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Sara Lee wants bigger slice of profits from bread business
(Chicago Tribune (KRT) Via Acquire Media NewsEdge) CHICAGO _ Sara Lee Corp. got into the bread business in a big way only a few years ago, and its innovations have helped it become a national leader with strong sales.
Yet in some ways, the business is still struggling.
Seven years after it dove headlong into bread, Downers Grove, Ill.-based Sara Lee has built the nation's best-selling brand. And lately its bread sales have been climbing despite a big run-up in commodity costs. Sara Lee has managed to pass on those costs, which is a downer for consumers but a godsend to investors.
But the profitability of Sara Lee's bread operations is usually less than half that of its main rivals. The company said it's working to fix the problem, in part by trying to gain production efficiencies through better use of technology.
Wall Street is paying close attention to whether it succeeds. Three years into a companywide turnaround launched by Chief Executive Brenda Barnes, Sara Lee's North American businesses _ retail bakery, retail meats and institutional food sales _ remain works in progress.
"All three are challenged from a profit margin perspective," said Alexia Howard, a stock analyst at Sanford Bernstein. But bread is an area in which analysts say Sara Lee has the most opportunity to improve profits.
"This is one everyone is really watching," Howard said.
It may not be exciting, but bread is a supermarket's No. 2 food sales category after chilled meats. It's also a business, unlike most in packaged foods, that's still highly fragmented and lacking in national brands.
The nation's top three bread producers _ Sara Lee; George Weston, which makes Brownberry; and Flowers Foods, which makes Nature's Own _ each had only 9 percent to 10 percent market share in 2008 through July 13, according to Chicago-based Information Resources Inc., a research firm that tracks sales at conventional supermarkets.
Sara Lee, perhaps the most national of the three breadmakers, covers about 70 percent of the country. Meanwhile, private-label or store brands lead the bread category with a 26 percent share, according to IRI. And family-owned, regional companies are still important players in the bread industry.
The bread business' fragmented nature "is partly an outgrowth of the product itself," said Jim Nolan, chief executive for Sara Lee's fresh bakery operations. Bread has a life span of about one week from its creation to when it's deemed stale and pulled from grocery shelves.
So bread is produced and delivered within a 250-mile radius. And the fresh factor makes it a capital-intensive business too: In addition to running a plethora of bakeries _ Sara Lee has 42 _ breadmakers must deliver their wares directly to grocery stores, requiring a legion of route drivers.
Despite the bread industry's challenges, Sara Lee in 2001 paid $2.8 billion for EarthGrains Co., one of the nation's leading breadmakers. Over the years, it has shed 72 regional bread brands and currently has 46, but it has focused on building a national brand under the well-known Sara Lee name.
It also came up with one of the biggest innovations in the bread world in recent years: Soft & Smooth. A bread with 30 percent whole grains, it's aimed at providing more nutrition than white bread but with white-bread texture. Soft & Smooth has become Sara Lee's best-selling bread line, and has prompted competitors to offer their own whole-grain hybrids.
With bread leading the way, the Sara Lee brand became the firm's first brand with $1 billion in annual sales, Sara Lee announced this month. Its other big U.S. brands include Ball Park hot dogs and Jimmy Dean and Hillshire Farms meat products.
Sara Lee's North American retail bakery operation, which includes bread and its Senseo coffee business, accounts for about 17 percent of the company's sales.
Overall, the unit, which counts bread as its biggest segment, had $2.2 billion in sales in its last fiscal year, up 9 percent from a year earlier. But it contributes far less to Sara Lee's profits.
The bakery unit's operating profit margin of 2.7 percent in its most recent fiscal year is also well below the high-single digit margins of key rivals Flowers and Weston, analysts said.
"It's a business where you can see that the margins should be meaningfully higher than they are today," said Christopher Growe, a stock analyst at Stifel Nicolaus & Co.
Nolan, Sara Lee's bakery chief, acknowledged the problem, adding that, "It's no surprise that we take the glass-half-full approach to it. We feel we have a great opportunity."
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Analysts agree, with Howard saying Sara Lee has "started to tackle" its bread issues.
For instance, the number of bread offerings has been cut by up to 30 percent over the past two years, weeding out less-popular items. Bread route drivers are receiving better portable computing devices and bakeries are upgrading their computer systems in an effort to move the product more efficiently through the supply chain.
Meanwhile, the company's route system is being retooled to become more efficient and to better focus on more profitable accounts from bigger customers.
Still, Sara Lee's challenge to boost bread profits comes at a particularly challenging time for the food industry, which is being buffeted by soaring grain and energy costs. Makers of packaged food have responded by passing those costs along.
In bread alone, Sara Lee has instituted four price increases totaling 35 cents over the past 14 months. Other bread producers have done the same, and consumers have seen bread prices climb at double-digit rates this year.
The question facing foodmakers: Will consumers eventually trade down from popular brands like Sara Lee to cheaper store brands? The average price for a loaf of Sara Lee bread has been $2.61 this year, compared with $1.46 for private-label bread, according to Information Resources.
Sara Lee, like most bread companies, also makes private-label bread, which constitutes about 45 percent of its bread sales. But private-label products have lower profit margins than branded goods.
And if prices keep rising, consumers will have a greater incentive to switch to lower-cost store brand breads, said Erin Swanson, an analyst at Morningstar Inc.
"Where do consumers break? What are they willing to pay up for, and what aren't they willing to pay up for?" he said.
The answer isn't clear, but the question hangs over Sara Lee's bread business. "Banking on them to realize higher profits in such a challenging environment, it's hard to tell how that will play out," Swanson said.
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(c) 2008, Chicago Tribune.
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Copyright ? 2008 Chicago Tribune
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