Anyone who visits Philadelphia and asks for a mere cupcake will soon learn the error of his ways. The Tastykake brand is truly an icon in this region of the country, and has been since its inception in 1914. Back then, gross sales were $300,000. Today, Tasty Baking Co.'s gross sales exceed $250 million.

Still, as the company approaches its century mark, it stands poised to revitalize and build its brand, expand into new markets and streamline its business thanks to vital long-range planning implemented by Charles Pizzi, president and C.E.O. Many positive changes have been implemented since Pizzi joined the company in late 2002, beginning with new board members, new management and a new strategy for moving the company forward.

“We've been instituting a turn around in the company for a few years, ever since Charlie Pizzi came in and the new management joined the company,” says Autumn Bayles, senior vice president, strategic operations. “There have been a number of foundation items that we've addressed, including our technology and financial platforms, and the way the debt was structured. The last thing on the list was what do we do with our old bakery?”

The answer lay in leasing property for a new plant, focusing on a long-term strategy and watching short-term earnings suffer temporarily as the company reinvests in its future.

Moving out of the 20th century

Aside from the fact that Tastykakes had been manufactured in an antiquated multi-story building since 1922, the company had no new product introductions, a limited marketing and advertising strategy, and literally no technology across its supply chain.

Because of the nature of the old plant, “the company had no new product flexibility, dedicated ovens for dedicated products, and it focused on what it could sell most profitably instead of what the consumer wanted,” says Mitch Pinheiro, equity research analyst, Janney, Montgomery & Scott, Philadelphia, who has covered Tasty Baking Co. since 1991.

Although the old management team knew that it needed a new bakery in order for the company to “survive and thrive,” Pinheiro says, “it was stuck between a rock and a hard place.” Management knew that earnings would suffer in the short term, and thus chose short-term tradeoffs and sacrificed long-term strategy. “Short-term wins a lot when you're a public company,” Pinheiro adds.

When Pizzi was hired, he had a simple vision — bring people on board from great brands who could energize the Tastykake brand and move it forward. The talent Pizzi acquired was significant — each board member is a specialist in his or her own right. Pizzi also brought on a new management team of aggressive people from great brands and meshed them with the existing management.

The new team devised five strategic growth initiatives, including investment of brand building, expanded product innovation, profitable sales growth in core routes, entry into new markets and drive operational excellence.

First and foremost among the team's plan of action was the implementation of an enterprise resource program (ERP). “It was hard for people to believe that we had no technology across our supply chain,” Pizzi says, “so we implemented SAP®'s ERP application on budget and on time. We basically went from nothing to the Ferrari. We didn't even have training wheels. SAP built quite a technology platform. Every aspect of our business is now run on SAP.”

Last May, Tasty Baking Co. announced it had entered into an agreement with Liberty Property/Synterra Ltd. to relocate its Philadelphia bakery to leased facilities at The Navy Yard — a commercial and industrial development center in Philadelphia.

It wasn't the first time the company had thought about building a new bakery, but the approach of leasing the building freed up capital to pay for equipment. “At one time, if we tried to finance both the building and the equipment, it just became an onerous mess,” Bayles says.

State and city funding as well as low interest loans made it possible for Tasty Baking Co. to remain in Philadelphia, which was key. Pizzi used his vast experience in the public sector to leverage private investment with public funding. “We have $32 million of public dollars in this project, which is significant. We also have the full support of the commonwealth and city of Philadelphia, and we have four banks led by Citizens Bank. We had to get the financials in a position to get a new plant. We leveraged this company twice in value and closed our credit facility, and that was a pretty big thing.”

From vertical manufacturing…

Industrial engineers concerned with maximizing efficiency would be amazed with how products flow through Tasty Baking Co.'s current, six-story bakery. Although its flow seems somewhat awkward and antiquated, plant personnel have seemingly made the best out of a difficult situation. Bulk liquids are stored in the basement and bulk dry raw materials are stored on the roof. Mixing is done on the fifth floor, where most ingredients are hand weighed. Individual employees are dedicated to specified ingredients. In other words, one employee may be responsible for weighing 25 to 30 batches of cocoa.

Finished products are logically shipped out of the first floor, but most other processes flow either upwards, or more typically downwards via gravity to depositors and ovens that are located on the third, fourth and sixth floors.

For instance, 400-lb. to 500-lb. batches of chocolate cupcakes are mixed in a hopper on the fifth floor and dropped by gravity to the third floor, where they are deposited, baked, filled and coated with chocolate icing, followed by a chocolate ribbon on top, and then packed. One of the features associated with an iced Tastykake product is the softness of its icing, notes Jon Silvon, director of marketing.

“Products are deposited and baked at the shortest distance between floors going vertical,” explains John Sawicki, director of research and development. Therefore, Krimpets are produced directly above their mixers, and cupcakes are produced directly below its mixer. Finished cases descend by a spiral-sliding chute to the first floor for shipping.

In spite of the building's age, much of the bakery relies on state-of-the-art technology, most of which was tooled in-house by maintenance and engineering, Sawicki notes. All 12 dedicated pan tunnel ovens and the steel band oven are electric. The newest piece of equipment in the existing bakery is the automated robotic packer for the cookie line.

In terms of production scheduling, pies are run early in the morning because of their short life of eight days. On all our lines, allergen-containing products and the coconut varieties are run at the end of the day on a dedicated line, Silvon notes.

Although donuts currently are made in two industrial fryers at the Philadelphia plant, these lines will eventually be moved to the company's Oxford, Pa. plant, which houses the bulk of frying operations for Honey Buns and the remainder of donut processing.

…to horizontal manufacturing

Tasty Baking Co. recently broke ground on its new 345,500-sq.-ft. building, which will include the production facility, a warehouse and a distribution center. The company plans to purchase new high-tech equipment designed to increase product development flexibility and production efficiency.

“The new facility follows conventional modern baking theory,” Bayles explains. “The more you can have a simple, efficient, logical flow, the better off you're going to be. In our multi-story bakery, we suffer a lot from not having that flow as we go up and down floors; things are split between two levels. There's a lot of ‘where's the sugar,’ so in the flow, it's a very simple pattern. Products flow down the line in one direction. When completed, they end up at the foot of distribution, and then right into the distribution center and right out to trucks.”

Although products are currently produced on 15 production lines in the old Philadelphia plant, the new, streamlined bakery will require only seven lines. During the strategic planning phase, Bayles and her team used what she calls “right-sized capacity” to determine that seven lines would be needed in the new plant. The old bakery has too much capacity for certain products and not enough capacity for others. Long-term planning involved forecasting to determine potential product mix, volumes and growth, in combination with line speeds and throughput expected from equipment designed with modern technology.

The new bakery will have obvious efficiencies and reduced labor requirements, with an “anticipated savings of $13 to $15 million dollars, net of facility leases and before debt service” Pizzi says. “Operating cash flow is expected to double, which will give the company a lot of cash to redeploy in building its brand, new product development, marketing and geographic development,” Pinheiro adds.

Tasty Baking Co. also is approaching its design with sustainability and environmental awareness in mind. “We're going in with green principles, so we're targeting platinum LEED on the office building,” Bayles says. “On the bakery, it's trickier because we have all of this processing equipment, so we're trying to go for a base level LEED certification. We're looking at whatever we can to try and build environmentally friendly and operationally efficient. Five of our cake lines will have thermal oil heating, which is reusable. As the oil circulates around, it gets heated, so there's not the waste you have with other heating methods.”

The new bakery also will have a mezzanine for public tours. Now, someone will pick up a cake and exclaim how exciting it was to visit the office, Pizzi notes, imagine how excited people will be to see actual production in process.

Back to the future

Many of the changes that Pizzi and his team have implemented place the company in prime position for future success, while maintaining the traditional quality and brand identity of its products. All of these action plans align directly with the company's five strategic growth initiatives.

A number of new products have been introduced since 2003, particularly those in the wellness category, including sugar-free, low-fat and 100-calorie. Some 80 new products have been introduced since the new management's inception, Pizzi notes. The sugar-free wellness platform was introduced at the end of 2004 and is now generating $9 million in sales.

Tasty Baking Co. also is building brand equity with marketing programs and by aligning the Tastykake brand with sporting events and sports teams. The company has entered the Hispanic market and recently went on air with a television commercial for the first time in nearly 20 years.

About 500 distributors comprise the core routes of the company's direct store delivery (DSD) system. Pizzi and his managers are communicating more frequently with these distributors and have formed a Sales Distributor Advisory Council, so they can get feedback on a more timely basis. “They're the best focus group we have,” Pizzi says. “We've increased the discount rate to them and are working on building up trust and credibility. We've also increased our regions and reduced our span of control from 22:1 to 14:1, which is more in line with industry norms. Now, there are only 14 distributors to one supervisor, so there's a lot more support.”

New markets are being acquired by using what Pizzi calls a “bolt on” strategy. New regions are effectively “bolted on” to core market areas that are easily accessible.

“Pizzi and the new board had to reinvest in the business,” Pinheiro says. “They brought in new people with IT experience; who had different views on brand management and volume versus profit tradeoffs. They installed ERP, a meaningful and necessary capital cost. Pizzi has hired the right people. The old management looked at moving the bakery, but could never pull the trigger. Pizzi has the intestinal fortitude to gut through the period between the old and the new bakery, where you see earnings fall (because of the depreciation of the old building and all of the equipment that's in it).”

Although the baking industry is facing numerous challenges given the state of commodities, Tasty Baking Co. appears to be poised for growth as it builds on the strength of its Tastykake brand. “We have a management team in place that has leveraged technology, and we have the opportunity, with this new facility, to transform and revolutionize our business,” Pizzi says. The company looks forward to opening its new bakery in 2009 so it can provide consumers with the same great tasting product that they've enjoyed for nearly 100 years.•

Tasty Baking Co.
at a glance

Headquarters: Philadelphia

Ownership: Publicly traded on NasdaqGM (Ticker Symbol: TSTY)

Web site: www.Tastykake.com

Board of directors: James Ksansnak, chairman of the board, Tasty Baking Co., retired vice chairman, ARAMARK Corp.; Charles Pizzi, president and C.E.O., Tasty Baking Co.; David West, president and C.E.O., The Hershey Co.; James Hellauer, retired executive director, The Colman Group; Ronald Kozich, retired managing partner, Ernst & Young LLP, Philadelphia; James Nevels, chairman, The Swarthmore Group; Mark Timbie, president, North American Consumer Foods, McCormick & Co. Inc.; Judith von Seldeneck, chairman and C.E.O., Diversified Search Ray & Berndtson Inc.; and Mark Conish, executive vice president, Global Operations, Church & Dwight Co. Inc.

Executive Officers: Charles Pizzi, president and C.E.O.; Autumn Bayles, senior vice president, strategic operations; Paul Ridder, senior vice president and C.F.O.; Laurence Weilheimer, senior vice president, general counsel and corporate secretary; Robert Brown, vice president, route sales; Christopher Rahey, vice president, direct sales; and David Vidovich, vice president, human resources and labor relations

Product line: Fresh snack cakes, pies, cookies and donuts under the Tastykake® brand

Marketing territory: Eastern seaboard and westward to Cleveland

Plant size: Philadelphia bakery, 585,000 sq. ft.; Oxford, Pa. bakery, 160,000 sq. ft.

Production lines: 15 production lines-three cupcake lines, two donut lines, one cookie line, two Kandykake lines, one Kreamie line, two pie lines, three Krimpet lines and one Junior line

Plant throughput: About 4.8 million cakes, donuts, cookies and pies per day

Packaging: About 200 SKUs-32% single serve packaging and 68% family packs

Sales: $169.9 million (2007 net sales)

Distribution: About 500 exclusive independently owned and operated DSD routes (72% of gross sales); Non-route sales — third-party distribution and direction sales (28% of gross sales)

Number of employees: About 900