THOMASVILLE, GA. — A portfolio profitability review has been launched at Flowers Foods, Inc. in an effort to offset headwinds weighing on bottom-line results. The review was announced Nov. 7 by A. Ryals McMullian, president and chief executive officer, during an investment analyst conference call in connection with quarterly financial results.
Mr. McMullian described the review, which will be completed in a matter of weeks, as an extension of cost-cutting efforts that were part of Project Centennial, a multi-year restructuring initiative. Having addressed indirect costs and organizational structure, he said portfolio and supply chain optimization represents the “second stage” of this work. Flowers also will focus more broadly on enhancing its snack cake and food service businesses.
In addition to the portfolio review, Flowers is investing in tools and capabilities that will help the company make more informed strategic choices around things like assortment, pricing, distribution and innovation, Mr. McMullian said.
“It will also help us more efficiently weed out unprofitable products or unprofitable accounts that contribute nothing but added cost and complexity,” he continued. “And it will generate opportunities for supply chain and overhead optimization. So the true crux of this effort is to drive out valueless complexity and improve our operational efficiencies.”
Steps toward this optimization already have begun, Mr. McMullian said. He cited the addition of organic bread production capacity in the Northeast this year, the announced closing of an Alabama baking plant and the installation of a high-speed bun line in Suwanee, Ga., as examples. He said plans are in place to convert another existing Flowers plant to organic production in 2020.
“I believe that a holistic approach that’s centered around the optimization of the portfolio will generate more meaningful improvements over time,” he said. “Before we formally launched this initiative, we did complete an internal review that began when I was c.o.o. I wanted to be sure that we challenge and hone the questions we’re trying to answer. So that when work began in earnest, we had a very tight focused scope of activities with clearly understood desired outcomes. The initial phase of this work has already begun. It will take several weeks to complete. It’s being directed by a dedicated internal team, and we have support from outside resources. And it’s our intention to have an update for you on where we are by our earnings call next February.”
Without elaborating at length on what will transpire, Mr. McMullian said stock-keeping unit rationalization will be part of what comes from the review.
Turning to the company’s cake business, Mr. McMullian conceded Flowers has under-invested in its cake brands and operations for several years.
“Recent production difficulties we experienced with that new product launch only serve to shine a brighter light on it,” he said. “We believe in the potential of the iconic Tastykake brand, and we’ll be seeking to make smart investments to drive the brand forward.”
In addition to a heightened focus on quality, service and distribution, Mr. McMullian said investing in robotics and other automation tools will improve quality, work he said already is under way.
Food service sales were adversely affected by ingredient quality problems in 2018, Mr. McMullian said, adding it is important to “get our food service business growing again.”
“It’s an important and scalable part of our business,” he said.
Also during the call, Mr. McMullian discussed the importance of mergers and acquisitions for Flowers. Noting that the integration of Canyon Bakehouse was in a winding down phase, he said Flowers has been “proactively” seeking strategic opportunities in areas of the store beyond the bread aisle as well as in other product segments in which members of Flowers management “believe we have the right to win,” he said.
Building out the Flowers team has been an important part of Project Centennial and remains an area of focus in the effort to elevate profitability, Mr. McMullian said.
“At all levels of the organization, we’re increasing communication, we’re increasing engagement, we’re aligning work schedules to better fit today’s modern lifestyles and we’re clarifying career paths to attract the best candidates and improve retention,” Mr. McMullian said.
These efforts to make Flowers a more attractive workplace are accompanied by increasing accountability, he said.
“Today, almost 30% of our employees have incentives that are directly tied to their role,” Mr. McMullian said. “Two years ago, that number was zero.”
Asked by an analyst to elaborate on the workforces issue, Mr. McMullian focused on one particular area of concern.
“Turnover has been the biggest problem,” he said. “To address that, we’re doing some short-term things. And then obviously, the portfolio and supply chain network stuff is a little longer term. But we’re trying to do some creative things with scheduling. As a fresh perishable D.S.D. (direct-store delivery) business, we basically run every day, and so we don’t have the luxury of building inventories and sort of having more predictable scheduling. So we’re doing some things with shifts to try to give people more certainty as to their schedule, more instances of consecutive days off, which is historically a rarity in our industry, and just overall, trying to make it a more attractive place to work.
“And furthermore, we’re moving back away in some of our plants from outsourced labor back to permit labor to create more of that one team atmosphere. We’ve done that in a couple of bakeries so far. And I can’t say that we’ve seen significant financial returns from that yet, but we have seen the turnover start to fall.”