Deal or No DealSometimes I think some members of the baking industry just don’t enjoy prosperity. How else can you justify some of the irrationally foolish promotions in the bread aisle? Okay, maybe “deep discounting” or “extreme” promotions are the politically correct ways to describe them, but I’ll let you do the math to decide which term is most accurate.
Recently, I saw a 1-lb. loaf of white bread selling for 75 cents and two-for-one whole grain loaves of a 24-oz. wide-panned bread at around three bucks. How can you make money doing that?
Extreme or just foolish?
Ironically, when flour and commodity prices spiked two years ago, bakers couldn’t raise prices fast enough to cover their costs. In response, many bakers convinced retailers that they needed to hike their prices 10% or more. Additionally, they found ways to increase productivity and to reduce overhead by “going green,” which added a little more black to the bottom line. When commodity prices slipped to saner levels, good times were being had by all.
Then the economy went into the crapper last year, and consumers responded by saving more, spending less, acting less impulsive and making shopping lists. Searching for values became the new norm. Retailers cut prices and branded snack and baked goods producers found themselves competing with private label offerings. For consumers, it was give me a deal or no deal.
Such deep discounting has some of the best in the business strategically ratcheting up their promotional plans against their competitors’ predatory pricing to maintain or gain market share. During its “meet the management team” meeting at the New York Stock Exchange last month, for instance, Flowers Foods noted that falling volume prompted it to react in the bread aisle.
“If you lose volume over time, you tend to lose shelf space,” explained George Deese, the company’s chairman and CEO. “If you lose shelf space, you lose access to the market and that’s not a good formula for success so we did what we had to do to protect our market share.”
Allen Shiver, Flowers Foods’ newly named president, added that the Thomasville, Ga.-based company did try to take the road less travelled, but it had no choice in the end.
“As you recall, we did take the high road from a pricing and promotion standpoint for the first three quarters of 2009,” he explained. “All along, we knew that at some point if the marketplace did not improve that we would have to get more competitive and that’s exactly what we have done. Based on our brand strength and our operational strength, we see that market share is responding accordingly.”
Nobody can be really too happy about the current situation. Part of the challenge is that the bread aisle is “inelastic,” Shiver noted. Some 98% of consumers regularly purchase fresh bread and rolls.
Consequently, for the industry as a whole, there’s not much wiggle room to reach new consumers.
To grow their businesses, the smart baking companies need to expand geographically, roll out new products, enter new distribution channels, add special displays to existing stores, expand into new product categories or take market share in their core markets.
Fortunately, the market may correct itself. As commodity prices and other overhead costs increase, bakers may have less discretionary income in their marketing budgets and be forced to cut back on extreme promotions simply because the cost of ingredients makes it economically infeasible.
“Extreme promotional activity does not increase unit sales,” Deese said. “It simply shifts the sales among bread vendors in most cases. Our view is that retailers want the category to be healthy and provide revenue and profit for themselves, as well as having a good value for consumers. Our hope is that the promotional activity in the category will normalize in the coming weeks or coming months.”
Yes, let’s hope common sense wins out. Then again, crazy bad habits are hard to die.
Extreme, stupid or how about extremely stupid?
Everybody knows you can’t fix stupid.