US Fresh & Frozen Bakery Sector – Competitive

Dynamics & Q2 2021 Update – 27 April 2021

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Don Hornish (DH)

Specialist:

VP at Bimbo Bakeries USA Inc

Title:

Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst

Agenda:

1. Innovation across sweet-baked-foods and bread

2. Private label share gains

3. Competitive overview – Bimbo Bakeries (BMV: BIMBOA), Flowers Foods (NYSE: FLO) and Hostess

Brands (NASDAQ: TWNK)

4. Sector outlook as consumer mobility increases

Contents

Q: Could you segment and size the US fresh and frozen bakery market?

Q: Who are the market’s main players? What market shares do they hold?

Q: Why do you think the foodservice segment is so fragmented? What do key customers want from bakery

providers?

Q: What 2-3 pre-coronavirus trends were you monitoring in the US fresh and frozen bakery market? What

were the key demand drivers?

Q: How would you describe the operating dynamics between fresh and frozen? Is fresh more likely to service

foodservice, given it is fast-paced, or is there a mixture of both?

Q: What were the preferences of large chain restaurants, given your foodservice experience? How do Bimbo

or Flowers Foods service these businesses in a sustainable way that keeps them coming back?

Q: You mentioned a health and wellness trend and the need to have a strong product and a great story when

servicing foodservice clients. Would they be likely to take a risk on a new entrant if they had the right

persona?

Q: What factors do you consider when assessing quality on a large scale?

Q: Where does US fresh and frozen bakery stand when it comes to offering new health and wellness

products? There have been rapid innovations with Beyond Meat and Impossible in plant-based products and

alternative meats, in addition to plant-based dairy alternatives and snacks. How does the bakery sector make

its products healthier? How has that evolved?

Q: Are there stricter regulations or tighter controls on manufacturing products that are labelled as

containing potential allergens? Could you elaborate on the implications?

Q: Could you clarify the ambiguity around clean labelling and what is considered a clean ingredient? How

would a large firm such as Bimbo or Flowers assess what they think the consumer considers clean? How are

products marketed as clean?

Q: How have firms approached or tackled clean labelling and health and wellness trends throughout your

time at companies such as Kraft and Bimbo?

Q: Who would you say is leading fresh and frozen bakery innovation?

Q: What environmental risks or ESG trends do you notice in US fresh and frozen bakery?

Q: What parts of the supply chain do you think are most important for ESG?

Q: Which players would you say are taking the packaging issue seriously? Company websites have

sustainability reports and talk about being much more conscious, but is money actually being allocated to

innovate? Do they just market their products as clean and leave the innovation to someone else?

Q: What cost inflation did you notice in the years prior to coronavirus and how has that evolved amid the

pandemic? Was there any tightness in the labour market or an increase in commodity prices?

Q: Coronavirus caused a distribution shift where players dropped foodservice and turned to groceries. Could

you outline the unexpected costs that may have arisen with that sudden shift in capacity and distribution? 10

Q: How does a CPG approach distributing into a foodservice or grocery channel? How important is

branding? As you mentioned, it doesn’t really matter in foodservice because it’s sold as someone else’s

product, but what about on the grocery side and with private label?

Q: Is it critical for big companies such as Flowers Foods to maintain a presence in foodservice and retail, or

could they successfully focus on one subset?

Q: Could you elaborate on the DSD [direct store distribution] model and how brands or companies

implement distribution?

Q: Why do you think some large players have not adopted the DSD model? What are some of the cost

preservation benefits?

Q: Where do you expect market share to go? Could smaller players, independent and regional bakeries take

share, or might the dominant players continue to expand their influence?

Q: What is your outlook on category growth for US frozen and fresh bakery?

Q: How should we assess the potential of sweet baked goods and the indulgence trend? We discussed health

and wellness, but smaller players such as Hostess have experienced significant gains due to stay-at-home

restrictions and indulgence. Is there opportunity for more innovation there?

Q: What is your six-month outlook for the US fresh and frozen bakery industry?

Q: Do you think anything about this industry is commonly overlooked?

Q: What supply chain and efficiency improvements have you noticed across bakery companies? Are large

companies such as Flowers or Bimbo sacrificing quality for efficiency?

US Fresh & Frozen Bakery Sector – Competitive

Dynamics & Q2 2021 Update

Transcription begins at 00:00:00 of the recorded material

NH: Welcome to Third Bridge Forum’s Interview entitled US Fresh & Frozen Bakery Sector – Competitive

Dynamics & Q2 2021 Update. I am Nyree Hinton, and I will be facilitating today’s Interview with Mr Don

Hornish, VP at Bimbo Bakeries US Inc.

Don, 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 information or any

other information which is confidential during this Interview.

DH: I agree.

NH: Could you start with a brief overview of your background?

DH: I’ve been in the baking business, here, most recently with a group called Bimbo, and BBU leading the

fresh and frozen foodservice business and cash and carry for the last three-plus years. Prior to that role, I was

the Vice President and General Manager at Kraft Heinz Foodservice, about a USD 3.5bn business, for North

America. Prior to that role, I was with Basic American Foods early on in my career in various different roles

and, again, centred around foodservice and broad-line distribution business.

[00:01:26]

Q: Could you segment and size the US fresh and frozen bakery market?

DH: On the retail side of the business, it’s about USD 17bn between fresh and frozen, which includes some

sweet baked goods business in there as well. On the foodservice side of the business, about USD 14.8bn.

[00:01:57]

Q: Who are the market’s main players? What market shares do they hold?

DH: Some of the main players, obviously, are Bimbo Bakeries, Flowers, Aryzta, Rich’s, US Bakery and then

there are a whole bunch of smaller regional players that are out there as well. Relevant size depending on what

segment or category. On the retail side, obviously, us and Flowers, BBU and Flowers, are two of the biggest for

the mainstream bread aisle. Then, when you break off into the foodservice side of the business, still, Flowers,

Aryzta, BBU, Rich’s, but after you get past the first five or six, there are probably 30 or 40 other players that

make up less than 1% each and under the local bakeries.

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[00:02:56]

Q: Why do you think the foodservice segment is so fragmented? What do key customers want from bakery

providers?

DH: I think a couple of things when you’re looking at fresh bakery. You have suppliers that are close to the

customer base, and on the foodservice side, obviously when you’re baking every day for next day delivery, the

further you get away, more costs are involved. People also like local and sustainable, so you have the smaller

bakery operators that are out there that can produce and supply the local market, and they’re able to stay at

the buy-local, sustain-local but also that maybe do some other smaller, complex runs that the big commercial

bakeries can’t or won’t take on.

[00:03:55]

Q: What 2-3 pre-coronavirus trends were you monitoring in the US fresh and frozen bakery market? What

were the key demand drivers?

DH: Pre-COVID, I think one of the biggest trends that has been happening for a while out there is brioche and

brioche style. You look at emergents out there, whether it’s with a St Pierre or the King’s Hawaiian, the

(inaudible 04.35) and other categories that King’s Hawaiian outside of just the dinner roll which they came to

market with. I think sweet baked goods, again, it’s indulgent, there’s a nice price point on it, has continued to

rise. Health and wellness is always something that’s out there, but how do you bring something that, in health

and wellness that’s new, innovative and that hits the palette and what people want to try? When people talk

about innovation, you have so much light wheat bread, and for me, and for what you see out there in the

competitive set, it’s how do I bring innovation that someone wants to try, that tastes great, and can be good for

you as well? If you can tie that to some type of social campaign as well, or social wellness, that hits another

chord. Those are really some key drivers or categories inside of the drivers that we saw prior to COVID.

NH: How have those trends evolved since March 2020?

DH: Obviously, foodservice side of the business, it took a pretty big hit, just with states closing down,

restaurants closing down, bars closing down, etc. A lot of folks were either eating at home and going to the

mainstream brick-and-mortar or e-commerce, and they were ordering, basically, at the beginning of March

there and April, whatever they could get a hold of, because we were forced to change our eating habits as

consumers. The real push was how I do I get product to market as fast as possible. It didn’t just happen with

bakery. I think we’re all familiar with what happened with, started in toilet paper, and then it moved to, could

we get bread on the aisles, is there enough bottled water. I think the latest thing you’ve seen in the news too is

the shift from bulk to individually packaged, individually wrapped, and you’re seeing the Heinz ketchup

package shortage. It moved to, “How do I get things to market faster, and how do I shift my manufacturing

footprint to take on all that consumer demand,” that was out in traditional foodservice. That went to back, to

retail, and the share of that dollar.

[00:07:08]

Q: How would you describe the operating dynamics between fresh and frozen? Is fresh more likely to service

foodservice, given it is fast-paced, or is there a mixture of both?

DH: I think when you look at it, you have fresh and frozen options, it’s about being a bakery solution provider,

but it is also what can your operation handle. Foodservice, to take on the amount of cube mainly that would

come in in frozen bread, they don’t normally have the freezer space to take that on. They can also get fresh

DSD delivery, which is direct sales, on a daily basis, where through broad line distribution, they might get one

or two deliveries a week. In the traditional brick and mortar where you’re coming out, you’re facing the shelves

with, in retail, with the fresh bread. There are many instances though where the product is made frozen,

Private and confidential 5

slacked in route or at store, and then put on shelves. I think when you talk about what products they are, how

many turns they’re getting and then the distance from the bakery, depending on the day of the shelf life

needed, all those dynamics come into play and frozen bakery has come a long, long way to offering once it’s

slacked out being as fresh or fresher than a fresh-baked product and the consistency that you see there. It’s

just a dynamic depending on the operational retailer and their choice.

NH: Which category offers the most opportunity for retailers or restaurants to gain the highest margin and

longest shelf life? Obviously, you don’t want something that’s going to sit on the shelf forever, but do you

identify the most opportunity for innovation and sales growth in fresh or frozen?

DH: I think there’s an innovation to be had in both. If you were to look at what’s happening out there, pre-

COVID, many of the trends that would start or come over, just look at the types of restaurants that have

opened here in the United States, and North America in general, and the flavour trends that are happening

and then that migrates onto retail shelf, I think what you see today is people want to try something other than

just the norm. Instead of making full loaves, to where people have to buy 24-26 slices, can we offer innovation

or other things in different pack sizes? The fresh and frozen component again comes down to ability to get it,

the number of turns per day or per week in a store. How many of the minimum of those or items that you have

to bake in a bakery, to get it out there, to make it efficient, and then how do you get it to the market effectively.

The better innovation, or innovation that’s not duplicatable or cutting-edge innovation is going to drive more

price point at the end point and more profit for the operator.

[00:10:45]

Q: What were the preferences of large chain restaurants, given your foodservice experience? How do Bimbo or

Flowers Foods service these businesses in a sustainable way that keeps them coming back?

DH: Ultimately, whenever you talk about products and you’re talking about large operators or chains, in many

cases, it’s being able to provide consistency, whether you’re eating in one of those restaurants in Seattle,

Washington, or Miami, Florida. Having a formula that’s replicable and duplicatable across your bakeries,

whether it’s fresh or frozen, providing that same user experience is critical. That’s really what it boils down to

and you have to have really tight controls to be able to accomplish that.

NH: What about the presence of local bakeries when it comes to controls and consistency? Do you expect

bakeries to invest more in their manufacturing capacity to service large foodservice customers?

DH: I think when you look at the local folks, they have to make a choice. What it all comes down to is capacity

and what do you have the capacity to do. If they have the capacity and want to take it on vs going out and

doing something that may be more innovative but lower volume runs but has a higher price point and they’re

looking for a capacity play, they may opt in to try to take some of that business on, but they’re going to be held

to the same controls and quality standards that any of the other manufacturers are. It goes back to my point of

I don’t care if it’s a local bakery or a big commercial bakery, they have to be able to have the same user

experience wherever they are for that chain restaurant.

[00:13:00]

Q: You mentioned a health and wellness trend and the need to have a strong product and a great story when

servicing foodservice clients. Would they be likely to take a risk on a new entrant if they had the right persona?

DH: I think it’s with anything. Are you a known entity in the marketplace? Do you have quality, consistency,

that other customers can recommend for you? They have a brand image as well, so many of the bakeries that

are supplying these large chains, no one actually, in many cases, knows who is supplying them, because it’s the

brand of that customer that is out there first and foremost. Again, it comes down to do you have a working

relationship? Is there trust there? Can you pull the quality off that they’re used to seeing in store and in

Private and confidential 6

market? If you can, you could earn yourself a spot. I think there are some local bakeries where it may be tough

to get to, that may have a better chance than a market or where there’s density of a bunch of different bakeries

where they have additional choice.

[00:14:29]

Q: What factors do you consider when assessing quality on a large scale?

DH: When you’re looking at quality at a large scale, even a small scale, if it’s the number of seeds, let’s call it,

or number of toppings that happen to be on a bun roll, a bakery item, the filling in the bakery item, a croissant,

is it a laminate dough? It depends on the item, but the quality is, if there is a gold standard for the customer or

for our products, how do we ensure that every single product comes out at that gold standard? There are

obviously tolerances, and the closer or tighter you can get your get your tolerances, the better off you’ll be, but

you have to understand that what is the spec, and then you’re achieving that spec on a consistent basis.

[00:15:33]

Q: Where does US fresh and frozen bakery stand when it comes to offering new health and wellness products?

There have been rapid innovations with Beyond Meat and Impossible in plant-based products and alternative

meats, in addition to plant-based dairy alternatives and snacks. How does the bakery sector make its products

healthier? How has that evolved?

DH: I think when you look at the products that are out there today and where it’s going, you’ve started to see,

it started with white bread and then people went to wheat bread. You move to the three grains, then seven

grains, now you see 21-grain bread, oat nuts. For me, the innovation in the health piece comes down to what is

actually going in. How few ingredients can you get into the bread, clean ingredients? Again, everyone’s

definition of clean could differ a little bit, but how do you get into the bread while still making it something

that people will eat, quite honestly? When you’re looking for either all-natural or clean-label ingredients while

still putting a product out there that people eat and can afford, those are the key components that you’ll see. I

think, over the last three, four, five years, everyone’s, we’ll call it a no, no, no list of what you can’t put in, has

started to go across the organisations. Now, it’s about can we get some different flavours or use enzymes or

other things that are clean or perceived as clean, without bringing those contaminants into a bakery, to

increase complexity. I’ll use an example. I think the most recent allergen that was just introduced is a sesame

seed. A sesame seed is pretty prevalent in not just baking but throughout the industry. If that gets labelled as a

no, no, no, that could create additional complexities or challenges for not just the baking industry but other

industries including just kitchens around the world or in North America. I think it comes down to how do you

put something out there that people want, that people are familiar with, and that there’s enough volume or

demand for it that you can produce it at a price point that people that will accept it.

[00:18:58]

Q: Are there stricter regulations or tighter controls on manufacturing products that are labelled as containing

potential allergens? Could you elaborate on the implications?

DH: It depends on if it’s a national standard or if it’s just a customer standard as an allergen. That comes into

play. If it’s a customer allergen and it comes down to how long does the line need to be taken down for either

cleaning, certification… The biggest thing, years ago, used to be organics, and there are very stringent ways

that you can certify it organic. There are ways around it through labelling and other things, “Made with

organic ingredients,” vs saying that it’s a fully certified organic product. It depends on how you want to label it,

what the labelling requirements are, or what your customer’s requirements are. If it’s a, let’s call it, national

banned ingredient, or something you want to bring into your plants, how many products could go through or

Private and confidential 7

touch that? Do you have to label that on all of your products? It comes down to complexity. What do you want

to be, what’s the volume, what’s the opportunity and how much complexity and risk does it put on the

organisation?

[00:20:35]

Q: Could you clarify the ambiguity around clean labelling and what is considered a clean ingredient? How

would a large firm such as Bimbo or Flowers assess what they think the consumer considers clean? How are

products marketed as clean?

DH: We’ve got a lot of really smart people, quite honestly, that sit and study what’s going into our products or

what’s in our bakeries or what ingredients are at our bakeries or even used in our bakeries, but again, it comes

down to what is the specific labelling or the labelling process, and it’s just an easy plant (inaudible 21.28),

whether it’s clean ingredients or it’s 100% certified clean and organic. Each company can take on their own

risk. I’m not here to play on that, but it’s what is your company going to take on? What do you feel comfortable

putting on the label vs your company’s label of clean vs the band label of clean or non-clean ingredients. That’s

really what it comes down to. It’s tough to break that one down because there are things that probably come

on and off that list on a weekly and monthly basis if you were to find it and look and every single thing that

happens in the foodservice business or even in the retail business.

[00:22:23]

Q: How have firms approached or tackled clean labelling and health and wellness trends throughout your time

at companies such as Kraft and Bimbo?

DH: Sugar was a big one, still is a big one. I’ll go back to K-12, and the guidelines are what you can or can’t

supply, K-12, that’s for the schools K through 12, and the amount of sodium or sugar even allowed in those

products, made with whole wheat or whole white grain. All those things come into play, and do you want to

put your organisation through, (1) sourcing those types of ingredients, (2) making sure that there’s enough

volume to put that through your operation, I don’t care whether you’re making ketchup, mustard, barbecue

sauce or bread, and then getting it out there vs using a whole wheat? At the end of the day, my viewpoint is we

want to make something that’s clean, healthy, meets the guideline and standards so that we never have to

worry about it, and something that’s nutritious in K-12 that the kids will eat. If we can hit those metrics and do

it in the right way, then I feel that we’re doing the right things for the company, the business and the

consumer. Sometimes there’ll be other things that are put on the business that just don’t make sense for us

from a commercial perspective, so that’s why, sometimes, you may pass.

[00:24:19]

Q: Who would you say is leading fresh and frozen bakery innovation?

DH: I think when you look at it, BBU has some products. Flowers definitely has some products. Rich’s has

some products. I’ll go back to King’s Hawaiian, they started with that dinner roll and they’re branching out

into other products now. They have a name and a following. If you go into the ISB side of the business as well,

you look at St Pierre, what they started with. They’ve now gone from a hamburger bun, the brioche loaf, a

filled brioche loaf, a brioche hot dog bun, and they’re capitalising on that piece as well. There are a bunch of

others that are out there, that may have something, but the key players, if you’re not innovating today, you’ll

lose share. That’s just a fact.

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[00:25:28]

Q: What environmental risks or ESG trends do you notice in US fresh and frozen bakery?

DH: I think some of the biggest things that are out there today when you talk about sustainability is what is

each respective company doing around sustainability, whether it’s clean water, wastewater, energy, renewable

energy. Each company has got their own missions there. I could tell you, more and more customers today are

looking at the sustainability piece for who they want to partner with and where it matches up with their own

sustainability or guidelines or recommendations because it’s an everyday topic where, three, five, 10 years ago,

it was mentioned but never really a guiding factor for who they may or may not partner with. Today, it’s

getting to be table stakes.

[00:26:49]

Q: What parts of the supply chain do you think are most important for ESG?

DH: I think one of the biggest ones when you look at sustainability and what have you is you go down

anywhere and it’s, is it biodegradable? How much plastic is being used? Is it biodegradable plastics? Is it safe?

Is there a way to eliminate any of the packaging material for how it gets to the shelf or gets to the consumer?

Those are all things that tie in. I think now, some of the social campaigns that brands are tying themselves to

to appeal to the folks out there or the giving back campaigns can also help drive some of that awareness.

Packaging is a huge, huge piece of any CPG or foodservice company and how products are getting to market.

[00:28:08]

Q: Which players would you say are taking the packaging issue seriously? Company websites have

sustainability reports and talk about being much more conscious, but is money actually being allocated to

innovate? Do they just market their products as clean and leave the innovation to someone else?

DH: I would say that if you dig through the report, and look at the timelines when they expect to be

compliant. If it’s centred around renewable energy or biodegradable packaging, there are many programmes

out there that you can ask one or two questions or dig for whether it’s partnering with companies like

TerraCycle and others to use the, we’ll call it, waste or the bag, the poly and other byproducts, to use them in

another life other than just going to a landfill. Whether it’s renewable energy through wind, solar, etc, for your

footprint on the grid, and when are the dates to be either fully compliant or to be sustainable? When are those

dates? Are they in 2025 or are they in 2050? That’ll tell you how serious people are.

[00:29:47]

Q: What cost inflation did you notice in the years prior to coronavirus and how has that evolved amid the

pandemic? Was there any tightness in the labour market or an increase in commodity prices?

DH: I think when you talk about inflation, obviously, there was a big expense for safety protocols and other

things, obviously with COVID to keep large-scale manufacturing and distribution centres, etc, open and safety

protocols and other things, whether it was safety goggles, gear, masks, procedures, thermal scanners, etc.

Those are all costs on the business. Then, you have, obviously, now, with the outlooks that are coming forward

now and for 2022, they’re talking about inflation. Inflation has been low to moderate over the last few years.

That is predicted not to be the case going forward, and that’s my view. We’ll get more of that information as

things come about here. Inflation on top of the COVID expense will start to hit all businesses in a very real

way. We have to be ready for it. There are always low levels of inflation depending on what categories or

commodities or ingredients you’re looking at or where you may or may not be impacted. It’s different levels or

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triggers if you want to say just inflation in general. Even COVID expense to get there, if people want to bucket

that as a piece of inflation. Costs are going up, and they’ll go up more in the next few years, in my view, than

they have in the previous two.

[00:31:52]

Q: Coronavirus caused a distribution shift where players dropped foodservice and turned to groceries. Could

you outline the unexpected costs that may have arisen with that sudden shift in capacity and distribution?

DH: I think it wasn’t so much people dropping foodservice, they were closed. Foodservice was closed, and so

folks were going to brick-and-mortar. They were going to e-commerce, online. I think if you look at the

acceleration of online ordering, online delivery, store pick-up… People, for their own personal choice or maybe

for medical reasons, couldn’t go into a store, so they were moving to the e-commerce or where you pick up,

which changed the dynamic in terms of staffing and other thing in stores. People had to pick the orders. They

had to walk them out, put them in a trunk. They didn’t have those people hired previously, so it changes the

dynamic. They had to move to e-commerce, and how fast could they get their e-commerce platforms up and

shipping of the products maybe not through traditional retail, but you saw, whether it was Amazon or others,

really ramp up their businesses as well, and how could they get the products to the consumer. Again, for me, it

comes down to they had to adapt their systems. Even today, coming through the COVID in foodservice, if you

go to almost any foodservice operator today, you’ll see either their drive-through lines if they have ability, and

the QSR side of the business did extremely well because they were already set up with QSR, but others that

had drive-through did extremely well because people got tired of eating at home, quite honestly, but they had

the ability to service through drive-through.

If you go to many today, if they couldn’t adapt the drive-through, they had pick-up or where you pull up and

somebody takes the order out to them. Even at many grocers today, you have where you pull up and dial, and

if you don’t have a set pick up time, they’ll come out and deliver your order to your car. You’ve even seen that

at folks like Domino’s to where you could drive up and they’ll put the Domino’s pizza right in your trunk. They

don’t even come to your window or anything. Cashless transaction, the ability to pick up, e-commerce side,

when you put your order in and you schedule delivery or schedule a pick-up, all of those things accelerated

extremely, extremely fast with the onset of COVID.

[00:34:44]

Q: How does a CPG approach distributing into a foodservice or grocery channel? How important is branding?

As you mentioned, it doesn’t really matter in foodservice because it’s sold as someone else’s product, but what

about on the grocery side and with private label?

DH: I think when you look at branding, there are either brands that you’re creating through innovation, which

are new brands that take time, but you’re creating it for a reason because you believe you have a path for a

stand-up business or a stand-up product, that will command something that you want the manufacturer of the

CPG or the manufacturer wants ownership of. The private label side of the business, if you’re standing up,

you’re either filling with someone else’s product or spec or you’re helping a partner or customer stand up a

private label offering for themselves. Typically, you have less leverage if it’s not your brand or you don’t own

the brand, to command what, honestly, goes into that product or how to price that product than you do if

you’re a private label. If you’re a private label, you’re usually, like I said, matching a spec and there’s a price

point you have to hit and there could be multiple players, and again, it’s how much can you command. The

other piece of it is how do you want to interact with the consumer. Whether you look at brands that are out

there, I’ll say whether it’s Heinz ketchup or a private label ketchup, what is it that you’re trying to accomplish

and how are you trying to appeal to the consumer/how are you partnering with your, whether it’s CPG or even

a foodservice customer? Are they are a partner to where you may offer not only your branded products but the

ability to produce the private label for them as well, or do you only want to be a branded supplier

manufacturer? If that’s the case, you’re probably never going to engage in the private label side of the business.

Private and confidential 10

[00:37:21]

Q: Is it critical for big companies such as Flowers Foods to maintain a presence in foodservice and retail, or

could they successfully focus on one subset?

DH: You could absolutely. It depends again on what your strategy is and what your business mix is today.

Could you only survive on one side of the business if that’s your strategy? Again, it’ll depend on what your mix

is today. Could you? Yes, you could. What are your footprint and bakery operations set up for? Do you have the

capabilities in all of those operations today vs your competitive set? Like I said at the beginning, the bakery

category and retail, when you look at it, there are a lot fewer retailers than there are foodservice operators. The

path to many of the retailers can be direct in many cases, or through a few of the other wholesalers, where in

foodservice, if you didn’t have a DSD model, you’re going to be tied through broad-line distribution, and how

do you have partnerships there outside of what you did out of those big national accounts or key contract

customers? It’s a different mix, it’s a different customer base, different segment, but again, it depends on your

operating model on which way you’d want to go.

[00:38:53]

Q: Could you elaborate on the DSD [direct store distribution] model and how brands or companies implement

distribution?

DH: Direct store distribution vs going through another third-party distribution, whether that’s a broad line

distributor or wholesaler vs taking your products through your own network on your own route systems.

[00:39:21]

Q: Why do you think some large players have not adopted the DSD model? What are some of the cost

preservation benefits?

DH: Direct store delivery has its benefits where you’re getting fresh product delivered and faced on the shelf

every single day of delivery vs broad-line distribution or outsourced distribution to where it may show up to

the store and then a store employee has to take it out to the shelf and face it on the shelf for retail. In

foodservice, again, it’s showing up fresh, whether it’s due to the fact they don’t have freezer capacity or space,

whether it’s they just have the perception or like the fact that they don’t have to slack the product at all. It’s

fresh. They toast it or plate up the product with a fresh bakery item and can go and they don’t have to keep as

much inventory on hand. There are different dynamics for each. For the perspective, there’s, what works,

again, what works best as the bakery solution to each party because there are different costs that go into all of

it.

[00:40:45]

Q: Where do you expect market share to go? Could smaller players, independent and regional bakeries take

share, or might the dominant players continue to expand their influence?

DH: I think you’ll always see competitors coming in at the small-to-midsize level. You’re seeing consolidation

in the bakery category over the last decade. I think you saw the announcement from the big player in Canada

announcing their intentions going forward. There are small bakery players out there every day that I’ll never

know about, but as far as the big players that are out there today, I think there’ll be continued consolidation,

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personally, in the market over the next 10 years.

[00:41:55]

Q: What is your outlook on category growth for US frozen and fresh bakery?

DH: If folks were to say, “Hey what’s going to happen?” Do I see it outpacing the 2020 levels in retail that we

saw? No, I don’t see it growing there. Obviously, that was a pandemic shift to drive, but I do think that you’ll

continue to see bakery grow, especially with emergence of sweet baked goods and other items in those

categories. It’s our main carrier for many, many proteins. Even plant-based proteins, bakery is still a carrier.

Will the retail side this year eclipse what it did if you just look at the segment, retail vs foodservice vs 2020? I

don’t think retail will eclipse the 2020 number personally. Foodservice is coming back as things open up,

which is great news, and again, it comes down to the dollar share, so how much of the dollar share will even

out in bakery overall. Bakery, as a category, I believe will continue to grow.

[00:43:29]

Q: How should we assess the potential of sweet baked goods and the indulgence trend? We discussed health

and wellness, but smaller players such as Hostess have experienced significant gains due to stay-at-home

restrictions and indulgence. Is there opportunity for more innovation there?

DH: I do. When you look at handheld, portable, indulgent, a quick snack, quite honestly, and this has been

happening for a number of years, we’re moving from 2-3 set meals a day, to four or five, six, snacking

occasions a day if you break it down simply. People want to grab something quickly, get it on the go, portable,

and may not want to sit down for that full meal for every single meal. I do think portable snacking, indulgent,

savoury, not for every meal, but I do think that will continue to go as people are changing their habits as well.

That trend started years ago and is continuing.

[00:44:48]

Q: What is your six-month outlook for the US fresh and frozen bakery industry?

DH: Again, it depends what you’re comparing it to. If you’re comparing it to 2019 or 2020, and then fresh and

frozen, overall, including foodservice, I see it getting better over the next six months.

[00:45:18]

Q: Do you think anything about this industry is commonly overlooked?

DH: It’s capital-intensive. It’s extremely capital-intensive.

[00:45:46]

Q: What supply chain and efficiency improvements have you noticed across bakery companies? Are large

companies such as Flowers or Bimbo sacrificing quality for efficiency?

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DH: Personally, I’ll speak for me. If you sacrifice quality, you’re putting a risk against your brand and your

reputation that takes decades to get to and earn. No, quality is not something that I personally would ever

sacrifice nor would I recommend that you ever do that. If you look at, in any operation, I don’t care what

business it is, but in bakery, every touchpoint somewhere costs money. How do you get the products out there

quickly and efficiently while maintaining your quality standards and eliminating a touchpoint somewhere

along your value chain? That’s a huge piece that many folks are always looking at. Each company operates

differently, but supply chain is all about minimising your touchpoints, filling up your trucks so that, for

simplicity, if you could ship 100 cases on a truck, you ship 100, not 98, because you’re leaving an efficiency

there. It comes down to what levers do you want to put, and how much time, effort and energy do you want to

put against those for the return on the efficiency you’re trying to gain? If you can do those things and have

really smart people in your network, we’ll call it the spaghetti bowl, because that’s really what logistics is, the

better they can navigate that spaghetti bowl, the more efficient you’ll be.

[00:48:04]

NH: Don, I think that is a good place to end the Interview. Let me just close by saying thank you very much

for your input. Clients, thank you for joining Third Bridge Forum’s Interview today. If anyone would like to

speak with Don in a private call or meeting, please let your relationship manager know. Don, thanks again.

Transcriptions ends at 00:48:13 of the recorded material

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