BOSTON — Ingredients and packaging, production labor, and shipping and transportation costs have increased significantly, leading companies such as Flowers Foods, Inc. to take actions to mitigate them with a variety of initiatives, from strategic pricing to portfolio and network optimization.
“Across the supply chain, the cost of doing business is accelerating above and beyond sales growth to date,” R. Steve Kinsey, chief financial officer and chief administrative officer at Flowers Foods, said during a Sept. 4 presentation at the Barclays Global Consumer Staples Conference in Boston. “We are pleased that the focus we put on cutting cost in our indirect spend and overhead structure have all set inflation in those areas and provide a leverage to our top-line growth.”
A. Ryals McMullian, president and chief executive officer, said labor inflation and the labor turnover issue are a “pretty big headwind” for Thomasville, Ga.-based Flowers, but added that the company doesn’t look at it in terms of pure wage inflation. He noted that Flowers’ wage inflation is pretty much in check. Instead, the real driver of the labor issue for Flowers is the inefficiency that turnover creates.
“In a very tight labor market like we have, we’re experiencing more turnover than we normally have,” Mr. McMullian said. “You then incur training and retraining costs, as in some areas it’s a bit of a revolving door there, creates inefficiencies in the plant, and every point of efficiency that we gain is very, very meaningful on our bottom line….
“That term ‘efficiency’ rolls up a lot of things, including labor cost per pound for us, scrap cost and the stuff that we throw away, that sort of thing. So every incremental point that we can get from an efficiency standpoint is very meaningful to the bottom line.”
Mr. McMullian said Flowers’ strategy is to attack the labor issue from a variety of angles.
“The quality of life aspects of a job at Flowers do need some improvement,” he explained. “We traditionally operate on a production schedule where most folks don’t have consecutive days off. They’re working 12-hour shifts. And particularly in a tight labor market like this, there’s just — folks have a lot of options. And … we’re going to have to move Flowers closer to today’s workforce, not trying to draw them closer into our old ways of working, so modernizing our benefit programs. Our pay tends to be pretty competitive. So that’s not really the issue. It’s really more around the quality of life aspects. If we can get that corrected, get the right scheduling, get the turnover stabilized, see the efficiencies come up, we’ll see a lot of impact on the bottom line.”
Mr. Kinsey agreed, saying it’s all about driving efficiencies in the bakery.
“I mean we are a scale business,” he said. “So when you start impacting labor and you have this kind of revolving door turnover, you do see significant drops in efficiency. And we’re down about 250 basis points from where we were about a year ago. So you can see that’s been a tremendous impact on our overall gross margin.”