THOMASVILLE, GA. — As Flowers Foods, Inc. seeks to gain share in the premium and breakfast bread categories, it is fighting off incursions by others in the soft premium segment. The status of these battles as well as significant share shifts in store brand bread sales were the subject of considerable discussion May 29 in a Flowers Foods conference call with investment analysts.
As reported, net income of Flowers Foods in the first quarter was $61,389,000, or 29c per share on the common stock, up 0.5% from $61,066,000, or 29c per share, in the same quarter in fiscal 2014. Net sales were $1,146,045,000, down 0.7%.
During the quarter, Flowers Foods achieved a modest improvement in its branded bread market share, to 14.2%, Allen L. Shiver, president and chief executive officer, said. In his opening comments, Mr. Shiver observed a continued highly competitive environment during the first quarter of fiscal 2015. One analyst specifically asked about “competitor products that appear similar to Nature’s Own.” While no specific company or brand was mentioned, the reference appeared aimed at Nature’s Harvest bread, introduced recently by Bimbo Bakeries USA.
“Nature’s Own is our No. 1 brand,” he said. “It’s the No. 1 brand in the country. So it’s not a surprise that our competitors have developed brands that are very similar, in fact, can actually confuse the consumer. The good news is our Nature’s Own brand has very strong consumer loyalty. We continue to look for ways to improve product quality and product freshness. So there will always be competition. But I would say that I think what you’re referencing, a recent introduction by one of our competitors appears to be directly aimed at Nature’s Own. The good news is our Nature’s Own sales continue to be strong.”
The introduction of Nature’s Harvest is not the first time a brand has been brought to market with a name similar to Nature’s Own. Interstate Brands, Inc. introduced a line of bread under the Nature’s Pride brand several years ago in a move that was subject to litigation. Flowers now owns the Nature’s Pride brand.
Commenting on the inroads Flowers hopes to make through its introduction of Cobblestone Bread Company products “in categories where traditionally we have not been strong,” Mr. Shiver tipped his cap to successes achieved by his competitors.
“There are other segments, such as specialty bread, which is dominated by brands like Oroweat and Arnold,” he said. “There are other product categories in breakfast, Pepperidge Farm. Those are competitors that are doing a really nice job in segments where we are not fully developed. So this is nothing new, but it does point to opportunities on how we plan to grow in the future.”
Updates were offered by Mr. Shiver on a number of Flowers’ bread brands, including an initiative to reduce by half the number of ingredients in Nature’s Own. This effort has been completed without compromising the company’s standards for quality or freshness, he said.
“Our innovation team has been busy, and we will soon be introducing several new bread varieties with nutritional attributes that are on trend for today’s consumer,” Mr. Shiver said.
Asked specifically about the performance of Wonder bread since it was acquired in 2013, Mr. Shiver was highly positive, reiterating its “very high consumer awareness,” and remarking on its growth. In several new markets, Wonder is the lead brand for Flowers Foods, he said.
Helping allow a 1.1% price increase for branded bread in the first quarter was an improved promotional environment, Mr. Shiver said.
“There’s still promotional activity, but the promotional price points have moved up slightly, and I give our Flowers team credit for a lot of that,” he said.
Longer term, Mr. Shiver said retailers are growing savvier when it comes to resisting the temptation toward highly promoted bread.
“There’s a growing understanding of the importance of this fresh bakery category,” he said. “And I think more and more retailers are understanding that simply lowering the price of fresh bread does not necessarily generate enough additional income to help their margins stay up. So it’s very much of a routine purchase, and category management I think helps retailers understand this in a better way.”
Considerable discussion during the call revolved around the steep decline in store brand sales during the quarter. Mr. Shiver sought to offer context to what transpired.
“The bid nature of the store brand category means that there are always contracts being won and lost,” he said. “We have opportunities to grow our branded sales, and we want to make sure our production resources are available to support the growth of our brands.”
Asked whether the losses Flowers’ has sustained in this area represent a fundamental shift in priorities for the company, Mr. Shiver insisted otherwise and noted that gains and losses in private label are subject to the vagaries of retailer bid cycles.
“We are not making any type of across-the-board decision to exit private label,” he said. “We’ll deal with private label on a market-by-market basis as bids come up. We are focused on growing our branded business. And from a production capacity standpoint, we want to make sure that that is our first priority to grow our brands. If we have excess capacity in a market, then a private label helps to fill that capacity.”
Positives were identified during the call in the Flowers snack cake business.
“While our share of branded commercial cake market including convenience stores was down compared to the first quarter of last year, it was up from quarter four in fiscal year 2014,” he said. “Overall, our share of commercial cake is 9.6%.”
Tastykake, Flowers’ largest brand and one that has been challenged over the past year or so by the return of Hostess cakes to the market, posted growth during the quarter, Mr. Shiver said.
“Our independent distributors continue to have great success growing cake sales in their territories,” he said. “Our independent distributors work hard to build relationships with their store managers, and to secure display opportunities. Our recently redesigned shipper displays help our independent distributors capitalize on those opportunities and to grow sales.”
R. Steve Kinsey, executive vice-president and chief financial officer, offered a brief primer on how plant efficiency is measured and how much progress has made in this area.
“When you look at plant efficiency, for the quarter we’re up a little over 100 basis points, where we are 93.5%,” he said. “From a capacity utilization (perspective), we typically don’t disclose that for competitive reasons. But I would say, we look at capacity based on three shifts at 40 hours. So 120 hours is 100% capacity for us. So most of our bread, bun and rolls plants would be operating at that level or above. In the cake arena, we would still have some capacity obviously, based on volume there.”
Mr. Shiver noted that plants, under certain circumstances of high demand, are able to run at even more than the 100% capacity measure that equates to five days, 24 hours over a week.
