State Of Da Industry

Dan Malovany, editor
dmalovany@stagnito.com

I’d like to apologize to Larry Marcucci, who took a bit of a ribbing from folks last year when he was quoted in our State of the Industry report as saying “business is booming.” Yes, business rebounded very nicely for the snack food and bakery producers following the denouement of the low-carb craze. The fact that I’m repeating his remarks from last year reflects how incredibly stupid I can be.

Fortunately, Marcucci, president of Alpha Baking Co., and too many others in the industry know me too well, so I hope he doesn’t mind if I add insult to injury by sharing with you some of his great insights about the snack and baking industry for 2006.

After an outstanding 2005, business remains strong for Chicago-based Alpha Baking and many other bakers. They’re benefiting from consolidation, which has eliminated much of the overcapacity in the baking industry, and from solid demand for premium baked breads and rolls in the foodservice channel.

“A year ago, it took off like a rocket, and you can only have things take off like a rocket for so long,” Marcucci says. “Eventually, it stabilizes or consolidates. Still, we’re running full throttle everywhere.”

As a mid-tier wholesale baking company, Alpha Baking continues to benefit from industry realignment as struggling major players shed what they deem non- or marginally profitable products. It’s not exactly the adage of “one man’s trash is another man’s treasure.” Rather, Marcucci explains, the churning of business has allowed Alpha Baking to focus on new opportunities that neatly fit its niche and simultaneously let go of other accounts that might be better suited for some other company. Call it the trickle-down effect.

“People are taking business that’s right down the middle of their fairway rather than stretching for the business that they are not really excited about, but it’s better than ‘a no business at all’ type of situation,” he says.

With these higher quality breads and rolls, Alpha Baking and other bakers are seeing greater price elasticity in channels where pricing has always been an issue. Unfortunately, not all of the higher margins are going directly to the bottom line, but rather, to cover increases in overhead as well. First, post-Hurricane Katrina spikes in natural gas and diesel fuel blew bakers out of the water. Now, because of weather or commodity index fund activity, the price of wheat has begun to explode. That’s not to say the industry is pushing up daisies in a bed of roses, but the current business environment is a classic example of a double-edged sword from Marcucci’s perspective.

“On one hand, we were able to get some volume and some pricing and start to come out of the woods,” he says. “On the other hand, all of a sudden your margins are getting eaten out from under you by all of these increases.”

Unlike in the past, many bakers and snack producers suggest they can ask for reasonable price increases without the fear of losing an account. Bakers such as Sara Lee and Flowers Foods agree that there is a little bit more price elasticity these days. With gas hitting record highs at more than $3 a gallon in some parts of the nation, a loaf of bread for the same price seems like a bargain to many consumers.

From a marketing standpoint, educating consumers is essential. The baking industry can’t become complacent at this time. More than ever, it needs the promotional efforts of the Grain Foods Foundation to spread the news about the benefits of whole grains. In reality, consumers are just beginning to buy into the message. Getting them to truly appreciate the wholesome goodness of many snacks and baked goods is critical for surviving in today’s challenging business environment. Snack and bakery producers need to get an honest buck if they are required to produce higher quality products.

Yes, these premium offerings are more expensive to produce, and that’s not only because of better ingredients. There are other trade-offs from an operational perspective.

“You can’t produce ciabatta rolls at 800 [pieces] a minute,” Marcucci notes. “It takes a heck of a lot more time to produce them than the buns that they have been knocking out at 800 or 1,000 a minute.”

To meet demand for these products, many companies have been beefing up their production lines by squeezing out changeovers, lowering scrap levels and reducing downtime.

That’s something that snack and bakery food producers used to do during bad times. Now it’s something they need to do even when times are good.

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