Bimbo Bakeries USA
Bimbo Bakeries USA plans to expand distribution of its Eureka! brand.

MEXICO CITY, MEXICO — While still a modest business at Bimbo Bakeries USA (BBU), the company is expanding distribution of its Eureka! brand, said Fred Penny, president of the North America segment of Grupo Bimbo SAB de CV.

In a Feb. 26 conference call with investment analysts, Penny and Grupo Bimbo chief executive officer Daniel Servitje commented on the performance of BBU new products, the legal wrangling over the classification of bakery delivery drivers and sales trends at the company.

While competitor Flowers Foods, Inc., Thomasville, Georgia, U.S., made expansion in organic bread sales a major priority in 2015, spending almost $400 million on two acquisitions, BBU is moving more deliberately. Penny described the organic business as a small one for Bimbo, centered on the company’s Eureka! brand.

Bimbo Bakeries USA
Fred Penny, president of the North America segment of Grupo Bimbo SAB de CV.

“But it is one that we are expanding into additional markets,” he said. “We’ve done some of that this year and we’ll continue to do that.”

While moving with some stealth in the organic bread market, the company has been more visible in moving to build its whole grains franchise. Just before financial results were released, the company announced the introduction of a new bread line called Extra Grainy. The line is rolling out nationally in April under the Arnold, Brownberry and Oroweat premium bread brands. The line will feature three varieties.

Sluggish category trends did not abate in the fourth quarter, but Servitje said Bimbo’s results were positive by a number of measures.

“In the United States, sales in dollar terms grew as our first half price actions and fleet optimization initiative more than offset volume declines,” he said. “Based on market data specific to the fourth quarter, category consumption was consistent with recent trends. In addition, based on 12-week rolling data, even after pricing initiatives implemented at the beginning of the year, we have been able to gradually improve our share in the mainstream category by 0.6 points. We’re encouraged by our recent performance and are committed to pursuing further opportunities in our pricing and trade strategies.”

The improved market share represented strength across all the categories in which BBU competes, Servitje said. While saying the company’s entire family of brands “is resonating with consumers,” he singled out the Sara Lee brand as a standout partly because of the success of the company’s new Artesano brand, which should be available nationally by March 5.

Bimbo Bakeries USA
Daniel Servitje, CEO of Grupo Bimbo.

“In addition, our premium bread brand trends are improving with double-digit growth for our unique whole grain Nature’s Harvest line, the Ball Park brand, and positive results with expansion of our Eureka organic bread into new markets,” Servitje said. “Ultimately, innovation and investment in our stronger brands have and will enable us to limit the volume pressure from pricing initiatives while supporting increased profitability. Volumes in the other part of our business, like snacks, breakfast (and our meals) and high-growth frozen bread business did well in the year. We also had healthy results in the Marinela brand; double-digit gains at Little Bites, which is one of our success stories and strong sales of our Thomas’ brand.”

Servitje offered a broader perspective of what BBU is doing in the marketplace.

“The bigger picture here is that we have spent the past four years integrating two of the U.S. industry’s major players,” he said. “Now, as a single restructured and aligned entity in terms of systems, assets, and people, we can redirect our strategic focus on driving growth and productivity as I will explain shortly.”

Optimization of trade spending is a major strategic priority for BBU and has been one for well over a year, Penny said.

“I talked in prior calls on the fact that we moved pricing earlier in the year, both front line and from a promotional price standpoint, and we stayed focused on that throughout the year and into the fourth quarter,” he said. “As an example, in the fourth quarter, our pricing was, on average in the bread category up 5%, ahead of the category overall and consistent with where we were in the prior quarter.”

Going forward, the company is looking not only to maintain pricing at current levels but also is exploring “opportunities to improve our price realization,” he said.

“Having said that we also need to compete, and I think the trick here is for us to compete effectively and smartly with promotions that from — based on good sound analytics are the most effective ones,” he continued.

While hopeful about how the company will perform moving forward, Penny was cautious when asked about specific growth projections.

“In terms of profit growth, I certainly can expect us to continue to improve our profitability in our margins,” he said. “I wouldn’t want to be too specific about the timing as to when we might get to our stated longer-term goals. But clearly you’ve seen good progress I think this year from us, and you should expect continued progress next year as well with the initiatives we have under way.”

Penny was asked about legal challenges facing baking companies over whether delivery drivers should be classified as independent operators or employers. He opted not to comment on the specific litigation facing competitors.

“The reclassification issue is not a new one for us, and yes about two-thirds of our routes are independent operators,” he said. “Our legal team, we work hard every day to make certain that we’re treating our independent operators or independent contractors as independent contractors. And we work hard to ensure that the IOs are successful entrepreneurs and successful IOs are less likely to challenge their classification.”

Bimbo Bakeries USA
In Canada, Bimbo recently introduced a line of corn crackers under the Salmas brand.

Servitje briefly updated analysts on Bimbo’s progress in Canada, where the company has made acquisitions over the past two years. A reformulation of white bread and the Campagnard brand in Quebec, Canada, targeting the fresh/artisan trend were highlights, he said. Tortilla sales were strong, and the company introduced a line of corn crackers under the Salmas brand. A migration of the Canada Bread enterprise resource planning system is progressing in line with plan.

EBITDA margin in 2015 in the North America segment widened 210 basis points from the year before, and EBITDA jumped 73%. Servitje attributed this performance to lower raw material costs, a more efficient cost structure and smaller restructuring charges.

The strong U.S. dollar will create headwinds in Mexico in 2016, and the company will focus on optimizing efficiency in baking and distribution, Servitje said.

Bimbo Bakeries USA
Bimbo plans to grow some of its strategic brands such as Nature’s Harvest, Entenmann's Little Bites and Thomas.

“In North America and in the U.S. specifically our priorities will be growth, where we will be investing and growing strategic brands such as Entenmann's Little Bites, Thomas, Sara Lee, Ball Park and Nature’s Harvest to name a few,” he said. “Along with brand investments, we will keep looking for opportunities to improve trade promotional effectiveness and creating a world-class DSD (direct-store delivery) operation by leveraging technology and standardizing our processes. Our second priority will be productivity, where we will advance the supply chain transformation and focus on eliminating waste across our entire cost structure.”

“In Canada, we are betting on quality over price as we’re doing in the U.S. We will also optimize trade promotion. We believe there is a big opportunity to offer consumers innovative products through our well-positioned brand. In the case of our frozen business, in North America, we will focus on driving growth via new products and innovation under the existing brands as well as adding new capabilities in manufacturing to further our market presence and stay at the forefront of this growing category.”