Tough Times Ahead
W. Dan Nagle and Gary Kyle are seasoned veterans of the wholesale baking industry and occasional contributors to Snack Food & Wholesale Bakery magazine. They also are founders of Nagle-Kyle Associates, which specializes in delivering solutions for strategic growth for consumer packaged goods companies throughout North America.
SF&WB asked them to give an unabridged assessment of the current business climate and share their outlook for 2006 and beyond.
QSnack Food & Wholesale Bakery: What are the major trends impacting the retail industry?
ANagle & Kyle: Traditional retailing channels as we once knew them are changing. Supermarkets still are the primary targets for food manufacturers, but mass merchandisers, drug stores, convenience stores and gas stations are selling a disproportionate amount of food. We refer to this as channel blur. The problem is that most companies do not have the skill sets or the strategies in place to take on these emerging channels. More drastic changes await all of us in the near future as Wal-Mart further dominates retailing.
QSF&WB: How are bakery suppliers being treated differently today than they were five years ago?
AN&K: Retailer consolidation has created bigger, more powerful players. Centralized buying is now the norm, and many small independent bakers have been squeezed out as they found that they could not compete on the logistics and technology front, despite superior products.
Buyer churn is also a fact of life. You never know if you’ll be dealing with someone new on your next call. This creates anxiety and pressure over trying to maintain distribution. Pressure on lower costs, deeper deals and better margins are byproducts of an increasingly competitive retail environment for bakery suppliers.
QSF&WB: What has been the impact of Wal-Mart on the supermarket industry and the way bakers must go about their business?
AN&K: Wal-Mart leads and the others follow, with very few exceptions. Wal-Mart’s buying power and loyal customer base creates a formidable force to reckon with. Now that most of the consolidation fallout has occurred, even the top players in food retailing are looking for safe havens. Several are now for sale as their attempt to compete on niche formats and strategies has failed.
Price/value is now king, and bakers are finding that they must abide or face consumer rejection. Keeping prices down and aggressively promoting in the face of rising commodities is a recipe for disaster. As a result, many bakers are planning for yet another round of price increases in early 2006. In discretionary, impulse categories like bakery products, consumers will logically fall out in pursuit of other more cost-effective choices. Bakery is in for a tough time in the year ahead.
QSF&WB: What is the state of the sweet baked goods aisle?
AN&K: They have been ready for full disclosure on artery-blocking trans fats in January. Wal-Mart refused to even look at bakery products containing trans fats as far back as last fall. The rest of the trade will now follow suit. The pre-packaged baked goods category seems to be sorely lacking product innovation and marketing. In fact, most of the so-called new products that we see in the pre-packaged sweet baked goods segment are either me-too products or they are contract packed under their brand name by another manufacturer.
Stale rates appear to be up, and trade promotion is rampant. Both come directly off the bottom line. We would conclude that full revenue sales are a very low percentage of total sales — not surprising when you’re constantly discounting the product in an attempt to drive volume. The winners in this category are the in-store bakery manufacturers who feature thaw-and-sell products, thus enabling the retailer to eliminate the high cost of bakery labor.
QSF&WB: How are consumer trends impacting the sale of baked sweet goods?
AN&K: This category of empty calorie products has been under siege, and we see no end in sight. The obesity issue, particularly childhood obesity, has reached national prominence and awareness. The school lunch programs have been revamped, eliminating these high-sugar products.
Efforts to boost sales by creating reduced-sugar, low-carb, low-fat, reduced-calorie products or by packaging them in smaller serving sizes have all been tried with no sustained success. Many consumers have opted to eliminate these products from their diet, while others may splurge every now and then for an indulgent treat. The heavy category users have become scarce, and declining sales would appear to be in the forecast.
Business Briefs
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Whitewater, Wis.-based HgCapital, a private equity investor, acquired the assets of Schenck Process, the parent company of Schenck AccuRate, from the German-based Durr Group.  
MGP Ingredients, Inc. broke ground in January for construction of its new corporate office building and technical innovation center in Atchison, Kan. MGP expects the two facilities to be completed within the next year.