KANSAS CITY — Bakers appear of two minds about prospects for the bread business. Many bakers over the past year have voiced optimism about the bread market, especially value-added, premium segments. Still, total sales have been drifting lower, and with costs escalating, leading companies are moving aggressively to maximize efficiency while seeking a larger exposure to grain-based categories viewed as having a more promising growth profile than sliced bread.

In the 52 weeks ended July 9, bread sales were $8,933,980,688, down 0.1% from a year earlier. Unit sales were 3,775,061,144, down 0.7%, according to data from Information Resources, Inc., a Chicago-based market research firm. The average price per unit for bread was $2.37, up 1c from the previous year.

Accounting for the sales contraction were 4.1% declines in both dollar sales and unit sales of private label bread. Private label accounted for 21% of dollar sales and 33% of unit sales. Sales of branded bread over the past year were up 1.2% in dollars and up 1% in units.

Most visible in efficiency pursuit efforts over the past two years has been Flowers Foods, Inc., Thomasville, Ga., which has been working to complete its Project Centennial initiative. Other major bakers have taken steps to reduce costs as well.

In April, the North American business of Grupo Bimbo S.A.B. de C.V. announced a voluntary separation program for certain salaried employees. The program was completed over a period of a few weeks. During a July conference call with investment analysts, Fred Penny, president of Bimbo Bakeries USA, described the program as “a significant event.”

“We’re talking about approximately a 15% reduction in our salaried workforce, and I mentioned on the last quarter call that this program was only for the salaried population, and it was a major event, a major undertaking to do, and we did not take it lightly,” he said. “I have to say also that I give credit to the leadership team of B.B.U. in the United States on the manner in which it was executed and the timeline in which this was executed. We’re talking about from conception to execution, probably no more than three months’ time. The objectives were clear — to create a leaner, more nimble, more cost-effective organization and, quite frankly, to create opportunities for high potential talent to move more quickly through the organization and contribute in a greater way to B.B.U.”

Efforts to find cost savings remain ongoing at Bimbo, Mr. Penny said.

“I would tell you, though, that we continue to look for opportunities to make the company more efficient,” he said. “If and when those opportunities present themselves, we’re certainly going to execute against them. I believe there are more opportunities across the organization to become more efficient, and we continue to work on identifying specific projects to achieve that.”

Bread vendors chart

The Bimbo moves followed a multi-year effort, mostly through capital improvements and plant closings, to enhance the efficiency of its North American baking business after the acquisitions of the Sara Lee fresh bakery business and Canada Bread.

About two years into its restructuring efforts, Flowers Foods has slowly begun to reap the fruits of its Project Centennial. The company expects to generate gross savings of $38 million to $48 million in fiscal 2018. A multi-dimensional program, steps taken by the company over the past year in connection with the program include the naming of a chief operating officer, acceleration of supply chain optimization initiatives and substantial investments to support the launch of new products under the Nature’s Own and Dave’s Killer Bread brands.

Additionally, selling, distribution and administrative workforce-related expenses have been cut, and working capital policies have been enhanced to improve the company’s cash conversion cycle.

A large part of the administrative workforce expense savings came from a voluntary separation incentive plan announced in July 2017. Together with other initiatives, the VSIP resulted in a net overall headcount reduction of approximately 450 associates, including a 15% reduction in management positions.

The greater efficiencies are being used to help Flowers achieve greater marketplace success, said Allen L. Shiver, president and chief executive officer of Flowers Foods, Inc.

“We’ve refined our brand assortment and focused on our highest-turning s.k.u.s (stock-keeping units),” he said in a Sept. 5 presentation at the Barclays Global Consumer Staples Conference in Boston. “We continue to grow dollar sales of our biggest brands, and we are beginning to use new promotional management tools that we expect will enhance the r.o.i. (return on investment) of our trade spend. We’re launching new products and growing in segments where we are underindexed.”

With a change in leadership earlier this year, Campbell Soup Co., Camden, N.J., initiated a review of its businesses to put the company back on a path toward growth. While the bread business has not been an area of focus, the company announced significant efficiency/sustainability investments in its baking plants. Specifically, the company’s bakeries installed LED lighting and motion sensor technology, which Campbell Soup said can nearly halve the electricity demand for lighting in some facilities. Converting to low-charge ammonia and CO2, four bakeries have phased out R22 refrigerants. The company also has invested in renewable energy as it Pepperidge Farm bakery in Bloomfield, Conn. (which bakes bread and rolls as well as other products), with a 1 MW (megawatt) solar array, and 1.2 MW and 1.4 MW fuel cells — the latter of which equate to the power necessary for about 1,400 homes.

A shift in mergers and acquisitions away from the bread market has become pronounced among major bakers.

Grupo Bimbo made two North American acquisitions over the past year, neither of which focused on the company’s core sliced bread market. In October 2017, Bimbo announced the acquisition of Chicago-based East Balt Bakeries from One Equity Partners for $650 million. A company specializing principally in bun production for quick-service restaurant customers, the acquisition gave Grupo Bimbo additional reach in the global food service segment.

“The company is one of the leading global food service focused providers of baked goods to quick-service restaurants in 11 countries around the world,” Daniel Servitje, Bimbo’s chief executive officer, said in late 2017. “East Balt Bakeries enjoys decades long relationships with some of the world’s leading Q.S.R.s such as McDonald’s, Wendy’s, Burger King and KFC, among others. It operates 21 baking plants and employs about 2,200 associates.”

In 2018, Bimbo acquired the Cicero, Ill.-based baking plant of Aryzta L.L.C. Aryzta acquired the Cicero facility in 2014 as part of its acquisition of Cloverhill Bakery, a specialist in sweet goods.

In December 2017, Campbell Soup made a major investment expanding in grain-based foods with its agreement to acquire Snyder’s-Lance, Inc. With brands that include Snyder’s of Hanover, Lance, Kettle, Cape Cod, Pretzel Crisps, Pop Secret, Emerald, Late July, Archway and Stella D’oro, the deal bolstered Campbell Soup’s position in the snack foods market. At the same time, the acquisition diminishes the proportion of Campbell Soup’s grain-based business dedicated to the bread market.

Flowers Foods was quiet on the acquisition front over the past year, deeply involved in effecting changes from Project Centennial and continuing to expand distribution of Dave’s Killer Bread. Potential bread acquisitions remain on the company’s radar screen, but Flowers has signaled its intention to look beyond its traditional bread/snack cake focus going forward. Such a shift would not be unprecedented — the company owned Keebler for a time in the 2000s. Over its history, Flowers has acquired more U.S. commercial bread businesses than any other baking company, and more are likely in the future even if the company pursues other categories.

“There are significant opportunities for this company as we look at adjacent categories,” Mr. Shiver said. “The perimeter of the supermarkets is where a lot of the sales action is taking place. We have the opportunity, both on the cake side and on the fresh bread and roll side, to expand into different product segments that may come through an acquisition. It may come from developing internally, but there are significant opportunities looking at adjacent categories to continue to grow this company.”

In the Sept. 5 presentation, Mr. Shiver again expressed interest in investment in “other segments of the fresh bakery category,” including the bakery-deli department.

“Since we are already very strong in the traditional loaf and bun and roll segments of the category, we are focusing on product segments where we’re underdeveloped,” he said.

On the other hand, in the same presentation he twice noted that regional bakers retain nearly a 25% market share in the bread and rolls category, leaving the door open for additional acquisitions in the bread market.

Standing out among burning issues facing baking companies and all manufacturing segments is the tightening labor market.

This challenge was hampering baking companies of all sizes.

“We all have the same issues of manpower,” said R. Jack Lewis Jr., president, Lewis Bakeries, Inc., Evansville, Ind. “Unemployment is running at about 3% here. I don’t think we are in a single market in which unemployment is above 3%. We’ve always paid well. Offered good jobs. But it’s a changing labor market.”

Mr. Penny of Bimbo also referenced the increasingly difficult labor situation.

“Like many other industries, we’re certainly feeling the effects of a much tighter labor market,” he said in a July conference call. “It manifests itself in longer recruitment time to fill positions, and it’s just something that we’re going to have to deal with and work through as we go forward to the extent that it doesn’t change anytime soon.”

Also challenging to Lewis, which operates five baking plants in Indiana, has been the transportation market, a situation that became significantly worse following implementation of Electronic Logging Devices trucking requirements that kicked in last December.

“Transportation, both incoming and outgoing, is very tight,” Mr. Lewis said. “The electronic logging changed that market considerably. Fuel costs are up, and availability of drivers is limited. You do the best you can.”

In the Sept. 5 Barclays presentation, R. Steven Kinsey, chief financial officer and chief administrative officer at Flowers, cited both labor and transportation as drags on financial results.

“Inflationary pressures in wages and freight have been much higher than we expected,” he said. ”This factor, along with incremental brand investments to support new product launches, has offset the bottom-line impact of our savings actions in fiscal 2018. To drive greater savings realization in fiscal 2019, we are working aggressively to improve productivity in our bakeries and looking to pricing and our mix to address the cost pressures impacting our industry.”

While declining to offer specifics, Mr. Lewis agreed that the retail landscape is changing.

“Everything is changing,” he said.

The bread market overall ”is not booming,” Mr. Lewis said. He said there have been signs of growth but also heightened competition.

Mr. Lewis was positive but guarded about the possibility of a checkoff program for bread. A related program was unsuccessful in the early 1980s and was unwinding when he served as chairman of the American Bakers Association.

“Unless you have transparency, you will have a problem,” Mr. Lewis said. “The program is meant to be a benefit to all, so it is crucial you have a level playing field regarding contributions to such a program.”

Optimism at H&S Bakery

Even as the company enjoys strong demand from retail customers overall, H&S Bakery Inc., Baltimore, is adjusting to rapid changes in the marketplace, said John Paterakis Jr., senior vice-president of sales and marketing.

“We’re very optimistic on the retail side,” Mr. Paterakis said. “We see lots of opportunity from large chains to small. Looking at I.R.I. data, we’re up in all categories with the exception of white bread. But buns were strong during the grilling season.”

While the largest baking companies in the United States have continued to gain share overall, Mr. Paterakis said many retailers remain committed to diversifying their supply base and carrying baked foods from regional bakers and not just the largest.

“We’re up significantly to the point we’re picking and choosing where we want to expand,” he said. “H&S sells baked foods, including bread at traditional supermarkets as well as club, dollar and mass merchandisers.

“The private label business is flat, which is a concern. Our branded business is booming. It really doesn’t make sense. I think it has to do with the shift of consumers toward better-for-you products.”

Mr. Paterakis acknowledged that many trends have been in place for years, if not decades.

“White bread has been dropping every year with the product line shifting toward more variety bread,” he said. “We were concerned with the gluten-free trend and the negatives about bread — pessimistic articles in the media about carbs and how it would affect our business. But the general landscape is good.”

While many trends continue unabated, other new trends have emerged in recent years, Mr. Paterakis said. He cited non-bioengineered products, clean label and organics.

“The bottom line is that there has been a change within consumer preferences, and the millennial is the target,” he said.

Seeking to capitalize on this shift, H&S has acquired the license to market Rudi’s organic bread along the entire East coast of the United States. Established in Boulder, Colo., in 1976, Rudi’s Organic Bakery, Inc. has been owned by The Hain Celestial Group, Inc. since 2013. Rudi's produces a wide range of bread varieties, buns, rolls, bagels, English muffins, tortillas and wraps.

While upbeat about the opportunity, Mr. Paterakis said the organic bread market isn’t an easy one.

“We’re just getting started,” he said. “It has been a challenge. Returns are higher, and shrink is higher, but the product is excellent. We launched about a year ago, in stages, beginning in demographically favorable areas.”

Also challenging is competition from market leader Flowers Foods. Mr. Paterakis said Flowers has been spending heavily to market its Dave’s Killer Bread organic line.

“I think it will help the baking industry,” Mr. Paterakis said. “And it will help with the transition into the millennial market. As a baker, I thank them for that.”

The company outsources ingredient procurement for its Rudi’s.

The challenges echoed those of Bimbo Bakeries with its Eureka! line of organic bread. In recent months, Bimbo management has said little about Eureka! but said it is looking to participate in the organic market through the launch of an organic line of bread under the Arnold, Brownberry and Oroweat brands. The bread is U.S.D.A.-certified organic and Non-GMO Project verified and contains no artificial preservatives, colors, flavors, high-fructose corn syrup or trans fat. Announced in June, the bread is available in 27-oz packages in three varieties and at retailers across the United States at a suggested retail price of $5.49.

Davis contends with regulatory pressure

Even for smaller baking companies, regulatory pressures have become a growing source of concern. Joel Davis, president of Davis Bakery, Inc., Cleveland, said the workload from regulations is sizable “especially since we are on the small side.”

“We are inspected by the O.D.A. (Ohio Department of Agriculture) and the Food and Drug Administration,” he said. “It’s a lot of regs for a company our size. It almost requires a full-time person. We go to approach our congressman to see whether there can be an exemption for a smaller baker.”

Challenges cited by Mr. Davis included compliance with the Food Safety Modernization Act and the transition away from partially hydrogenated oils (mostly for sweet goods). He said recordkeeping was the single greatest challenge.

Davis Bakery serves institutional customers throughout the Cleveland metropolitan area together with delicatessens the Davis family has operated for decades. Mr. Davis said the bread business has been strong, driven principally by specialty bread.

“We do see a trend toward grainy, ancient grain types of bread,” he said. “We are known for rye bread. Ours was voted one of the best in the country and is a staple. Maybe we are seeing growth in rye bread because of the seeds. Demand has been growing more for hearth type bread than for pan bread.”

While Davis sells its products to supermarkets, this business is centered more heavily on sweet goods than bread.

“We sell rye bread to casinos in Cleveland and to other local delicatessens,” Mr. Davis said. “We also sell to arenas, like where the Cavaliers play.

“We’ve always produced many different varieties, and we still do. At the arena, they always are looking for specialty bread, something different. Maybe it's bread with kalamata olives or sundried tomatoes.”

A fourth-generation family business established in 1939, Davis Bakery launched its delicatessen business in 1952.

“There is an affinity between bakery and deli at retail,” Mr. Davis said. “My dad and uncles were ahead of their time.”

— L. Joshua Sosland