Can we expect more M&A in bakery? ‘Absolutely yes’, says Flowers Foods

By Elaine Watson

- Last updated on GMT

Related tags: Input costs, Baking

Deese: Expect more M&A
Deese: Expect more M&A
Punishing rises in input costs, cautious consumers and a predicted rise in capital gains tax will drive further consolidation in the US bakery sector this year and next, packaged bakery giant Flowers Foods has predicted.

In a conference call to discuss the firm’s second quarter results yesterday, chief executive George Deese (pictured) said many smaller, regional bakers were probably considering making an exit sooner rather than later.

He added: “Do I see continued consolidation in the baking industry? Absolutely yes … Most of us know that capital gains​ [tax] will probably increase tremendously in 2013.

"So my prediction is that in the rest of 2011 and certainly in 2012 you will see probably more activity from an M&A standpoint.”

Input costs, pricing and consumer demand

Market conditions were particularly tough in the bakery aisles, with packaged bread “down 3.5% in units and up 2.3% in dollars”​ in the second quarter according to IRI data, said Deese.

“My main concern for the immediate future lies with input costs, pricing and consumer demand… But out of these three, consumer demand is the real concern. Reviewing IRI data, you see fresh packaged breads in dollar and unit growth rates did not perform as well as total food.

“It’s not a drop off the bridge situation but you do see the volume in units down pretty significantly in the bread business.”

​As recent lackluster figures from major retailers revealed (Walmart’s US same store sales were down 0.9% in the second quarter)​shoppers were being cautious,​even in low-ticket categories such as bakery, added Flowers Foods president Allen Shiver.

“Some of the discretionary impulse purchases … are the first to go when consumers run through financial pressure.”

More price rises to come

In the longer-term, innovation, new technology and new business wins - rather than higher prices on existing products - were the key to increasing margins, said Shiver.

But in the short term, bakers would seek to at least maintain margins via further price rises as input costs continued to rise, he predicted.

In 2008, the category actually absorbed more pricing than the category has absorbed now. So we feel like given the commodity situation that there is more pricing to come.”

Deese added: “We will be having more cake​ [price] increases in the third and fourth quarter… All ingredients are continuing to rise at levels that we've not seen. In addition it is very volatile. We see more swings in a day than 20 years ago we'd see all year.”

As for 2012 commodity prices, he said, “We're looking at more of the same … we don't see any big letdown on input cost.”

Tasty Cakes integration

Georgia-based Flowers, which acquired snack cake maker Tasty Baking Co in a $165m deal in April, has hoovered up more than 100 companies since going public in 1968.

The integration of Tasty Cakes was progressing well, with Tastykakes now part of Flowers’ product line up in Florida, most of Georgia, Alabama and South Carolina, said Shiver. “Over the next 12 to 16 months, most of our remaining regions will have the opportunity to sell the Tastykake brand.

“Our plans are also underway to introduce Nature's Own and the other bread products into Tasty direct store delivery markets. As we increase sales, we will need additional bread and bun capacity to effectively serve those new markets. We're currently evaluating our manufacturing alternatives.”

Net income slumps 16.4%

Volumes at Flowers were down 2.1% in the 12 weeks to July 16 although revenues rose 5.7% to $642.6m thanks to the Tasty acquisition and higher selling prices.

Net income slumped 16.4% to $28.2m.

Flowers’ brand stable includes Nature's Own, Whitewheat, Cobblestone Mill, Blue Bird, Mrs Freshley's and Tastykake.

Related topics: Manufacturers

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