‘What’s going on, cookie man?’
Dave Fusaro
Is it chaos in the baked goods business or the same consolidation that’s already hit the rest of the food industry?
What the heck is going on in the bakery industry?
For wholesale bakers, the past nine months have seen an unprecedented amount of activity, which threatens to rearrange the leaders, thin out the second-tier manufacturers and possibly leave small and agile bakers with a few opportunities.
First, the business record: Interstate Bakeries Corp., the leading wholesale baker, bought No. 3 Continental Baking; Keebler Co., No. 2 in cookies and crackers, is for sale; so is the Salerno div. as Sunshine Biscuit Inc. restructures; Kraft Foods sold its bakery operations, including Entenmann’s, to CPC International Inc.; Anheuser-Busch is jettisoning its Campbell-Taggert unit; and Pepsi’s Frito-Lay subsidiary has announced intentions to become a major player, and not just through its recent deal with Sara Lee.
Big brands, which have had mixed success in the overall category, suddenly are taking on new importance. The point was driven home by the Nabisco SnackWell’s phenomenon.
Now Sara Lee is delivering its branded fresh baked goods to stores (brawling head-to-head with Entenmann’s), the Pillsbury name is appearing on loaves of bread, and even Nabisco is looking for brand augmentation by licensing ConAgra’s Healthy Choice brand for products due out next year.
Then there’s the human toll: Pepperidge Farm, a unit of Campbell Soup, announced the resignation of President Charles McCarthy and the immediate appointment of Dale Morrison, former president of Frito-Lay North America and Hostess Frito-Lay Canada. Phil Roos, who successfully crafted the “Big Brands” co-branding program at small brand Delicious/Frookie, left to become a consultant.
“We see the coincidence[s] signaling significant change in the structural and competitive circumstances in the broader baked goods marketplace,” financial analyst Les Pugh wrote for Salomon Brothers (he recently moved to S. G. Warburg & Co.). “These changes represent an opportunity for some…a challenge for others…and a potential threat to a few.”
WHY?
The upheaval concerns but doesn’t entirely surprise Paul Abenante, president of the American Bakers Assoc., Washington. “I think it’s been happening for quite some time, building for five years or so, it’s just that the pace has accelerated,” he says.
“It’s a pattern in the food industry as a whole, and probably in all of American industry. There are business opportunities and combinations that make good business sense for the future. The market forces are not that different if you’re Continental Baking or ABC-Disney.”
David Rabinowitz, food analyst for Smith Barney Inc., New York, agrees. “If you look up and down the aisles of the supermarket, most of the product categories already have undergone consolidation,” he says. “The typical food category has only half a handful of brands. Bakery has been the exception. It’s unusually fragmented. Now people in that category are trying to achieve the same efficiency brought about in the other categories,” Rabinowitz says.
However, it’s not all market forces. The bakery business has been beset by a unique set of problems, starting with the definition of those wonderful, wafting smells as air pollution. Not many people thought of it that way, but those aromas emanating from bakery ovens are full of volatile organic compounds (VOCs), which have been deemed a major threat to air quality, according to the Environmental Protection Agency.
Its debatable how much of the VOC problem is caused by bakeries, but the result was regulation that is requiring millions of dollars of pollution control equipment in operations big and small.
A second problem has been ingredient costs. Wheat prices shot up nearly 50% in one year, the result being flour that currently costs $13 per hundredweight, up from $9 a year ago.
Transportation costs affect this segment more than other food businesses, and a chaotic change is on the horizon. A Clean Air Act requirement, set to take effect next year, requires 50% of new truck fleet purchases to be vehicles with alternative fuels. That means not only more costly vehicles, but also heavier ones, which could push typical bakery delivery trucks into the more costly commercial vehicle class.
Finally, there is the yin-and-yang of the trend toward healthier eating. While grain-based products, including baked goods, came out winners in the USDA’s Food Guide Pyramid (611 servings a day are recommended),the tandem fear of fat cast a shadow over most baked goods. Reduced-fat offerings are making up much of the lost ground, but this first generation of products still has a ways to go in terms of taste, according to some consumers.
Consumers, however, are infusing the category with some hope. They’ve shown renewed interest in the more wholesome fresh-baked goods, such as breads, especially unusual ones, scones and bagels; as well as in more exotic things like pita, focaccia and naan.
“Keep in mind that people are willing to pay $4-5 a loaf today, where they never would have thought about it years ago,” Molly Ingram, editor of Bakery Production and Marketing magazine (a sister publication to Prepared Foods), told a recent meeting of BEMA, the association that represents bakery equipment manufacturers. “They are more nutrition- and quality-conscious, [and] thus are willing to pay the price.”
Despite all the turmoil, the overall market continues to grow. It increased about 3.2% last year, and should rise another 3.4% this year to $32.7 billion. The only subcategory to show a decrease in supermarket sales was “pastry/danish/coffee cakes,” down 4%, and cakes were fiat (see chart on p. 18).
Within the category, fat-reduction has been a hot subject. Nabisco’s SnackWell’s, which started the phenomenon, is now a 27-product line (biscuits and snack crackers combined) with $500 million in sales.
“Even we cannot believe SnackWell’s continues to grow the way it has,” says Ray Verdon, president of Nabisco Biscuit Co. The brand’s overall market share, of both cookies and crackers, is up to 7.8%.
Moreover, SnackWell’s ground-breaking efforts in fat reduction have driven category growth – both for Nabisco, which has debuted reduced-fat versions of everything from Oreos to Ritz crackers, and for Keebler and the other cookie and cracker makers, who have followed suit. Just last week, Pepperidge Farm announced fat-free and reduced fat products.
BAKERS REACT
If there is a theme to the reactions of the bakers and other manufacturers participating in this segment, analyst Rabinowitz may have summed it up best: “If you’re going to be in this business, you gotta be big.”
For Interstate, No. 1 in the wholesale business, the reaction was to buy No. 3 Continental. “It establishes our company as the undisputed No. 1 wholesaler of fresh delivered bread and cakes in the United States, with projected combined sales of more than $3 billion,” Charles Sullivan, chairman and CEO of Interstate, wrote in the company’s 1995 annual report, just out.
Among the Continental assets he mentioned being happy to get were “some of the best-known, strongest brands in America, including Wonder, Home Pride, Beefsteak and 1the venerable Hostess line of snacks cakes, donuts and pies.”
BAKERY CATEGORY TRENDS
Sales for 52 weeks ending 6/18/95, selected categories
Kraft may be big, but not in fresh-baked goods, which requires a whole different store delivery system. So Entenmann’s fits well, says Rabinowitz, within CPC, which already has store-door delivery for its Thomas’ English muffins, Sahara pita bread and Arnold’s and Brown-berry breads.
On the positive side, Sara Lee – which in recent years has expended more efforts in non-bakery efforts – has suddenly rediscovered its roots. The interest actually began in 1993 with the acquisition of regional wholesaler International Baking Co., Vernon, Calif. After successful tests of fresh-baked, Sara Lee-branded items, the company launched what it’s calling its “fresh-baked initiative.” It’s a two-pronged attack: specialty breads, including bagels, English muffins and pitas; and sweet goods, namely donuts, cakes, danish, muffins, cookies and pies.
Why now, especially when a company with a baked-goods name has never before made fresh-baked items?
“We identified this market as a potential for growth,” says a company spokeswoman. “We’re taking a well-liked name from the freezer case to the fresh-baked aisles. The Sara Lee name has translated very well to those products.”
So then, how would two big names – Sara Lee and Frito-Lay – fare against a Nabisco? That’s the fight that may be shaping up in the baked snack goods segment. And it’s also symptomatic of another change in the basics of this business: a view of the baking and snack foods businesses as a single industry.
The deal involves single-serve baked goods. Sara Lee will manufacture the products and they will carry Sara Lee’s name. Frito-Lay, a subsidiary of Pepsico, will distribute them using its 13,000-truck delivery system. But rumors have circulated that Frito-Lay would like to get even deeper into the bakery business, at least on the cookie and cracker side.
This kind of competition may be one reason why a powerhouse company like Nabisco with a powerhouse brand like SnackWell’s is looking for co-branding help from ConAgra’s Healthy Choice (see News Briefs on p.32).
But this is a category in which private labels and regional brands have thrived. The recent muscle-flexing by retailers may provide a defense against even the biggest of brands.
“In recent months, we have seen more retailers attempt to position their bakery products as branded rather than generic items,” said Interstate’s Sullivan. “This puts added pressure on the consumer and, of course, upon us. More and more the retailer is becoming a marketer of food products rather than the merchandiser he was in the past.”
How will it all shake out? “People who make acquisitions will be the winners, along with the sellers of things that did not fit their stratgic needs,” says Rabinowitz. “There’s probably no more room for a second tier.
“As for the little guys,” he continued, “they may find a few niches that still are uncovered. They must either supply unique products or compete on price, which is something nobody really wants to do.”
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