Harlan Bakeries specializes in producing almost any grain-based food that its in-store, foodservice and private label clients can dream up. As a result, its sales top $250 million, a tenfold increase over the last decade. Now, the nimble company is chasing a dream of its own, and that’s to become an even bigger and better baking company.

It seems like decades ago for brothers Hugh and Doug Harlan, but in reality, it was only a few years back when frozen unbaked and fully baked bagels made up between 70% and 80% of the company’s sales. In those days, calling on a potential client was a fairly simple, if not direct, process.

Through strategic acquisitions and internal growth since 2000, Harlan Bakeries has transformed itself from a specialty bagel producer into a major, diversified wholesale baking operation with a full line of products ranging from frozen breads, pies, cakes and other desserts to frozen muffins, cookie dough and, yes, bagels for its contract manufacturer customers, hundreds of in-store bakeries and thousands of national foodservice operations.

“We have a clear definition of the three channels of distribution that we compete in, and we have aligned our team members to better serve those channels of distribution,” notes Joseph Latouf, executive vice president of sales and marketing.

Perhaps its boldest move was the 2005 purchase of the assets of Meyer’s Bakeries business in Hope, Ark., and Wichita, Kan. Purchased by its subsidiary, Southern Bakeries, LLC, Harlan’s acquisition of the $60 million operation last year added thousands of much-needed stock-keeping units (SKUs) to Harlan’s product portfolio — everything from brown ‘n’ serve dinner rolls to breadsticks, hearth rolls, English muffins, energy bars and conventional hamburger and hot dog buns. In addition to private label, the business also sells baked goods under the Nature’s Grain brand.

“It’s making us more of a one-stop shop,” says Dennis Daniels, Harlan’s chief operating officer. “It also allows us to anchor some of the existing customers that we had shared with Meyer’s. It makes us a stronger supplier to them.”

In addition, Southern Bakeries now operates Meyer’s extensive fresh distribution, which is much more complex than Harlan’s line of frozen, longer shelf life baked goods that are shipped via foodservice distributors and other carriers. Overall, fresh sales account for 15-20% of the company’s business.

“We have it set as a stand-alone separate business,” explains Doug Harlan, executive vice president. “We want to understand the business better before we do a full integration. There are a lot of complexities that were new to us on the fresh side and getting a good understanding of that operating facility.”

Initially, Harlan poured in millions of dollars in capital expenditures to retool the aging Hope plant and to provide the new pans and griddles that have enhanced the bakery’s product quality and consistency. As a result of its efforts, the Hope plant received a superior rating from the American Institute of Baking after an audit of the operation earlier this year.

Southern Bakeries also pared down the number of SKUs it produces and streamlined its list of customers to ensure that it strengthens the operation, albeit smaller in volume than before, and its bottom line.

Masters of Reinvention

Like many successful businesses, Harlan Bakeries has reinvented itself since it was founded 15 years ago to respond to shifting consumer trends and restructuring its business model to reflect changes in the competitive climate.

Founded by the Harlan brothers and their father, Hal, in 1991, the company initially was known throughout parts of the Midwest for its “Bigger Better Bagels” in the freezer case. Harlan Bakeries added to its regional retail business and began a path of rapid, double-digit growth by producing products for some of the nation’s largest foodservice chains and retail shops.

Since 1997, combined annual sales have risen tenfold to more than $250 million. At the same time, the number of employees has risen from 200 to more than 1,600. Not surprisingly, the company has been one of the fastest-growing businesses in Indiana for more than a decade. In fact, it has received Indiana’s Growth 100 Award from the Johnson Center for Entrepreneurship & Innovation, a center within Indiana University’s Kelly School of Business, for the past 11 consecutive years. Because of its innovation and sustainable growth, Snack Food & Wholesale Bakery magazine named Harlan Bakeries our 2006 Wholesale Baker of the Year.

Harlan Bakeries has relied on a number of strategic acquisitions of small- to mid-scale wholesale baking companies to propel sales and broaden its ability to serve national accounts. In 2000, the company bought Kyger Bakery, Inc., a Midwestern producer of cakes, pie shells, and meringue and cream pies with a 45,000-sq.-ft. semi-automated plant in Lafayette, Ind. Simply by leveraging its new line of desserts against its existing customer base, Harlan Bakeries tripled the business to more than $20 million in less than two years. Today, sweet goods make up between 25% and 30% of the company’s combined annual revenues.

To better serve its burgeoning base of in-store, foodservice and private label customers with frozen pies, cakes and other desserts, Harlan Bakeries shut down the Lafayette plant this year and replaced it with a 160,000-sq.-ft. state-of-the-art facility in Indianapolis that’s much closer to its Avon headquarters, allowing the company to leverage synergies between operations and the corporate staff.

That facility now houses three automated lines that produce an expanded line of more upscale desserts that garnered the bakery 12 awards at the American Pie Council/Crisco National Pie Championships this spring.

In addition, Harlan moved its pre-deposited muffin and cookie dough operations from Avon to Indianapolis to consolidate all of its baked sweet goods production under one roof. (See “Hitting the Sweet Spot.”)

“We have improved the quality of our sweet goods quite a bit,” Hugh Harlan says. “But then again, we were previously selling the products at a price point we had to hit. We have upgraded the quality, but we haven’t gone to the full gourmet path.”

Moreover, in the sweet goods category, the company is a partner with Apple Valley Foods, a Kentville, Nova Scotia, producer of fruit pies and other baked sweet goods. Initially, Harlan Bakeries planned to shuttle pie production between its two sweet goods plants to offer customers a full line of products. However, with skyrocketing oil and energy prices along with the strengthening of the Canadian dollar, the companies scuttled that idea, for the most part. Today, the Nova Scotia operation focuses on serving the Canadian market. Only about 20% of its volume goes to U.S. customers.

“So far, business is going well up north of the border. The joint venture just completed a capital expansion project that substantially increased capacity in its Canadian operations,” Hugh Harlan says.

Additionally, producing more premium positioned products is paying off.

“Regular pie consumption appears to be trending down, whereas gourmet pies appear to be trending up,” Latouf notes. “Sugar-free and no-sugar added pies are trending up as people deal with issues like the glycemic index and reducing sugar in their diet.”

To avoid seasonal dips, the bakery relies on summer pies, such as key lime and cream varieties, as well as the angel food and cream cakes that are popular during the warmer months.

“We’re growing our cake business and a couple other items, such as the sliced cake category and the angel food category,” Latouf says.

Like the pie category, the bagel industry has had its challenges, but Harlan Bakeries continues to gain share in this market as the number of bagel producers consolidates and it gains market share in the three distribution channels it serves. Over the past few years, because of rising overhead coupled with a price-sensitive category, several mid-sized bagel manufacturers have exited the business, leaving the doors open for the Harlan Bakeries’ more efficient operations to fill the vacuum.

“There are fewer competitors today than there were three years ago,” Latouf explains. “Bagel consumption is relatively flat. Decreases in consumption in the freezer case are being offset by increases in the fresh bakery aisle.”

Likewise, bagel sales in the foodservice channel are flat, with volume shifting among the various quick-serve chains as the competitive environment changes and companies roll out new products.

Harlan Bakeries, however, has been able to weather the winds of change in the bagel category. Its 260,000-sq.-ft. plant in Avon is probably one of the most efficient, low-cost producers of bagels in the nation. Each day, the operation cranks out 2.5 to 3 million unbaked, par-baked and fully baked frozen bagels ranging from 1 oz. to 5 oz. in size. The workhorse’s three dedicated lines have 40 pockets of dividing capacity, including a new 8-pocket divider and makeup system, to produce unbaked bagels. The frozen bagel lines also support the plant’s three baked bagel operations. Additionally, Harlan recently installed a mini-bagel line.

Despite several expansions of its efficient Avon operation, which more than doubled its size over the last five years, the need for even more bagel capacity is an ongoing challenge for the company.

Its Southern Bakeries unit, for instance, has lines that produce bagels for its customer base. To better serve its West Coast customers, Harlan purchased A.C.E. Baking Co., a Denver, Colo., bagel producer, in 2002. A.C.E., Hugh Harlan notes, was a “really nice acquisition” because most of its systems were similar to those at the Avon plant. Such compatibility allows the two operations to produce more consistent products, which is of critical importance to many of its national customers.

Additionally, the company is looking to add even more capacity as it consolidates its position as one of the leading producers of bagels in the nation.

The Quiet Growth Channel

One of Harlan’s fastest-growing channels is contract manufacturing, due to confidentiality agreements, the company does not discuss in any detail about what it’s doing. However, Hugh Harlan does note that contract manufacturing accounts for about one-third of its sales, and if several projects come to fruition, they should propel its annual revenue to above the $300 million mark in 2007.

As with the bagel and other parts of baking industry, the changing competitive landscape and shifting business models have created growth opportunities for Harlan Bakeries. In some cases, manufacturing capacity — especially for the production of innovative, hard-to-automate products — is shrinking in the baking industry.

“You’re seeing some companies getting out of self-manufacturing, and some larger companies are really trying to focus on just building their brands,” Hugh Harlan says. “They want their name and logo on the new product to build their brand, but they are really not interested in spending capital to produce it.”

Harlan Bakeries’ ability to take product concepts from the test kitchen and find a way to automate them in a timely manner has sparked growth in this expanding and lucrative business channel. It has a knack for mass-producing products that others dream up.

“We’re very flexible in developing processes and systems,” Doug Harlan says. “As everybody knows, things change very quickly in this industry, so being flexible is a strength in this market.”

 In some cases, Harlan Bakeries developed patented processes to automate processes of products that are not that easy to produce commercially. Moreover, the company has the old Lafayette, Ind., facility and a plant in Golden, Colo., where it can ramp up production in a short period of time.

“Over the last few years, we’ve been seeing a trend in the industry where companies have a lot of new product ideas, and if there is capacity out there, sometimes they’ll use that capacity versus building additional capacity in their plants,” Hugh Harlan adds. “We’re a specialty manufacturer who also happens to be expanding and supporting our current product lines. On specialty manufacturing, we can get to the market very quickly. We’ve built some lines here in just a matter of months where some other companies may take a year to build them.”

Daniels notes that the Harlan brothers are adept at identifying emerging trends and developing new business opportunities.

“If they see a piece of business that may not be a core competency today, they will still pursue it,” he notes. “They’re innovative from both an operations standpoint and a product standpoint.”

In life, there are dreamers, and there are people who turn their dreams into reality. In the baking industry, Harlan has built its own dream business by making the dreams of others come true.