Northeast Foods – Fresh Bakery Trends in Foodservice –
29 June 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist:
Bob McNally (BM)
Former EVP, Operations at Northeast Foods Inc
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Agenda:
1. Speciality bakery consumer trends
2. Foodservice operating dynamics
3. Retail offerings toward health and wellness
4. Opportunities in transportation and distribution gains
Contents
Q: Could you give an overview of the speciality bakery goods market, including the key players and trends? 3
Q: What are the implications of something such as sesame being deemed an allergen? Does that create
pressure for bakers, or is it just about changing the labelling?
4
Q: Are any other health and wellness trends coming to the forefront in bakery products? Are there any types
of ingredients that you think are next to be removed from products to make them more attractive for
consumers who care about their diets?
5
Q: Could you give an overview of Northeast Foods’ business and the categories or channels it plays in?
5
Q: How would you segment Northeast’s channel distribution for fresh bread? Is there a 70/30 split between
retail grocery and foodservice? Are you aware of the shares of private label vs branded products?
6
Q: Can you talk about cost? How do you become more profitable in this sector? What are the main cost
drivers?
Q: How fragmented is this industry? Why haven’t there been companies who recognise it’s a pennies
business and consolidated and scaled to improve operational efficiency across locations and hopefully
become one of the major players who can turn pennies into dimes?
6
7
Q: Are any players able to employ best practices and then buy other regional players without changing the
distribution landscape, but just ownership through a parent organisation? Could they then apply some
advanced automation techniques?
7
Q: What do you think about supply and demand? How agile is the bakery industry when it comes to meeting
9
demand in foodservice or retail, especially amid coronavirus?
Q: Are there any supply chain bottlenecks when it comes to obtaining raw materials? Northeast has its B2C
and other ways to deliver to customers. What is the advantage of having a different distribution model and
this type of influx of supply and demand?
9
Q: What was the growth rate for the entire bakery industry pre-coronavirus and what is it now? Are any
categories providing innovation opportunities for Northeast? What is innovation like in fresh bakery?
Q: What is the opportunity within retail grocery to build a successful branded product? Is branded in this
industry no different than the private label, so there’s not much competitive moat?
Q: How are QSR demand trends driving volume for bakery suppliers? There is currently an explosion of
chicken sandwiches and presumably an influx of demand. How can we anticipate and plan for demand?
10
10
10
Northeast Foods – Fresh Bakery Trends in Foodservice
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview, entitled Northeast Foods – Fresh Bakery Trends in
Foodservice. I’m Nyree Hinton, and I will be facilitating today’s Interview with Mr Bob McNally, former EVP,
Operations at Northeast Foods Inc.
Bob, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information or any other information which is confidential during this Interview.
BM: I agree.
NH: Can you start by giving the audience an introduction of your background and the various roles you’ve
held in the industry?
BM: From an education standpoint, I’m a 1984 graduate of the United States Military Academy at West Point,
where I got my bachelor’s in general engineering, and then I got my master’s in business administration from
Baylor University. I spent eight-and-a-half years in the army as an Infantry Officer, and then since I got out of
the army in ’92, I’ve spent the majority of my times in operational roles. I worked for Corning Inc for four
years in their environmental product division. We manufactured ceramic substrates for catalytic converters for
Ford, GM and Chrysler. I then went to work for Tamko Building Products for 16 years, most of that time as a
General Manager for three different locations, two in the State of Texas, one in the State of Maryland. I also
started up an asphalt processing facility while I was at Tamko, which was a greenfield operation. Then I spent
a year working for Oldcastle, doing mergers and acquisitions as VP of Business Development, and then from
2013, excuse me, 2014 to 2018, I worked for Northeast Foods. I started out as Director of Manufacturing, got
promoted to EVP of Operations for the last, almost, three years. Up until last fall, I was Chief Operating Officer
for a company that processed and distributed fresh and frozen seafood in the Mid-Atlantic. In my current role,
I’m CEO of Envision Building Products. We manufacture and distribute railing systems for both commercial
and residential use.
[00:03:06]
Q: Could you give an overview of the speciality bakery goods market, including the key players and trends?
BM: When you look at the bakery industry there are really two areas that you should concentrate on. Number
one is, I call it fast food, but I guess it’s more commonly called quick service in the industry. You have quick
service, and then you have retail. The quick service would be some of your larger customers, and they would
be, obviously, McDonald’s, Burger King, Wendy’s, Chick-fil-A, Subway, it would be Hortons up in Canada, as
an example. Then on your retail side, as you go across the country, your larger retail chains, places like Giant,
Wegmans, Kroger, Food Lion, Albertsons, as examples on the retail. Then you’re going to have a sub-set of
that which would service the same product lines but would be your convenience stores that would be serviced
really through independent operators, 7-Elevens. I’m an East Coast guy, so I’m going to give you East Coast
ones, Royal Farms, Wawa, Sheetz, places like that where you can go in and buy baked goods would be serviced
by them. As I go through this afternoon, we’re going to have to keep the last year-and-a-half in perspective,
because COVID had a major impact on really the distribution of where people were eating. I think that’s one
thing that you’ve really got to look at, is the generational divide that’s occurring in our nation. You’ve got a
generation, I’ll call it my daughter’s. I have three daughters that are millennials and all three of them and their
generation, they’re very health-conscious, they’re very knowledgeable about what the ingredients are in foods
Private and confidential 3
vs people of, I’ll say, my generation.
I’m going to be 60 this year, where we grew up, my generation, with the advent and the growth of McDonald’s,
with Burger King, with Wendy’s, that fast food, the, “Let’s go get that hamburger.” The industry trends that are
happening now is that the millennial generation is really less in-tune to go to fast food. They want their food
quickly and they want it fast, but they want it to be healthy. Unlike folks of, say, the plus-60 where, I’m still
going to drive through a McDonald’s or a Wendy’s and gravitate towards that, this younger generation is going
to go towards organisations that are going to promote and foster healthy. Gluten free as an example is
becoming very popular in the millennials. Guys, I’ll be honest with you, when I was a kid, 10 years ago, I could
have cared less if gluten was in or not. I wanted was all about taste, but that is a big thing. Non GMO is a big
deal, and the gluten free is spreading across, whether it’s going into quick service and/or retail, it’s just a
fundamental want that you’re seeing becoming more and more prevalent in the industry. You’re seeing breads
that are coming out where the makeup of the calories, the fibres, as an example, Schmidt makes a bread, 647
bread, Sara Lee makes a bread, it’s called their light fare and it’s 45 calories, those are becoming very popular
because the generation that’s coming up is really conscious about that.
You can still have a great sandwich or a great hamburger and still meet your health requirements either from a
calorie perspective, the fibre mix, the grams of fibre that are in there, but that is really what we’re seeing, I
think, that’s really taking over the industry is this move to a healthier food offering in terms of the baked good,
the bakery good, the bread good. One major example I can show you is that in the quick service industry, a
major shift happened at McDonald’s over the last five years, and that was going from a fresh bun to a frozen
bun. If you guys didn’t know this, and you wouldn’t know it. If you went to a McDonald’s today and bought a
hamburger, you’d swear the bun was fresh. I’m going to tell you what. It’s not. All their buns are frozen. Why
are they frozen? The reason they’re frozen is because they took out all the preservatives that were in there, in
the bun, and in order to do that and still maintain the freshness and get it from time of manufacture to time of
usage and still being able to do that within a 48-hour window, they can do that, but it had to be frozen.
Wendy’s has been doing that all along, matter of fact, Wendy’s has gotten to it, if you look at their store
models, all the Wendy’s stores, they have their own refrigerator specifically built on-site. It’s about the size of a
parking lot, excuse me, one parking spot, and the majority of the product that’s in there is buns. They’ve been
doing it for a long time. McDonald’s just changed to it. Burger King has gone to it.
One of the major players out there that still does not do it, and they look at it as a competitive advantage still,
is Chick-fil-A. Chick-fil-A still offers fresh buns on a daily basis. They have not gone over there yet to where it’s
frozen. That, to me, has been the big change here in the industry, and it’s on both sides. If you go on the retail
side, there’s still a lot of demand for that in this generation that’s coming up. Yes, they still sell a lot of the
standard breads, the white breads, the wheat breads, the multigrain breads, but gluten-free white products,
100%-wheat products, things like that that are being advertised and are being clearly and boldly put on
packaging is really what is being generated and is generating demand today as this millennial generation,
they’re getting into their 30s now, and late 30s some are, and they’re having children. It’s just going to become
more and more prevalent as time goes on.
[00:11:40]
Q: What are the implications of something such as sesame being deemed an allergen? Does that create
pressure for bakers, or is it just about changing the labelling?
BM: One of the things that you can find out is with the internet today you can get all the information you
want. As a matter of fact, a company like McDonald’s, you can actually go on their blogs and they will tell you
what’s in their buns, what’s in their products. They have their labels. There really isn’t anything. You can’t use
these scientific words anymore, people don’t want to hear that, they just want to see plainly used terms in
terms of labelling. They call it clean labelling. That’s what they want. They want clean labels. Clean labels
means don’t send me the scientific words, give it to me what it means in layman terms. In terms of sesame,
McDonald’s still offers the sesame seed bun. There are other people that offer it. You’ve got various other
multigrain buns, products that are out there. It’s all about what’s in the labelling. If the label is clear, and that
is what is needed today, then people are going to make the choice. When they read the label they’re going to
Private and confidential 4
say, “Okay, that’s fine, I can live with that,” or, “No, that’s not what I want. I’m going to go to another product.”
It’s really into how the product is clearly labelled, and it’s going to go to what the consumer’s preferences are at
that point.
NH: How much of it is just perception vs actual health benefits? If there are new ingredients or clean
labelling, is it necessarily on the packaging outside of the McDonald’s bag? How are customers able to see
some of the new changes to ingredients?
BM: It’s a little bit of both because not everybody in the population is going to go out and do the research
needed. However, this younger generation, they are probably more knowledgeable than any generation before
them, and the reason for that is everything is all about the power of information. There is so much information
that is just at people’s fingertips, whether it’s on their phone, it’s on their computers, so that perception is
really changing into reality, and it’s fact-based. You can get this information online, you’ve just got to Google it
and it comes up, and there are too many sources of information where people will fact check to make sure that
what a company is saying is in fact true. You’ve got a lot of different organisations out there that have the
wherewithal to do that, and people are doing it. Can I say that I’m going to sit here and say 100% of the
population as fact? No. There are people out there that, “It’s gluten free. It’s got to be healthy,” and if you
haven’t done your research on it then you really don’t know, but the fact that it is, is that a statement that can
be supported by documentation? Absolutely, and it’s readily available. I would have said probably 5-10 years
ago, a lot of it, most of it was probably perception. Today I would say that most of it is based in fact because
the information to support the hypothesis of, “Yes, this is healthy,” is too clearly available to anyone to get,
today.
[00:16:21]
Q: Are any other health and wellness trends coming to the forefront in bakery products? Are there any types of
ingredients that you think are next to be removed from products to make them more attractive for consumers
who care about their diets?
BM: I guess there are some. You have to hit the nutritional value that you want in the product you’re getting,
and the biggest one they’ve been able to do is really to take out the preservatives that went in there to keep the
freshness of the product. By doing that, and then also, the offerings of the gluten free, the light. 100-to-1 you’ve
got to look at when somebody says, like wheat bread, if it just says wheat bread, I’ll give you a little bit of trivia
here. If you look at a bread that says wheat bread, it’s only about 20% wheat. It’s got to say 100% whole wheat
for it to be 100% wheat. Again, that goes to clear labelling, and they are. When a bread says wheat bread it
doesn’t say it’s 100%. It has to say 100% whole wheat bread for it to be 100% whole wheat. There are always
continued looking ways or ingredients, but the biggest major breakthrough has been to get the preservatives
out of a lot of bread products, particularly on the quick service side, to promote that as being a more healthy
eating bread than what was previously offered.
[00:18:15]
Q: Could you give an overview of Northeast Foods’ business and the categories or channels it plays in?
BM: Northeast Foods, they’re one of the largest privately owned bakery organisations in the country. They
have 10 bakeries. They’re located from New England down to North Carolina. The majority of them are
situated in the Mid-Atlantic, so they’ve got a bakery in Connecticut, New Jersey, Philadelphia, right outside of
Raleigh. They’ve got five of them in the Baltimore area. They’re primarily focused in two areas, one is quick
service and the other one is retail. On the quick service side, their largest customer is McDonald’s. They service
over 3,600 McDonald’s restaurants. Chick-fil-A would be their other one. Then on the retail side, they service
primarily in the Mid-Atlantic, ShopRite, some Giants, Walmart, Wegmans would be some of their bigger retail
customers. Then, as I said, what they do through independent operators, they distribute to areas like the 7-
Elevens, the Royal Farms, Sheetz, some small mom-and-pop shops that would sell bakery goods. In terms of
Private and confidential 5
their shipping, they ship from New England to anywhere as high up as Maine, north as Maine, as far west as
the western part of Pennsylvania down to south, into North Carolina. Primarily down, I would say, the 95
corridor is where they distribute their product to.
In terms of products, fast food is obviously focused on hamburger buns, and then on the retail side, white
bread, wheat bread, family. I’m talking your basic loaves of bread, multigrain, and then they make a variety of
roll products as well, anywhere from a three-inch to a 21-inch sub roll. They make some speciality dinner rolls,
some artisan rolls, brioche rolls. That would be the family of products that are offered on the retail side, and
muffins too, excuse me, forgot about them.
NH: Are these branded or privately owned?
BM: They’re both. The Schmidt Blue Ribbon label is one of their major labels that they distribute products
under, and their other one that they private label under is Harvest Pride, and that’s on the retail side. On the
quick service side, they’re making it for the entity that the product is being sold to.
[00:22:04]
Q: How would you segment Northeast’s channel distribution for fresh bread? Is there a 70/30 split between
retail grocery and foodservice? Are you aware of the shares of private label vs branded products?
BM: It’s pretty even. You have to understand the quick service market and the dynamics of it to really
understand it. Typically, in the quick service market, the people that play in it, there are regional players. As an
example, McDonald’s has between 20 and 22 different suppliers across the country to supply their stores,
okay, because, when they were serving, when you service out of a bakery you’ve really got to be efficient about
a 150 mile radius where you can ship your product from and have it be cost-effective. As an example, to have a
bakery in North Carolina and to try to ship product to California, it’s just not cost-effective to do that, so that’s
why they have so many of those different regional distributors of it. It’s the same thing on the retail side.
You’re within about 150 miles of what you can to efficiently distribute your product. Therefore, not everybody
has that capability to do that, and there are a lot of McDonald’s suppliers, as an example, that 100% of their
business or 95% of their business is tied to that main customer of McDonald’s. There’s one organisation that’s
based down on the Gulf Coast. They’ve got two bakery locations, one in Texas and one in Mississippi, and the
majority of their product goes to McDonald’s, that’s solely why they’re in business. If they didn’t have
McDonald’s as a customer, they wouldn’t be able to survive.
There are a lot of companies around the country that have specifically aligned themselves to be that primary
source of supply is to a McDonald’s, or is to a Wendy’s or is to a Burger King, as an example. Northeast Foods
is no different, they actually have five of their bakeries are dedicated for the majority of their product coming
out of it is to quick service. Quite frankly, I know of two of them that really, if it wasn’t for the McDonald’s,
there would be no reason to have those locations. They’re roughly, I’d say, pretty split evenly in terms of retail
and quick service, in terms of how they distribute. Again, to reiterate my initial point, it all, with these
different regional players out there supplying on the quick service, as an example, some may be 95% and some
maybe have a more balanced approach to it, as I described.
[00:26:33]
Q: Can you talk about cost? How do you become more profitable in this sector? What are the main cost
drivers?
BM: I will use this term to start out with, the bread business is literally a pennies business. It’s a very low-
volume, excuse me, low-margin, high-volume business, and you have to realise that right upfront. Not a lot of
margin to be gained in selling bread. The quick service side is very, very tight, and, literally, USD 0.01 or USD
0.005 can make a huge difference on whether you’re going to be able to be a supplier or not be a supplier to
Private and confidential 6
the quick service customer. Your major components, obviously, your raw materials are a major component,
your labour is a component. There have been a lot of advancements in mechanisation and automation to
improve throughput, reduce variation, reduce waste and all those, and reduce the dependency on human
capital to reduce costs. They did do an added cost by going to frozen. It’s not that great, not that much, but it
did add some cost because you have to freeze the product prior to selling it. Another major cost to the product
is distribution, and the person who can really manage and maintain and be the most efficient at distribution
will have a competitive advantage on that side.
The other component I’d like to add a little bit more on is freezer space, and that was a big deal. If you had
your own freezer, in other words, you physically have a large commercial freezer that is part of your operation,
that’s a significant advantage, vs if you have to use an external commercial freezer, it’s going to add significant
cost and could be a game changer. The folks that have internal freezers, and not everybody does, that is a
competitive advantage on the quick service side and on the retail side, but it has more of a dramatic impact on
the quick service side.
[00:29:41]
Q: How fragmented is this industry? Why haven’t there been companies who recognise it’s a pennies business
and consolidated and scaled to improve operational efficiency across locations and hopefully become one of
the major players who can turn pennies into dimes?
BM: Again, it goes back to it’s the nature of the business. You’re dealing with a perishable product. You can
freeze. I’ll give you an example. You can freeze bread, and some of the bread that they freeze has a shelf-life of
180 days. What that means is you can freeze it for up to 180 days and then take it out, de-thaw it and then use
it and it’ll be fine. That’s, you say, “That’s great.” Let me give you an example here, let’s say I make this product
in Baltimore, Maryland, and I freeze it in Baltimore, Maryland, and you want me to ship it to Phoenix,
Arizona. For me to ship it to Phoenix, Arizona and it still be worthwhile, I have to ship it on a refrigerated
truck across country to get it there. It doesn’t make sense, guys. The math doesn’t work for it to be cost-
efficient in order to do that. When you’re dealing with perishable foods like that, regional concepts are ones
that are very, very successful, and as I said, as a general rule of thumb, typical distribution around a bakery is
about a 150-mile radius. You really can’t get much beyond that, so the way you drive your costs down is
through automation. If you can get automation and reduce the dependency on human capital, and just to let
you know, the technology exists, it’s out there. It can be done. For those that have the financial capital to do it,
it can be a game changer. There’s number one.
The folks that either have existing or have put in freezers on location, and there are those who have done it.
Turano out in Chicago is an example. Northeast Foods has done it, as a matter of fact. They put in one at their
New England bakery a few years back specifically for that, to help them with their distribution throughout
New England. Turano did it when they set out a bakery in Orlando, Florida, to give them the capacity and
ability to support preferred customers that they were going after, okay, and then having a good distribution
system in place. If you can maximise those three components, those are the areas where you can shave off
pennies to continue to be competitive, as you move forward.
[00:33:16]
Q: Are any players able to employ best practices and then buy other regional players without changing the
distribution landscape, but just ownership through a parent organisation? Could they then apply some
advanced automation techniques?
BM: There are two parts to your question there, so here’s a good example. On the quick service side,
McDonald’s has what they call a hamburger, a bakery council, and they have representatives from each of their
suppliers that meet on a regular basis. When I mean regular, they have scheduled anywhere, probably one-half
a dozen a year, where everybody comes into Chicago, goes to McDonald’s corporate office and they sit around
Private and confidential 7
and they discuss best practices because their approach is more of a partnership than their customer supplier
relationship. Sharing ideas with the fellow suppliers is not only encouraged but expected. The thing that’s
interesting about that model is you’re not competing regionally against these players, because they’re
supplying to McDonald’s elsewhere in the country, so sharing of best practices, going to their facilities, them
coming to your facilities, is encouraged, it happens, and there’s a tremendous amount of sharing of practices.
Again, McDonald’s’ approach is, they look at it as a partnership and not a traditional customer-supplier
relationship, and I’ll give you a hardened example of that. In 1965, when Ray Kroc wanted to expand
McDonald’s into the East Coast, he went to a gentleman named John Paterakis, who was the founder of
Northeast Foods. He said, “John, I want to bring McDonald’s here and I’d like you to build me a bakery to
support my restaurants.” John Paterakis agreed, John Paterakis and Ray Kroc shook hands and that was the
supply agreement that’s been in place since 1965. There is no formal supply agreement with McDonald’s
besides that handshake that is in existence today.
That’s pretty powerful. That is the partnership that McDonald’s has with its suppliers. That’s number one. The
second one on the distribution side is there’s a company out there called Martin Brower who really has
maximised the distribution specifically for McDonald’s. When a Martin Brower truck comes from their
distribution to a McDonald’s restaurant, they came up with the idea of one-truck delivery to a store that has
every component that you need to supply that store and to operate that store. When I mean every, I mean
every. Down to mops, buckets, cleaning supplies, wrappers, salt and pepper, iced tea, the salt shakers for the
tables, the buns, the meat, everything. Everything that you need comes on one truck to your store, and they
have a delivery schedule anywhere from it could be three times a week, four times a week or six times a week,
depending on the volume of your store. Martin Brower is the company that came up with that business model,
and it’s tremendously successful because it was a way for them to reduce distribution and transportation costs
of their suppliers going into their stores. If there’s a model to look at for distribution, Martin Brower is the one
to replicate.
NH: How has that relationship transformed over the years? What is competition like when you’re a bakery?
How are you competitive in this market? How do you win business that is entrenched in informal agreements?
BM: The informal agreements, they’re not backdoor agreements because they’re on the table, they’re right out
in front. Again, it’s, from the quick service side, and I’m giving you from the Northeast Foods and the
McDonald’s relationship perspective, is that it was built on a partnership and it’s only grown through the years
as a partnership. There’s a tremendous amount of transparency between supplier and customer. We would
have to be very open about our costs and our capital network spending, and any significant capital had to be
approved by the customer because it went into the costing model of the product. It doesn’t mean you can rest
on your laurels though, because there are a lot of people out there that really want that relationship with
McDonald’s because of the-, I say guarantee, there’s nothing guaranteed, but the demand and the volume.
When you get into a relationship with a company like McDonald’s and you build a bakery specifically to
support them, and bakeries are USD 25m, USD 30m, USD 35m to put in place with all the support, that’s
pretty powerful, and there are a lot of benefits to that, so, McDonald’s keeps everybody in check. You have to
do business reviews with them twice a year, and they’re very, very extensive, very detailed, and there’s a lot of
financial information that is discussed and exchanged. If you are not cost-effective and a good-quality
supplier, you’ll be replaced.
I’ll give you a perfect example. There was a company called East Balt that was located in the Midwest that was
a supplier to McDonald’s in that region. After three years of unsuccessfully working with them, they tried to
turn them around, they were replaced by a company called Turano. They are now the preferred supplier to
McDonald’s in the Midwestern market, in Illinois and Chicago and around there. Just because you get in the
door and you’re a supplier doesn’t mean you could rest on your laurels because you’re always being pushed to
come up with, bigger, better, faster, more cost-efficient ways to provide your product to the customer. Not only
at a cost efficient, but it’s got to be a quality product and meet their very stringent quality standards as well.
That’s how they managed to do that. Just like any business, they’re continuing to look for ways to take costs
out as costs continue to rise in other areas.
Private and confidential 8
[00:42:14]
Q: What do you think about supply and demand? How agile is the bakery industry when it comes to meeting
demand in foodservice or retail, especially amid coronavirus?
BM: This goes back to my first comment way back, and I said when we had to deal with COVID. Pre-COVID,
your demand was pretty steady in terms of your fast-food demand and then your retail demand. During
COVID, that dynamic changed. Fast-food restaurants were able to stay open on a drive-thru service. Because a
lot of restaurants in normal, that people took advantage of, there was an uptick in demand on the fast-food
side, but the real demand occurred on the retail side. Retail demand completely went through the roof, and
because people were going to grocery stores, there was no other place, they still had to eat. Children were
home from school, they were being home-schooled, so more parents had to make lunches for their children
and the students, so retail demand really went through the roof during COVID. Now that things are loosening
back up and restaurants are opening up more and people are starting to go out and dine more and once
schools will open again in the fall, I think you’ll see some of that retail demand is going to recess some.
[00:44:11]
Q: Are there any supply chain bottlenecks when it comes to obtaining raw materials? Northeast has its B2C
and other ways to deliver to customers. What is the advantage of having a different distribution model and this
type of influx of supply and demand?
BM: Yes, so, one of the biggest issues we’ve got right now in the country, and I don’t care what industry you’re
in, there’s a labour shortage that we’re trying to get out of, out of COVID. People aren’t working. The reality of
life is, I’m going to call a spade a spade, people can make more money staying home making unemployment
and the subsidy to that than they can by going out to work. In every single industry, including the industry I’m
currently in right now, we are having a hard time getting people. It’s not that the raw material to make the
product isn’t available, but the supply chain of getting them there, getting the people to make the material,
getting the product delivered, it’s a challenge right now, and it’s going to take some time for that to work its
way out in our nation. The entire supply chain, it doesn’t matter what industry you’re in, is definitely stressed
and tapped right now, until we can get more folks in the labour force to get back to work and start
contributing.
In terms of the distribution side, it goes to what is your availability of distribution assets. If you have your own
trucks, you have an advantage, and not everybody has their own trucks. If you have your own trucks your
ability, Northeast Foods as an example, they have their own truck fleets. That’s a big deal because they’re able
to deliver, they can do direct store delivery, DSD, and they can also go to distribution centres, so that’s an
advantage. If you don’t have that and you have to go to third party, that’s a challenge, then. That’s going to add
to your cost. I talked about the Martin Brower model, which they’re nationwide, so they’ve done very well
specifically there, but the people that have their own trucking assets are going to be able to control their costs
greater than people that have to rely on a third party to deliver their product to wherever their end customer
is.
NH: You said the technology is out there for automation. Are you saying the labour issue is more on the
processes that can’t be automated, or is there opportunity for well-capitalised players to invest heavily into
automation and reduce some of that cost longer term?
BM: The automation capability is there, the technology exists. The people that have the capital availability to
invest are the ones that are going to be able to take advantage of that, you know. Some of the automation, you
start getting into automatic wrappers and automatic palletisers, automatic tray washers, there’s new
technology. You can have continuous batch process as you’re making your flour mix, instead of being a batch
process it’s more efficient, less variation, causes less defects, that technology is out there. The technology is
there, it’s the companies that have the capital wherewithal to make those investments are the ones that are
going to be able to take advantage of it.
Private and confidential 9
[00:48:37]
Q: What was the growth rate for the entire bakery industry pre-coronavirus and what is it now? Are any
categories providing innovation opportunities for Northeast? What is innovation like in fresh bakery?
BM: As I have described, Northeast Foods is a company that has the financial wherewithal to invest
significantly into their bakeries to improve their processes, to improve their production line, to go out and get
automation to help improve their production efficiencies to keep their costs down. I described earlier, they
built a freezer on-site at one of their locations in New England, that was not an inexpensive investment, not
everybody will have the capability to do that. Their ability to improve there and modernise to the best they can,
and quite frankly, they’ve been doing it. As a matter of fact, their bakery they built in North Carolina in 2012, it
was featured in Food and Science Magazine because it had the most advanced automated processes of any
bakery. The complete bakery is automated from start to finish. Very rare. It’s run with minimal people,
minimal people touching everything from they’ve got automated measurement systems, automated weighing
systems, automated packaging, automated stacking, automated washing, automated batching, automated tray
return, automated tray washing. The entire facility, they designed and built it out there, so the technology is
there. A business like Northeast Foods will continue to use their capital advantage to create a competitive
advantage for them in the marketplace. It’s like I said earlier, and I know I have said this two or three times,
the technology is there. If people have the capital or access to the capital, they can take advantage of it and
they will have a competitive advantage moving forward.
[00:51:28]
Q: What is the opportunity within retail grocery to build a successful branded product? Is branded in this
industry no different than the private label, so there’s not much competitive moat?
BM: It’s going to depend on the grocery store. I’ll give you an example, a store like Wegmans, or that
Wegmans brand. When you make a product for Wegmans and Wegmans private labels and puts the Wegmans
name on it, it goes through a very extensive approval process, all the way up to the owners of the company. I
know that, because when I was in the seafood industry, our biggest retail customer was Wegmans, and I got to
see it first hand, what the approval process was for a product that they put their name on, but not everybody is
like that. You could go to a bakery and it could have, let’s say, six production lines. On each of those six
production lines, they’re putting a different packaging over the same loaf of bread, depending on where it goes,
which means the formulation is the same, you’re just putting a different package on there. It’s really going to
depend on who the customer is, what the label is and what the formulation of the product is. Some customers
are very, very stringent in what they want and adherence to it, and they will come in and they will audit you
and they will audit your process and they will audit and watch your process. Other ones, not so much. As long
as the quality is good and people are buying it, they don’t have a problem if you’re replicating another
formulation or their formulation isn’t much different, as long as you can supply them with a good product and
you’re a reliable supplier.
[00:53:45]
Q: How are QSR demand trends driving volume for bakery suppliers? There is currently an explosion of
chicken sandwiches and presumably an influx of demand. How can we anticipate and plan for demand?
BM: Let’s take a look at that, and it’s interesting you mention chicken. This is one of the challenges that
McDonald’s and the Burger Kings of the world and Wendy’s have been fighting, is that whether you call it
perception or fact, and I’ll go back to one of your earlier comments, chicken is seen as a more healthy protein
than hamburger meat or beef patty. That’s one that the hamburger places are trying to overcome. The second
is there’s a lot more competition today than there was in the ’60s and ’70s when I was growing up. You had
Private and confidential 10
McDonald’s, you had a Burger King and Wendy’s was just coming onboard. There are so many different quick-
service opportunities now to compete against each other. You’ve got all the quick-service hamburger
restaurants, you have the Subways of the world, you have the Jimmy John’s of the world, you have the
Smashburgers, the Five Guys, Saladworks, and there are so many more options now for people to take a look
at that are challenging out there. Here’s a prime example, and this is where Chick-fil-A is really driving the
competition to rethink how they operate. Chick-fil-A’s business model is completely different than the three
big that I’ll call Wendy’s, Burger King and McDonald’s. When you’re an owner of a restaurant for Chick-fil-A,
their philosophy is one store, one owner, that’s it. If you’re really, really good and really successful, you may
get what’s called one-half a store, which is a Chick-fil-A in a mall, and you would have two stores.
Nine times out of 10, it’s only you’re getting one store, unlike the other three where a McDonald’s, you could
have a little business empire. There are McDonald’s owners out there that have 25-30 restaurants, they have
their own corporation, they’ve got VP of Sales, they’ve got VP of Operations, they’ve got a CFO and they’ve got
these big companies. Northeast Foods used to service the Wendy’s and the McDonald’s area. There was one
owner that owned 152 Wendy’s. The difference with Chick-fil-A is, their customer service model is tops in the
industry. Why? Because their business model, they want their owners in the stores, interacting, engaging with
their customers. If you own 25, 30, 50 restaurants, you can’t do that, and therefore, how are you maintaining
the customer service? I encourage you to go to a Chick-fil-A and go through the drive-thru, and you can be in
and out of that store in a minute. It’s incredible what they do. They’ve got people outside taking your order,
they’re in vests, they’ve got half a dozen people that are working through to make sure that your experience of
getting that meal is nothing short of spectacular. That is a business model you need to look at. Another thing
is, and I have seen this several times, where there’s a McDonald’s on one corner and a Chick-fil-A on the other,
and that Chick-fil-A’s sales are almost double that of McDonald’s, and that Chick-fil-A is only open six days a
week. Why is that? Number one is their product offering is perceived as being healthier, ie a chicken sandwich,
but that customer service experience is second-to-none.
[00:58:35]
NH: Let me close by saying thank you, Bob, for your input. Clients, if you would like to speak to Bob in a
private call or meeting, please let your relationship manager know. Thank you again for joining Third Bridge
Forum's Interview today, this now concludes our meeting. Goodbye.
BM: Alright, thank you very much. You as well.
Transcription ends at 00:58:50 of the recorded material
Private and confidential 11