 per share, just beneath its 52-week high of $33.25. The May price was up 75%, adjusted for dividend payments, from where the stock was trading in 2010 at the last Expo, and the price was up 161% from the closing price in the fall of 2007. The performance far eclipsed the Standard & Poor’s 500 index, which was nearly flat over the same period.

Still, profit growth at Flowers has stalled. Net income of $136 million in 2012 was not far above the $134 million earned three years earlier.