Flour milling industry outlook

by Emily Buckley
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There has been an impressive 30% gain in U.S. flour consumption since 1972 that peaked in 1997 at 147 pounds, the highest it had been in over 50 years. Since then we have had five years of declines that have left an expectation that this year will finish at 139 pounds — equal to the level of 2000.

The factors for this impressive run in per capita gain include changing lifestyles, health conscious consumers, the bun revolution — fueled by fast food, pizza, bagels, variety breads, artisan breads — and a host of new products that have lead the way in increased consumption.

The loss of momentum that we now experience is not fully understood and a lack of comprehensive data from the various food processing and retail sectors means we have to piece together bits of information from various sources to give us direction.

FLOUR USAGE

A compilation of data from a census of manufacturers, annual flour production, retail sales data and a good dose of our own intuition, gives us an estimate of total flour usage by the 10 major end-user product categories.

We have used the years 1993 and 2000 because they are points where we had the best information available. But it should be noted that 2000 was the all-time high for flour consumption, reaching a total of 412 million hundredweights, or 18.7 million tonnes of flour).

The seven-year period from 1993 to 2000 saw a gain of 11%, 43 million cwts (nearly 2 million tonnes flour). The Ready-To-Eat (RTE), pizza, and tortilla categories had the bulk of the gain; growth in just those three categories accounted for 39 million cwts of the total 43 million cwt gain.

RTE, the largest category by far, includes all fresh-finished products coming from wholesale bakers, in-store, retail and foodservice. The object here was to determine the amount of flour going to this, albeit rather broad, category, regardless of the sub-product used to get it there.

Table 2 reflects the major product groups that makeup the RTE category, again, without regard to where they are produced or what method is used to complete the finished product. This group used 64% of all flour; bread and rolls is the largest single product category with 42% of all flour usage. This category also had the largest usage gain of any product, with an increase of 21 million cwts (1 million tonnes), nearly half of flour’s total usage increase during the 7-year period.

The reason for the growth in breads is attributable to multiple factors that include premium and super premium branded breads, hearth rolls, artisan breads, in-store bakeries, sandwich shops and a better understanding by consumers of the value of grains in the diet promoted by bakers and the Eating Right Pyramid.

MARKET DRIVERS

The per capita changes and product category flour usage data gives us a pretty good idea of where we are, but it doesn’t tell us what’s driving the market trends, the retail environment nor consumer attitudes and the impact on flour and grain-based foods consumption.

Extended Shelf Life (ESL) will forever change the dynamics of the wholesale bread and cake industry — at least that is what the proponents of the benefits of ESL, tell us. What we do know now is that baked product formulated with ESL has entered the market, the initial quality problems seem to be resolved and every wholesale baker is either using it or is planning to.

We also know that bakers are currently able to extend the shelf life of breads from between 3 to 12 days over what has been the conventional 2 to 3 days. The impact of these additional days is made clear by the statement from Interstate Bakeries in their recently released 2002 annual report. "Before ESL, we had to bake 115 loaves to sell 100; now it takes 108." That means 13% of the 115 loaves were returned as "stales" while the remaining 87% were sold to consumers. The new ratio is 7.5% stales to 92.5% sales. In IBC’s case they have accomplished this improvement with an extension of only 2 to 3 days.

The IBC report quantifies a second area of improvement, reduced route deliveries. They attribute a reduction of 1,000 routes with the elimination of the corresponding equipment and labor, 10% of their total routes system-wide have been pared since they initiated their ESL program two years ago.

Perhaps more im-portant than what we do know, is what we don’t know about ESL. Turning stales into sales is a very legitimate expectation by bakers and grocery retailers who have always lamented the loss of bread sales due to half-full or empty bread racks. With the new ability to pack the shelves full, expand shelf space and keep stocked transport trailers on premise for replenishment, then no longer is being out of stock an impediment for bread sales. If this scenario is correct, then it truly is a win for bakers and "not a loss" for flour milling.

What might the impact be on milling if this is not the case and sales remain the same, but with fewer loaves baked? If we use my earlier estimate of 175 million hundred weight (8 million tonnes) flour usage for all bread and rolls, and use IBC’s reduction of 6% in bread loaves, that’s a drop of 2% on 2001 domestic flour usage.

There are several other questions which, when answered, will greatly determine if ESL really has the potential for "remaking baking."

• What will happen to thrift stores, will they go away or will they become stealth retail baked foods outlets?

• What is the future of route sales vs. lower cost attendants managing product on the shelf?

• Will bread and cake bakers follow in the path of cookie and cracker bakers, replacing small and medium size plants with large regional facilities?

• How far can shelf life be extended? (Some bakers believe it could go as far as 30 days.)

• And most importantly, will the consumer care?

It is hard to point to another development that has the potential to re-make the wholesale baking industry as does ESL.

SHAKE-UP IN RETAILING

While ESL has the potential to reshape baking, on the retail side, Wal-Mart continues to shake up retailing. In its fiscal year ending in January 2002, Wal-Mart had grocery sales of U.S.$65 billion from their 1,200 super centers and $19 billion from its 520 Sam’s Clubs for a total of $84 billion. That gives Wal-Mart just under a 10% share of supermarket grocery volume and 11% of all retail groceries. It now surpasses number 2 Kroger by $30 billion, and is double the size of numbers 3 and 4, Albertson’s and Safeway.

Wal-Mart’s internal balance is quickly changing with 39% of it’s total revenues now from grocery sales, and, while they do not provide any specific product category data, we estimate their sales of baked foods, not including in-store, to quickly be approaching $2 billion.

But if that doesn’t stop you in your tracks, this should: At the beginning of its current 2003 fiscal year Wal-Mart announced the "largest increase in store space in the company’s history" with plans to expand its total square footage by a breathtaking 9%. This translates into a 15% increase in the number of supercenters, 10% more Sam’s Clubs, doubling the number of neighborhood markets, and 33% increase in international units.

Advertising Age magazine reported on Wal-Mart’s expansion plans with the following analysis: "The next three to five years will see the biggest retail consolidation since the great depression." Wal-Mart’s revenues grew by $26 billion last year, and it plans to grow between $30 and $35 billion for the next three years as it continues with aggressive expansion. Ad Age estimated that most of that growth will be from groceries. The magazine concluded that this would be "a devastating period for the U.S. supermarket industry and U.S. manufacturers.

NATURAL AND ORGANIC LEAD NEW PRODUCTS

There is by no means an absolute relationship between new products and per capita flour consumption growth, but the trend line direction is clearly the same. Food product manufacturers craft their new introductions to meet what they at least believe to be current consumer attitudes about nutrition and health. The changes over the 9 years from 1993 to 2001 are extremely instructive and potentially positive for flour-based foods. ‘Low fat’ was the leading nutritional claim for new products in 1993 and new product introductions jumped to 1,405 in 1997 at the height of the low-fat fad.

By 2001 it was still an important claim, but no more so than in 1993. Low calorie claims fell off the map from 742 in 1997 to just 170 in 2001 — but ‘No additives, preservatives" jumped 6-fold in four years and all natural and organic claims exploded. (See Table 3.)

If we group these nutritional claims together under those associated directly to better health issues and those more associated with well being, the results are pretty astounding. Nutritional claims for low fat, low calorie and less sugar, as a group are down 31%; natural, organic and no additives are up 150%. The totals of 1,300 versus 3,400 speak for themselves. Organic and natural are both very small categories in actual sales, but it is interesting to see where all varieties of food manufacturers are placing their bets when it comes to nutritional and health claims.

FOODSERVICE

In the foodservice sector, an increase in total restaurant sales for 2002 is expected to be in the range of 4%, which is on the heels of a similar increase in 2001. The Limited Service Restaurant sector, which includes the all important fast food chains, was originally forecast to be up 4% but recent adjustments by individual chains, such as McDonalds, are likely to result in a shortfall of this projection. The hamburger category, which is the largest in this group, was originally projected to be up only 2% and may actually end up being flat. McDonalds and Burger King have announced special $1 promotions on certain sandwiches but the results of that are yet to be known. It goes without saying that softness in this category is likely to impact total bun sales, an important category for wholesale baking.

But the bigger issue for the fast foods industry is the crossroads that this important sector is facing as the key players contemplate how they are going to respond to the growing consumer demand for more nutritious foods. Pressure is building as consumer groups are pressing for posting nutrition content on the menu boards, and Wall Street is concerned with what strategy they will employ as health conscious baby-boomers stop at Panera and Subway instead of fast food stores.

While the implications of this potential important shift occurs in the fast food sector, flour-based foods are doing well in the ‘Other Sandwich’ and ‘Other’ categories that includes the booming Bakery Café stores. Other Sandwich, which includes Subway, is projected to have sales increase of 12% while Bakery Cafés’ 14% jump is the fastest growing category in the Limited Service Group.

There are three individual chains in the Sandwich and Café categories that are noteworthy in terms of their contribution to promoting flour based foods with great product and professional marketing. Subway has climbed to the number 1 restaurant chain with more than 13,200 units. It is estimated they sell close to a billion rolls annually. But it is the innovative and effective marketing that they used to position the sandwich as a healthy, good-for-you-food that puts them at the top of the list of flour based foods marketers.

Subway’s advertising campaign "Jared Fogel — 425 pounds — lost 245" is arguably the best promotion of bread going right now.

Krispy Kreme’s success has been made famous by their creating an experience of going to buy donuts. They have re-energized what was a moribund product group and turned it in to a growth sector in baking.

Panera is the largest bakery café operator and credited with defining the Bakery Café concept. They are spawning a whole wave of new companies that see this concept as having acceptance with consumers looking for high quality breads and baked foods. They certainly have taken artisan breads and made them mainstream.

Collectively these three companies and the some 50,000 retail and in-store bakeries, bakery café’s, donut shops and sandwich restaurants are the interaction points for flour-based foods and another of the great advantages that this industry enjoys.

The other foodservice sector that needs to be mentioned is Lodging and Managed Food Service. This more than any category has been effected negatively by September 11 and the economic slowdown. Airline passenger traffic, hotel bookings and vacation destinations suffer from the effects of both these events and the signs for an upswing are not evident yet.

CONCLUSIONS

• Extended Shelf Life bread should not negatively impact bread sales as long as quality can be maintained.

• There are fundamental changes impacting the retail sector, but there should not be any long-term negatives for flour-based foods.

• Resurgence of new products fueled by a number or influences can only positively impact consumption trends.

• Foodservice is changing, affected by the slow economy and consumer attitudes, but flour-based foods can positively change with it.

 

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Table 1: Projected flour usage by product category

(million cwts/million tonnes in terms of flour)

1993

2000

% change

%of total flour usage

cwts

tonnes

cwts

tonnes

RTE baked goods

237

10.75

265

12.02

12

64.30%

Pasta

39

1.77

41

1.86

5

10.00%

Pizza

28

1.27

36

1.63

28

8.70%

Family Flour

15

0.68

14

0.64

-6

3.40%

Consumer mix

9

0.41

9

0.41

nc

2.20%

Tortilla

8

0.36

11

0.5

37

2.70%

Frozen baked

6

0.27

7

0.32

16

1.70%

Cereals

6

0.27

6

0.27

nc

1.40%

Soups

3

0.14

3

0.14

nc

0.70%

Other

18

0.82

20

0.91

nc

4.90%

TOTAL FOODS

369

16.74

412

18.69

11

100%

 

 Table 2: Projected flour usage for "ready-to-eat" products

(million cwts/million tonnes in terms of flour)


1993

2000

% total RTE flour use

ctws
tonnes
cwts
tonnes

Bread & rolls
153
6.94
174
7.89
42
Soft cakes
21
0.95
23
1.04
6
Crackers
21
0.95
22
1.00
5
Cookies
16
0.73
18
0.82
4
Sweet goods
14
0.64
16
0.73
4
Pies
5
0.23
5
0.23
1
Cake donuts
5
0.23
3
0.14
1
Pretzels
2
0.09
4
0.18
1
TOTAL
235
10.66
265
12.02
64

Table 3: New Product Nutritional Claims

1993
1997
2001
Low Fat
847
1,405
886
Low Calorie
609
742
170
No Add/Pres
543
142
833
Low Sugar
473
78
320
All Natural
449
587
1,560
Organic
385
505
1,059

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