Q4 2021 US Bakery Update – Channel Opportunities &
Pricing Trends – 30 September 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Eric Rodriguez (ER)
Former Executive Director, Key Accounts at Perfection Bakeries Inc (Aunt Millie's)
Agenda:
1. Pricing and promotional activity
2. Foodservice rebound
3. Private label and branded assortment trends
4. Volume outlook for retail grocery
Contents
Q: How would you segment and size the US fresh and frozen bakery market? How much of the market is
fragmented into small bakeries vs large accounts such as Bimbo?
Q: Why do you think the industry is so consolidated, with two players controlling 50% of the market?
Q: Could you talk about overall growth throughout your time in the industry? Has the TAM stayed around
USD 13bn or has it increased to USD 13bn today from USD 10bn seven years ago?
3
4
4
Q: Could you elaborate on the opportunities within fresh or frozen? Is there a larger trend towards everyone
focusing on fresh? Is that where the category opportunities are?
4
Q: Could you talk about the ingredient sourcing issues? Even if you’re focusing on bricks-and-mortar, if you
can’t pull the product together, you won’t have a product to sell into bricks-and-mortar.
5
Q: Are most of the ingredient supply challenges on the fresh side rather than frozen?
Q: You talked about the SKU rationalisation and discontinuing products. How are smaller bakeries able to
take advantage of these supply crunches, where perhaps Flowers Foods can’t supply demand for every
account it has? Are some smaller bakeries taking market share because of these demand crunches, or is it
truly a nationwide issue where everyone’s struggling?
5
5
Q: What are your thoughts on private label?
6
Q: You mentioned the perks of doing private label are not what they used to be. Why would a company want
to engage in private label contracts with retailers, given the cost-benefit analysis is not there? Is it just the
two biggest players who are able to service these needs?
7
Q: How are the market share dynamics playing out between foodservice and retail? Was the industry 80%
retail, 20% foodservice to begin with and then foodservice made this industry 90% retail, 10% foodservice?
What do you think about the market share of fresh and frozen bakery across the multiple channels available?7
Q: Which of the issues around ingredient sourcing and labour do you think is most pressing?
8
Q: Are the largest players investing in automation capabilities to make their jobs less dreadful to go into? 8
Q: What are the pricing challenges? How successfully are players passing on price increases to consumers?
Do a lot of retailers still want this to be a very promotional-driven category?
8
Q: Are the large retailers or the regional retailers more likely to pass on price increases vs take a margin hit? 9
Q: Could you talk about smaller bakeries being able to service major retailers? There has been a big trend
towards localisation. Could you talk about the success of smaller bakeries in gaining shelf space in the big
retailers, even with the e-commerce dynamics?
Q: What innovation is happening? Which categories are growing that provide opportunity for bakeries to
gain market share?
9
10
Q: How are the clean labelling and better ingredient trends in snacking translating into how bakeries source
raw materials? Is there a trend of less or simpler ingredients? Is that putting strain on the supply chain?
11
Q: What are you monitoring as we reach year-end 2021? What are the most important topics that you think
investors commonly overlook in bakery, fresh or frozen?
11
Q4 2021 US Bakery Update – Channel Opportunities &
Pricing Trends
Transcription begins at 00:00:07 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview, entitled Q4 2021 US Bakery Update – Channel
Opportunities and Pricing Trends. I’m Nyree Hinton, and I’ll be facilitating today’s Interview with Mr Eric
Rodriguez, former Executive Director, Key Accounts at Perfection Bakeries.
Eric, 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.
ER: I agree.
NH: Thank you, Eric. Could you start by giving the audience an introduction to your background and the
various roles you’ve held in the industry?
ER: I have spent, as of today, 42 years in retail, starting out working in brick-and-mortar grocery, Kroger, and
then independent, SuperValu, and then spent about seven years running a cake route, Little Debbie route, and
then a bread route. Then got into management and then spent the last 22 years as an account executive,
calling on Walmart, my most experience, with 20 years, Sam’s Club, 20 years, and then Costco, Target,
SuperValu, Kmart, and a lot of regional players, in both sales and I do have experience in operations.
[00:01:40]
Q: How would you segment and size the US fresh and frozen bakery market? How much of the market is
fragmented into small bakeries vs large accounts such as Bimbo?
ER: Right now, 2020, I think up till June 2020, the sales for fresh and frozen combined are right at USD
13.9bn, with the fresh leading that. I want to say they have about 65% of that number.
NH: How much of that USD 13bn is produced or manufactured by small bakeries vs large manufacturers?
ER: Based on the numbers, and, actually, I still get my publications so I guess this number is correct, USD
9.6m is fresh bread. The top two vendors are wholesalers, which are Grupo Bimbo, which, to everybody, is
Sara Lee, Brownberry, they’ve got about USD 2.6m, and then they’re followed by Flowers Foods, which is USD
2.3m. Those top two have 50% of the share. Campbell’s comes in next at about USD 677m. Then the small
regional players, there’s Lewis Bakeries, they’re at USD 2.2m, US Bakery is on the West Coast, they’re about
USD 1.8m, and then Aunt Millie’s bakeries, they’re at USD 1.8m. Those two big ones generate over 50% of the
total business, but they have ACV, or distribution, in the entire United States, to where these other ones, now,
Campbell’s does too, but all the other small regional bakers, like Lewis Bakeries, it’s Midwest, maybe seven
states, Aunt Millie’s is five-and-a-half states. H&S is on the East Coast, they’re about only USD 1m. It’s those
big two that drive all the volume.
Private and confidential 3
[00:04:31]
Q: Why do you think the industry is so consolidated, with two players controlling 50% of the market?
ER: The largest reason is the cost of expansion. Almost all these companies, and I do know them very well, the
majority of them have union salesmen, or route sales drivers, so you have that major expense of capturing a
facility, transportation from the bakeries to the facilities. Then you have the commission-based sales, so it’s a
base and commission on all these, except for Lewis. They have that expense, healthcare, retirement benefits.
It’s just really hard to grow into a new territory, it just takes a ton of money. Truly, the unknown secret of all
this is the bread business is really a pennies business, you don’t make a ton of money off your bread, and
private label, you make less. Unless you have a big portfolio, which both Grupo Bimbo and Flowers do, based
off acquisition of smaller companies, so they might have a cake line where they’ve bought companies that had
specialised in cake. I know Flowers has bought tortilla companies, and Bimbo, they have Thomas’ English
muffins and the bagel business, they bought those companies. When you have a broader portfolio, it’s easier
because they have the plants everywhere.
[00:06:17]
Q: Could you talk about overall growth throughout your time in the industry? Has the TAM stayed around
USD 13bn or has it increased to USD 13bn today from USD 10bn seven years ago?
ER: What happened, as of the end of 2019, the prior four years bread, buns, rolls were on a decline. If you
were at zero or plus, you were an all-star. The millennials, the Gen Xers, they just don’t eat bread like the older
folks, so the bread category was really flat to down. The frozen did take off, and it’s not because people were
eating their bread more, it’s just frozen took off because of all the smaller speed-channel stores, so all
convenience stores, believe it or not the Menards, any place that has a cash register that wanted to sell
product, you could sell one-way product to them. Then more and more smaller companies would buy the
frozen products because most bakeries that sell frozen products sell to big frozen distributions, like the Sysco,
Gordon Food Service, anybody that sells a whole variety of frozen products, meat, and everything. They would
sell a one-way product, one-way business, so there are no returns. It’s so cheap. I don’t think that, matter of
fact I know that the quality is not the same as a fresh product, but they’re not always looking for top quality
when they want to sell. They want quality but it doesn’t have to be premier, if that makes sense.
[00:08:40]
Q: Could you elaborate on the opportunities within fresh or frozen? Is there a larger trend towards everyone
focusing on fresh? Is that where the category opportunities are?
ER: No, I truly believe in the fresh bread industry it is so costly to grow. With what’s happened in the last 18
months with the pandemic, you can’t get workers, you can’t get all your ingredients, utilities are higher,
everything is more expensive on the fresh, it’s what they call DSD, direct store delivery. Everything’s just more
expensive. Fuel is up, you name it, everything’s going. They also are stepping back, wholesalers are stepping
back and looking at it and saying, “Okay,” to where five years ago you could go to every convenience store or
every small restaurant, you could drive and deliver them USD 200-worth of product. Today, as they’re
forecasting, when you look at the wear and tear on your vehicles, you’re paying commission on that, you have
to buy the ingredients, you have to produce it, they’re getting away from even going to these smaller stores.
Most people don’t think that’s a lot, but if a company has 500 routes and each route has 10 stops like that,
their return on investment is very little considering everything they had to spend just to get it.
Most companies out there, I want to say 85% of the companies selling fresh bread, now offer, and this
probably started about 3.5-4 years ago, what they call E SL, and it’s extended shelf life. It’s not frozen product
but it’s product that’s made, and instead of putting it in a bread tray or a bread basket, they box it up in boxes
and will sell it to, let’s just say, a Speedway gas station, or any big chain. They can sell them products one-way
Private and confidential 4
business, meaning no returns, you’ve got to stock it, they can sell it to them that way and the retailers just have
to make sure they sell it. It’s just not sustainable to spend all that money on the fresh side in the time when
you could be investing all your time and extras into your big brick-and-mortar stores.
[00:11:47]
Q: Could you talk about the ingredient sourcing issues? Even if you’re focusing on bricks-and-mortar, if you
can’t pull the product together, you won’t have a product to sell into bricks-and-mortar.
ER: It’s all across the board. Without disclaiming major details, I know several companies that, because of the
ingredient shortage, they are temporarily discontinuing products. Let me back up. 20% of all your volume, in
most companies, or 80% of all your volume comes from 20% of your products. Let’s just say 100. If you’ve got
100 items, you have 80 that aren’t the top 20, and you’ve got that bottom 20 that maybe the store wants that
or you think it’s a niche item, but it’s got a higher return, shrink, means loss, they’re not putting it into that
because of the pandemic there is an increase, I don’t know, I don’t think ’21 over ’20 there’s an increase,
because ’20 was like every week was a blizzard, but now it’s flat, which still means they’ve maintained some of
that. It’s just across the board, it doesn’t matter whether it’s wheat, speciality wheat, and I don’t want to jump
all over the place because I know you’ve got a lot of questions, but when you get into speciality, the items with
the wholewheat, wholegrain, all those require a better grade of flour. Then all the supplements, the brans, the
flaxseed, all that stuff costs a lot of money, so you want to keep that because it’s growing, so you’ve got to get
rid of, like I said, they did temporary item deletions. Just to say, it could be forever or it could just be
temporary, but the landscape right now is not looking favourable for ingredients for the next six months.
NH: How is the industry acquiring these ingredients? When I think ingredients, I think of big ag producers
such as ADM [Archer-Daniels-Midland] and Ingredion. Is this is an issue where you have a more direct
relationship with the producer?
ER: No. Typically, it’s all the big guys. Again, I know that Canada has some really speciality wheat, and, like a
lot of commodities, you buy out, so a lot of people buy out for two or three years, if they’ll go that long. Most of
them don’t go that long because there’s so much fluctuation with weather, but let’s say you’re buying a year
out, that helps, but everybody else is having the same issue. The farmers, it’s costing more to produce it, them
getting their supplies just to plant and then the cost of harvest and transportation. No, it’s really they’re buying
from the big guys. I don’t think there’s very much going straight to farm, are the small people. They just don’t
have the volume. Most bakeries are buying railroad cars full of product or ingredients.
[00:16:07]
Q: Are most of the ingredient supply challenges on the fresh side rather than frozen?
ER: It’s all of it. I guess I should back up. The United States, everything, back to the specialities, it’s ancient
grains, organic grains, custom blends of wheat, the sales are at a record high but so is the cost. It just is what it
is.
[00:16:52]
Q: You talked about the SKU rationalisation and discontinuing products. How are smaller bakeries able to
take advantage of these supply crunches, where perhaps Flowers Foods can’t supply demand for every account
it has? Are some smaller bakeries taking market share because of these demand crunches, or is it truly a
nationwide issue where everyone’s struggling?
Private and confidential 5
ER: It is a nationwide issue. I was reading last night in my Milling & Baking News, two bakeries in the last five
months, that have been around since the 1940s, just literally shut their doors. I’m sure, like a lot of things,
maybe their finances weren’t in the best order, or maybe, as you and I would look at it from a consumer
standpoint, there were upside-downs and stuff. Dealing with what I talked about earlier, you have these
pensions you have to fund, and the health insurance and everything, maybe they just got in a little trouble, but
they just went out of business. This is where I believe Flowers Foods bought one of them, I’m not sure, or at
least the rights to their brand, because, actually, one’s on the East Coast. That brand has still got some very
strong share, so you buy and that then you make that, you have to buy the rights and everything, but it’s across
the board. The bigger are getting bigger. I have these conversations all the time with colleagues and prior
people that with bricks-and-mortar, where they’re selling, how long can they last, the real small regional
chains? When I say that, I mean chains of grocery stores, 10-25 stores, competing against the big, big bricks-
and-mortar, competing against e-commerce, which is the fastest-growing segment right now, which was doing
well.
E-commerce was growing rapidly prior to the pandemic. The pandemic just catapulted it to just nobody knew.
Of course, the typical mum, our oldest daughter is 30, three kids, works full-time, sports and everything, she
was using e-commerce before the pandemic, because it’s just as easy to stop and pick them up, just order
online, you’re not going into the stores. Nobody really likes that, from the brick-and-mortar stage, because
they really want you coming in and doing the impulse buying, but once one company starts to do it, you all
have to do it, because you’re just going to lose share if you’re not offering that. E-commerce is changing a lot of
stuff.
E-commerce has actually impacted assortment. I know a lot of them, if you can visualise looking at a bread
rack to where let’s say you have four suppliers, and every supplier has three diet breads, the challenge with
that is, out of those four suppliers, three diet breads, you’ve got 12 offerings. It’s like I said earlier, 80% of your
volume comes from 20% of your stuff. You could probably get by with just three of those diet breads because
you have to be in stock more on the bread rack so your e-commerce pullers at the stores, the people that are
pulling these orders have that offering to fill the order. E-commerce has actually created the, “Let’s get rid of
the stuff that’s really not relevant or drives a lot of sales,” because the leakage, if they were buying your brand,
and they had their number one diet bread and you drop it, and I don’t think they all went from three to one
but let’s just say, out of those 12, now you’ve got five, you’ve cut it in half, you’ve increased your shelf space, or
days of supply, by 100%. In reality, most people, when one person creates an oatmeal, light oatmeal, that’s
why the competition creates it, it’s because you don’t want them capturing more. That just is what it is, it
doesn’t matter whether it’s bread or if it’s Cherry Coke or Cherry Pepsi. You know what I mean? Somebody
started it and somebody says, “Oh, no, we’ve got to get in that.”
[00:22:12]
Q: What are your thoughts on private label?
ER: The challenge with private label, if you go back 10, 15, 20 years, as a supplier, you always got something
for being a private label supplier. As my mentor told me about 25 years ago, “The only thing worse than you
having private label is letting your competition have it.” Private label has always been one of those things that
keeps your plants running when it’s slow, because you have your plants, you have your employees, it keeps it
running when it’s slow, but in today’s world it’s very, very minimal that you get extra perks by having it. A lot
of retailers still want to have a lot of that speciality item that they can put their brand on, but the shrink is very
high, meaning your returns, stale, whatever you want to call it, on a lot of those speciality items can run 40%,
which is not good. One of the things that one of the major retailers has done, they went and utilised the frozen
department, so now they’re buying frozen speciality items, and they buy it, again, at a lot better margin but
they have to stock it. Let’s say they wanted a speciality brioche bun, they buy a frozen, it’s a freeze-and-thaw
product, now all they have to do is thaw it and put it on the shelf. The challenge with that model is then the
typical bread guy is in there five days a week, if not six, and their employees have 20 other tasks they have to
do every day, so it all depends on where that falls on the priority list. They’ve all got their ups and downs,
there’s no perfect model.
Private and confidential 6
NH: Are you saying the supplier of private label for this retailer is the one bringing staff in to stock the
retailer’s shelves?
ER: Yes, it’s the Bimbos, the Flowers, almost every one of these companies. I don’t think Campbell’s does any
private label, so that’s the Pepperidge Farm. I can’t make that a guarantee but in the Midwest I’ve never
known them to do it in my 20-some years. What they do is they sell it to a different department. In almost all
of them, you have a category that’s fresh DSD, and typically the frozen goes through the bakery/deli, it’s a total
different buyer. There’s your little conflict too, the fresh doesn’t want to give up their main total sales, but you
can buy it over here at much more margin, it’s just the business model is a little challenging, but it comes in
under the private label, yes, sir.
[00:25:35]
Q: You mentioned the perks of doing private label are not what they used to be. Why would a company want
to engage in private label contracts with retailers, given the cost-benefit analysis is not there? Is it just the two
biggest players who are able to service these needs?
ER: I believe all of them, all those top six, seven, eight, nine, it’s different with each account, each bricks-and-
mortar they’re dealing with, but it’s definitely changed over the last 10 years. It doesn’t matter what the bricks-
and-mortar is as far as what you get. Let’s say 10 years ago, you’d become their private label supplier and that
would get you an end cap in every store, and on that end cap, so that’s at the end of the bread aisle, it would be
three-sided, so the left, right, and then the front. Maybe you would get half of that for premium product and
the other half for a private label, and then plus what’s on the bread rack. You got something extra for being
that private label supplier. Then maybe you would get X amount of ads free a year for being their private label,
but they would also want you to then promote their private label at a reduced cost. It’s really a catch-22,
private label has always been there as long as I’ve been in the business. It’s a draw item, that X amount of
customer base wants, is that value-driven white bread. The mum with five kids, one income, it’s always been
there and it’s never going to go away. There are still those people that have that four kids, one income and
they’re going to buy the private label white, the private label hamburger buns, whatever. You used to get perks
with it, and now it just seems like it’s almost non-existent. Again, when you’re the two largest suppliers,
they’re the ones that typically have the most shelf space in a store. Unless there’s a very strong regional brand,
they’re the one that the buyer is going to push back on. “We want it. We want you to be the guy.” That’s a hard
thing to tell them no.
[00:28:28]
Q: How are the market share dynamics playing out between foodservice and retail? Was the industry 80%
retail, 20% foodservice to begin with and then foodservice made this industry 90% retail, 10% foodservice?
What do you think about the market share of fresh and frozen bakery across the multiple channels available?
ER: I don’t know the actual numbers. What I know is what they’re predicting right now, that North American
frozen bakery products in 2019 were USD 9m. The analysts are saying that it’s going to grow at 5.2%, so it’ll
grow to about USD 13m by 2026. What I’ve seen was bread sales were flat, as I said earlier, and the frozen, aka
foodservice, was growing probably 15%-plus but it’s on a smaller number. You know what I mean? It’s not like
it took 15% of the fresh but it did nothing but get bigger and bigger and bigger from probably 2016 on. When
you’re talking having a 5% increase on frozen for the next three or four years, that’s a pretty solid number.
When you’re talking on that total category, that’s a big number. More and more people are going to it as it gets
tougher every day. To have employees, the cost of distribution, even if it’s a semi-truck that’s just going from
your facility to a warehouse, everything’s going up, from the tractor, the trailer, the ingredients, it’s going up.
The other thing, I’m going to segue this in here right now with the production type. All these small items, so
that out of that 80% that’s not generating, yes, you’ve got 20% that generates 80% of your volume, that bottom
20%, why they’re temporary discontinuing them, every time you switch a line over to run one type of bread to
Private and confidential 7
the next type, it’s over an hour’s switchover conversion. Not every bread line just runs the same. The pan size
is different, the way they grab it, the way they put it in the bags, the way they put it into trays, it’s just a
conversion, a switchover. That’s another reason why a lot of these, I think the consumers are going to see even
more of their favourite niche item go away and the only way a supplier can do that is if they can do it frozen
because you can bake frozen differently. It can be baked whenever because you’re freezing it. You’re flash-
freezing it, it’s going into a box, it’s not getting shipped till it’s a whole big semi. Fresh has to go every day. You
run hundreds of semi-runs. Let’s just say a Midwestern company, any company, has 500 routes, it’s not all
being made at one manufacturing facility, typically two, three, so they’re running all these loads to all these
distribution centres. It’s just very costly.
[00:32:34]
Q: Which of the issues around ingredient sourcing and labour do you think is most pressing?
ER: Labour. Labour production issues, meaning they can’t get people to work. I talk to people every day,
doesn’t matter what company, you see them trying to utilise third-party hiring, sign-on bonuses. It’s labour.
Today’s people, some of these bread companies, a lot of them, they pay really good money. It’s non-skilled
labour but there are a lot of challenges to it, getting up at 02:00, 03:00, you never, is a big word, get two days
off in a row. You work Monday, Tuesday, Thursday, Friday, Saturday. Most companies do what they call
conditioning pull-ups, you go out on a Wednesday and Sunday, condition the stores, and that’s usually a
reverse situation. If nobody volunteers to do it, then they start at the bottom and you’re forced to do it, so the
new people are working six days a week, you work all holidays, so there are not a lot of people jumping in line
saying, “Oh yes, that sounds like me.”
[00:34:21]
Q: Are the largest players investing in automation capabilities to make their jobs less dreadful to go into?
ER: No, it doesn’t matter whether you’re big or not. Everybody’s tried. I think what the pandemic has done
has opened it up, I know there are some retailers, to where it used to be, and then not only did I tell you about
the not so good, prior to pandemic you used to have to service these stores between 05:00 and 12:00, or 06:00
and 13:00, and you’ve got everybody and their brother out there trying to do it, not just the bread guys. You’ve
got the beer guys, the pop guys, the chip guys, the cake guys. You’ve got people standing in line just to get their
product checked in. The pandemic, I know in some areas, because they didn’t want people in there delivering
while people were shopping, so they opened it up to 00:00 to 08:00. Again, it’s not flattering, who wants to
now get up at 22:00? You’ve been getting up at 14:30 for a long time and now you’ve got to go to bed even
earlier to get up at 22:00 or 23:00 and start work.
There’s really nothing in this business model that’s going to change that delivery method yet. I think that the
reality is this. 63% of brick-and-mortar business is done between Friday at 15:00 and Sunday at 18:00, so that
means 37% is done between Monday and Friday at 14:00, but they still, the people that are operations at store
level want it to look like it’s brand new when you walk in every day, even though you might not turn the units
that you need to turn. The only time it’s been official is when they get that, “Hey, we got a snowstorm,” or
there’s a hurricane, to where your shelves are blown out. If somebody can ever figure that out, they’ll be an
industry changer.
[00:36:48]
Q: What are the pricing challenges? How successfully are players passing on price increases to consumers? Do
a lot of retailers still want this to be a very promotional-driven category?
Private and confidential 8
ER: I know that the majority of wholesalers in the last six months have had a cost increase. I know they’re
forecasting the ingredients are going up again, everything’s going up. My experience is, all prior buying offices,
when you wanted a cost increase, you had to validate it, meaning you had to show why your costs were up and
what your costs were up and what percentage they were up, to be able to say, “This is why we can justify we
need this cost increase and here’s why.” Typically, if you had that, because right now everybody has it, again
people have already seen one cost of goods increase, they’re forecasting within the next 6-8 months consumers
are going to see another one. It’s out there everywhere. It just is, from the fuel, the ingredients, everything,
health insurance. Trying to get people to come to work means you’ve got to pay them more. No, they have to
accept it really, because it’s not just fresh-baked goods. Look at the price of meat, everything is just crazy. Is
this short termed? I have seen it once in the last, I think, 15 years. I think that was the last financial challenge
we had. Was that 2008, ’11, something like that?
NH: Yes, 2008-09.
ER: There were a couple of cost increases and then things, within 36 months, went back the other way. You
had to give back because they were coming at us with the same justifications. Numbers don’t lie, so they have
analysts, all these big bricks-and-mortars have people looking at everything, and when they’re seeing
everything going down, they say, “Woah.” They document, “Hey, it went up. Our cost increase was 1.8-2.4%.”
They’re watching everything just as well as you are, saying, “Woah, woah, woah. Now it’s back. You owe us.”
I’ve seen that once in 30 years, so no. Bricks-and-mortar, they know you’re not just coming out there with a
fake dog and pony show. Again, they require you show them documentation because they have to show that to
their, and the analysts, because it’s all reviewed. “Yes, this is justifiable.” They have to determine whether they
want to eat some of it so they can still be the best price in town or do they want to pass it all on to the
consumers, because that works both ways too. We’ve seen it where you give them a cost increase, they might
go higher than your suggested retail or they might go lower and eat some of the margins to stay very
competitive with your core item. Nobody wants to be the lowest, doesn’t matter what your banner is. If you’re
in the same region, they might say, “We’ll eat some of that so we can at least stay very competitive.”
[00:41:04]
Q: Are the large retailers or the regional retailers more likely to pass on price increases vs take a margin hit?
ER: The big retailers. They don’t want to give a reason for it to go back to the regional, the hometown.
[00:41:31]
Q: Could you talk about smaller bakeries being able to service major retailers? There has been a big trend
towards localisation. Could you talk about the success of smaller bakeries in gaining shelf space in the big
retailers, even with the e-commerce dynamics?
ER: Let me back up just a little. All these regional players are very well-respected in the big box stores. It
doesn’t matter whether it’s an H&S Bakery on the East Coast, if it’s Lewis Bakeries in the Midwest, if it’s Aunt
Millie’s in the Midwest, these retailers are smart about market share. If, what is the name of that, an H&S
Bakery has a 50% market share in a market and let’s just say Flowers only has 18% and Sara Lee only has 12%,
so that’s 80%, and then the other little itty-bitty bakers, they do space allocation based off sales. There are
definitely situations where the small player regionally has more space than both Flowers and Bimbo. I guess I
wanted to make sure you were clear that just because you’re a small baker doesn’t mean that the big guys don’t
give you what you deserve, because they do, they just do.
NH: Would you say that if you’re a smaller player and you have a small presence in that particular retailer,
you’re going to be less likely to take the margin hit for your product?
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ER: Correct. The one thing about that, too, is when you’re a small bakery and you’ve been around and people
are loyal to your brand, it really doesn’t matter. It’s no different to you or I, favourite barbecue sauce, I don’t
want private label, I want my barbecue sauce. I don’t care it costs me USD 0.50 more. Whether it’s bread,
barbecue sauce, your mayonnaise, your beer, whatever, your peanut butter, it’s what you want and I guess that
takes you back to where you got that dollar segmentation between the private label supplier and your premium
and really what you want. That’s all based on disposable income and can you do it?
Back to the small retailers though, sometimes they do give, because they know being a local chain, let’s say,
I’m familiar with one, Indiana, Ohio, 12 stores, 12-15 stores, that they like to support the small regional
companies. Usually, that’s relationship from their buying office/owners to the history with the account or the
wholesaler. You can get a lot of turns, like you said, more and more people are, I think, going back to that
trend, to the ones, the smaller retailers that have made it. You get a lot of people, as the baby boomers get
older, don’t want to go on the Easter egg hunt in a big brick-and-mortar store because there are a lot of steps
to be taken. Doesn’t matter what banner it is, there are lot of steps vs the smaller footprinted brick-and-mortar
store. There’s not as much walk-in, there’s more of a personal connection, not as many people. It’s not a
superstore, as you would say, where it’s got everything. They just want to go in there and get their groceries.
[00:46:31]
Q: What innovation is happening? Which categories are growing that provide opportunity for bakeries to gain
market share?
ER: The hottest thing going right now is keto-friendly, low carb. That is the number one, I know. I just read in
a publication this week where one Midwest company just was awarded the best low-carb bread, got a couple of
awards, and this is a 16-ounce loaf that tastes good and I think it’s retailing for USD 4.59. If you’ve got
innovation, maybe most of these companies, I don’t know at what level they stop at but they’re no different
than anybody else, they have bakeries with laboratories. They start making it and then they start doing test
tasting inside. The low carb, the keto-friendly, the other things that have focused in the last 2-3 years, you see
everybody out there with them, private label and premium, flavoured pretzel, and buns, that’s a big one,
brioche. I’ve seen that anywhere from the brioche bun, brioche bread, brioche English muffin. I think the
newest one that hit, which you don’t think because this used to be big in the ’80s, it’s like bell-bottom jeans,
they’re coming back, is butter, butter buns, a buttery roll, butter bread, just more butter in it. I don’t know how
they make it, I’ve been in production, I’ve been in the bakeries many a time and they make it yellower. Maybe
they’re putting more butter in it, something that makes it taste that way. Those are the biggest things I see in
bread.
Of course, then there’s the super premium. The whole organic, non-GMO, that’s still growing. The organic and
non-GMO, it’s not double-digit growth but it’s growing. That segment, I think every day is maintaining it. As
everybody is really more health-conscious, I think you see more and more people in the stores picking up a
package, and it doesn’t matter if it’s bread, peanut butter, whatever, they’re looking at what’s in it, and that’s
just what we as a country have done, everybody’s promoting healthy. That’s all you see, whether it’s they’re
promoting healthy or saying what’s not good, it’s out there in the news, publications, what can you do, what’s
more healthy. That’s my take on the core categories. There’s no healthy with cake and doughnuts, but snacks
are a growing thing too, though. When I say cakes and doughnuts because that is one of the fastest segments,
now that doesn’t fall under the bread but when you see what the snack bars are doing, there’s a ton of them out
there. I know myself, I eat them more. I do a lot of travelling, I like my cheese and crackers or my peanut
butter crackers but my wife is always throwing in, there are these, they kind of taste good, healthy little snack
bars, whether they’re oatmeal and honey, it’s better than eating a candy bar or a Twinkie. When you eat snack
bars, it’s better than eating a snack cake or a candy bar.
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[00:51:06]
Q: How are the clean labelling and better ingredient trends in snacking translating into how bakeries source
raw materials? Is there a trend of less or simpler ingredients? Is that putting strain on the supply chain?
ER: I truly believe that that better-for-you segment is growing. Less preservatives, less additives, lesser trans
fats, rich in protein. They’re looking for essential micronutrients, so less is more when you look at that label.
You want the better-for-you stuff, and they’re finding out just with that carb-friendly bread. USD 4.59 a loaf
and it’s just unbelievable what it’s doing. Almost every store I go in, and I’m probably still, today, I’m probably
in 20 grocery stores a week minimum, and it’s not only on the shelf, they’re giving it incremental displays.
We’ve seen the diet thing, I have in the last 30 years, come and go, the Atkins diet, all the other diets, this carb
thing and the keto-friendly, not only is it playing both of those decks but it’s a healthy, it’s a better-for-you
choice. The key thing is if it tastes decent. I’ve tasted some over the years, it was like taking a bite of cardboard.
It’s really doing it, so the whole better for you, clean label, less ingredients. The challenge is the ingredients
they’re putting in there cost more. People don’t have a problem, when they want something and they’re, the
people that I see that are focused on this keto-friendly, zero-carbs, cost isn’t an issue. It’s no different than I
just told a gentleman yesterday in a store, USD 2 a pound for an apple or I can go get a candy bar, or the cheap
frozen doughnuts that fold in the bakery, where you get six of those little doughnuts, it’s USD 1, we don’t bat
an eye at that but healthy does cost.
[00:53:48]
Q: What are you monitoring as we reach year-end 2021? What are the most important topics that you think
investors commonly overlook in bakery, fresh or frozen?
ER: I think right now, if I was in that seat, you’ve really got to have a big decision tree on what you want to get
into vs fresh or frozen. Fresh has always been the denominator. I think the way the business models are
looking right now and the landscape, frozen is a much cheaper way to go to market. You don’t have to have
500 bread trucks. You don’t have to have, your employees are just not as many. You have to be able to produce
it, freeze it, package it and then get it on a semi and get it off of a semi. You can offer any of the bricks-and-
mortars, and this is where a lot of start-up companies are going, a frozen product, a quality frozen product at a
great cost and them a great margin, and yet you can make some money because you don’t have all that
overhead of having all those delivery people. That’s what I see. If they said, “Here’s your pile of money, go buy
one. Which would you do?” I would go frozen all day long. It’s just a cheaper one-way model.
There’s a little risk there because can somebody come in, and this happens a lot, somebody can do a start-up
and say, “I can operate a little bit less.” I’ve seen companies that come in to big bricks-and-mortar and they’ll
have the business for two years, and then somebody else comes in and underbids them. There’s no guarantee
that you’re going to keep that business. That’s my biggest thing, but it is the cheapest way to go to market,
especially if you have the account team that has relationships because a lot of that is still there with the bigger
bricks-and-mortars, if you have that relationship to at least get it in. Getting it in is the hardest thing. Once
you get it in, if your product turns, because they want to know how many units you’re turning per day, what’s
your cents per unit, what’s that margin, so their financial people can forecast it as well, saying, “This is a good
deal and it’s turning.” That’s all they care about is turns.
[00:56:46]
NH: Let me close by saying thank you, Eric, for your input. Clients, if you would like to speak to Eric 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.
ER: Okay.
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Transcription ends at 00:57:02 of the recorded material
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