By Keith Seiz
editor

Eight different bakers. Eight different backgrounds. Eight different opinions. When Baking Management editors approached leaders of eight commercial bread manufacturers with 10 questions about the baking industry, we had no idea the range of answers we would receive. After all, these eight bakers share a common goal: providing North America with breads.

Why then, do these eight executives have fundamentally different opinions about the past, present and future of the bread industry? This question is answered in the comments of the bakers interviewed for this story. These comments detail a state of transition from the old to the new. However, the extent and significance of this transition differs from baker to baker. Baking Management's State of the Bread Industry Report analyzes these differences and offers a snapshot of the baking industry in 2005, and provides a glimpse into future bread trends and baking issues.

The bakers
Baking Management compiled data for this story by identifying a cross-section of the baking industry that most aptly represents the commercial bread business. The first target was publicly held multi-unit bakeries. These bakeries supply the bulk of the bread industry and deal with bread aisles in multiple geographic regions. They also have to answer to shareholders. In this report, Interstate Bakeries Corp., Kansas City, Mo., and Flowers Foods, Thomasville, Ga., represent this section of the industry.

Next, Baking Management solicited opinions from large, privately held independent bakers with one to 10 plants. These bakeries have a different set of issues and viewpoints, and for the most part, only deal with one geographic region. This report includes comments from Perfection Bakeries Inc., Fort Wayne, Ind.; Butterkrust Bakery, Lakeland, Fla.; and Alpha Baking Co., Chicago.

Baking Management also approached niche bread manufacturers, such as King's Hawaiian Bakery, Torrance, Calif., and French Meadow Bakery, Minneapolis. These bakeries operate one plant and supply the bread aisle with niche products such as organic, functional and specialty breads. Finally, Baking Management solicited the opinion of Canada Bread, one of Canada's largest sliced bread manufacturers.

The questions
Baking Management asked each baking industry executive to answer the same 10 questions about the past, present and future of the baking industry. These questions deal with many baking industry issues, from low-carbohydrate diets and fish oils to excess capacity and extended shelf life. This report provides a unique peak inside the minds of some of North America's leading bakers.

1. In the last two years, what single event had the biggest impact on the bread industry?
The low-carbohydrate craze dominated the industry for the last three years, and is the most frequent response to this question. From the sudden popularity of the carbohydrate craze to its just as sudden demise, this once fad diet is still on bakers' minds.

"Short-term, low-carb had the biggest impact on our industry," Larry Marcucci, Alpha Baking Co.'s president, says. "But on the flip side, lowcarb is pretty much over with."

The lifespan of low-carbohydrate mania was a roller coaster ride for the baking industry. For bakeries such as Flowers Foods, this diet phenomenon did not negatively impact the company, Gene Lord, Flowers Foods Bakeries Group's president and chief operating officer, says. The Thomasville, Ga.-based company was the first commercial bakery to launch a low-carbohydrate bread, thus reaping the benefits of minimal competition in the marketplace.

Other bakeries did not fare as well. From the summer of 2002 to the end of 2004, many bakeries reported plunging volumes. This period marked a nadir in the bread industry, with many bakers content to tread water until the storm passed.

Despite the significance of the lowcarbohydrate craze, the fad diet is not the only event to impact the bread industry. "The government's new dietary guidelines, designed to promote increased consumption of whole grains, are having a growing, and likely lasting, impact on the bread industry," Tony Alvarez, Interstate Bakeries Corp.'s interim chief executive officer, says.

Barry McLean, Canada Bread Fresh Bakery's president, agrees and points to a laundry list of issues as having a significant impact on the bread industry, including an aging population, increasing obesity rates and growing consumer interest in nutrition.

2. What will be the lasting impact of the low carbohydrate craze on the bread industry?
"It burst the bubble that we were all living in," Marcucci says. "We rode flour consumption for 150 years, and low-carb told consumers that carbs were not always the best thing for you."

The low-carbohydrate diet had a significant impact on consumers and bakers. For consumers, the diet was a wakeup call. "People are no longer just removing fat from their diets," J. Bohn Popp, Perfection Bakeries' vice president, says. "They are concerned about other nutritional issues such as carbohydrates, fiber, whole grain and fortification like calcium and natural ingredients."

Although consumers are nutritionallysmarter, bakers still need to keep their finger on the fad diet pulse. "I'd like to hope that this latest diet craze taught consumers the difference between fads and sound nutritional guidance, but I'm sure that we'll see other diet crazes in the future," Lord says.

For bakers, the low-carbohydrate craze had an even more significant impact. "It encouraged our industry to make our products healthier," Doug Wimberly, Butterkrust Bakery's president, says.

According to Shelby Weeda, King's Hawaiian Bakery's president, the lowcarbohydrate impact taught bakers "that one should conduct more research before jumping into a consumer trend."

Most importantly, the low-carbohydrate craze taught bakers the importance of innovation. "It forced us to look in the mirror and it forced us to become more innovative," McLean says.

The low-carbohydrate craze also forced bakers to operate their businesses better. Instead of relying on volumes, bakers focused on profit margins. Many bakeries exited their private label businesses and began pushing their branded products.

"Low-carb has allowed bakers to realize that grains are a nutritional value, and this thought has enabled many to derail the promotion giveaway train that bread companies used as their primary promotional strategy," Popp says. "Today, I am seeing for the first time true brand equity introduced into the industry. Bread companies are competing through consumer marketing, product development, marketing and positioning. The bread industry seems to be realizing that bread and whole grains are a valuable product and there is no reason why we can't charge a fair price for it."

3. Do you feel the "evolution of the bread aisle" from white flour products to wheat and whole grain products has been exaggerated?
Executives are split on this question: three say yes, three say no and two straddle the fence. Not surprisingly, two of the bakers that work for large, multi-unit bakeries say that the " evolution of the bread aisle" is being exaggerated.

"While there has been a slow decline in white bread consumption over a long period of time, white bread still accounts for more than four in 10 bread units consumed," Alvarez says.

Lord echoes this opinion, stating that he does not think there will ever be a time when the bread aisle transforms into shelves of only whole grain products.

On the other side of the coin are bakers such as Marcucci. "Every time I look at the bread aisle I'm amazed at how much variety I see there," Marcucci says. "I don't think the shift is exaggerated at all, I definitely see the transition."

In Canada, McLean says the "evolution of the bread aisle" already has occurred, with traditional white pan bread only accounting for a third of the market.

4. What is the future of white bread?
"White bread has been demonized about as much as any food over the last two to three years and sales are in decline nationally," Popp says.

Almost all of the bakers interviewed for this report say this decline will continue. However, most of the bakers are optimistic about white bread's continued place in healthful diets. "The mild taste and very soft texture of white bread makes it incredibly well-liked by a large segment of consumers," Alvarez says. "Going forward, we expect it to remain a significant part of bread consumption, even as new products are introduced and wheat varieties gain in popularity."

To jump-start the white bread category, many bakers say the benefits of fortification and enrichment must be publicized and expanded. "To stem the tide of the decline in white bread, bread companies need to think about what they can do to bring some positive elements back to white bread," Popp says.

Despite its bad reputation in the last five years, white bread is a nutritious product with countless nutritional benefits, such as B vitamins and folic acid. "We should not overlook the health benefits of white bread," Alvarez states.

In fact, many bakers feel that these health benefits should be amplified by adding more vitamins, fiber and calcium. "I think the company that can successfully produce a good tasting white bread with these elements will see a growth pattern for the next three to five years," Popp says.

5. Do you think whole grain and multigrain breads will have a lasting impact on the look of the bread aisle?
The bakers interviewed for this report answer this question with a resounding yes. "Whole grains are not a fad," Wimberly says. "They are a lifestyle product that tastes good."

Baby boomers play a large role in whole grain consumption, and bakers say this segment of society will continue to exert its influence and buying power. "As baby boomers age, they are discovering the benefits of whole grain and highfiber breads in their diets," Lynn Gordon, French Meadow Bakery's president, says. "And, the children of baby boomers, the 'thirty somethings,' are going to continue this trend."

The new Dietary Guidelines for Americans and increased nutritional education also will continue to push whole grain bread consumption upward. "With new dietary guidelines and increasing consumer awareness of the benefits of whole grain nutrition, whole grain and multigrain products will continue to gain in popularity," Alvarez says.

However, the rush to flood the marketplace with whole grain products has caused confusion among bakers and consumers. "Most consumers don't understand that there is a difference between a product labeled 'whole grain' and a product labeled '100% whole grain,'" Lord says. "It's very confusing and the industry has a responsibility to help them understand what these descriptions mean."

6. Do you think Food and Drug Administration should relax restrictions on whole grain health claims to enable more products to carry a whole grain claim?
Most bakers interviewed for this report say FDA's whole grain health claim requirements are suitable for the baking industry. "You can't have something called whole grain when all you did was wave the bucket of ingredients near the mixer," Marcucci says.

Popp echoes this statement by saying that Perfection Bakeries' labeling policy requires "that any of our whole grain products have whole grain listed as the first ingredient on the nutritional label."

Other bakers, such as Alvarez, say FDA's restrictions on whole grain health claims are too stringent. "While it is appropriate to have standards, some of the requirements essentially prevent bread manufacturers from contributing to an increased consumption of whole grains among consumers—the expressed goal of the new guidelines—by limiting labeling only to whole wheat bread," Alvarez says.

Gordon believes that education about whole grain nutrition is more important than actual claims. "The benefits of whole grains are in the whole grains and not the claims."

7. In the last 12 months, multiple commercial breads with fish oils in their formulas have been released. Do you think ingredients such as fish oils, resistant starches and other nutraceuticals will play a major role in the next generation of bakery foods?
"It is always difficult to distinguish between a fad and a trend," Alvarez says. "In our view, taste and economic issues will be the most important factors in determining the long-term appeal of products such as omega-3 fish oils."

This question divides the baking executives interviewed for this story. Many think that nutraceuticals will play a role in the future of the baking industry, but some are skeptical about how large a role these ingredients will play. "People don't, as far as I'm aware, eat bread to get their intake of fish oils," Marcucci says. "If people want fish oil, they will eat salmon."

"I don't think introducing [nutraceutical-rich breads] will be quick or easy," Lord says. "We have to ask ourselves if the average consumer has any knowledge of these ingredients or substances. To say a loaf of bread contains omega-3 fatty acids may actually be misunderstood by consumers who don't know what it is or its benefits."

8. With the amount of bakery closings in the last two years, has industrywide bread capacity finally normalized, or is there still excess capacity?
This question has all of the bakers on the same page. "There are still seven to nine competitors in a lot of the markets," Wimberly says.

And, with this abundance of competition comes an abundance of bread ovens. As part of its strategy to emerge from bankruptcy protection, IBC closed six bakeries. And, Alvarez says, "there continues to be excess capacity in the industry."

In Canada, McLean says there is very little excess capacity due to many years of bakery closings and rationalizations. "The U.S. industry has been very responsive to the need to remove capacity in the past two years, which is a positive move for the industry," McLean says. "However, there is still more to be done before supply and demand will truly be balanced."

Despite overcapacity, Lord says that most of Flowers Foods' bread plants are operating at or near capacity. The company plans to open a new bakery about every 18 months to two years to deal with its capacity problems.

9. Has the quest for extended shelf life in the bread industry been good, bad or neutral for your bakery and the bread industry in general?
This is the million-dollar question that evokes strong, different opinions from many of the bakers interviewed for this report. "I believe that ESL has been primarily a negative issue for the industry because it was used for the wrong reason, which was purely cost cutting," Popp says. "If ESL had been developed to increase sales through increased distribution then it could have been a very positive move for some of the bakers who implemented this plan."

Alvarez holds an opposing viewpoint. "As long as quality and consistency are maintained, extended shelf life provides benefits for the industry and consumer, allowing manufacturers to more efficiently manage high-cost distribution systems, while providing consumers with products that stay fresh longer."

IBC made a splash in the baking industry when it launched ESL bread as a method to reduce distribution costs. When IBC's ESL program was first launched, a philosophical discussion broke out in the industry over the pursuit to cut costs and the pursuit to produce "fresh" breads.

"When pursuit of ESL technology becomes a cause into itself and we start to make trade-offs on some of the key attributes consumers associate with our category, like freshness, then it can lead to some decisions which compromise our business," McLean says. "When ESL technology is pursued solely with the objective of optimizing production or distribution, then I believe decisions can be made which ultimately compromise the product quality."

After IBC launched its ESL breads, many bakeries followed suit, some with the same quest of IBC to double the shelf life of bread, and others with a more cautious approach. "We took a very cautious approach to it, increasing the shelf life of our breads by only one day for some minor benefit," Lord says. "When it comes to bread, consumers still want to buy a loaf that was baked fresh today. They aren't interested in a loaf that has been sitting on the shelf for a week and still has a week left on its date code."

Consumers also are not interested in a bread shelf that is poorly stocked and rotated, which is something Marcucci says ESL invokes. "If you use ESL ingredients to decrease the amount of trips your driver takes to a supermarket, then your competitor is going to eat you alive," Marcucci says. "You're going to walk in one day and wonder where all your shelf space has gone."

However, Marcucci believes that ESL has its uses in certain market channels such as convenience stores and institutional channels such as schools and prisons. "If you can reduce your deliveries to those places, then you have saved a lot on distribution costs," Marcucci says. "But if you try to do it in a grocery store where you're fighting for shelf space, you're going to get eaten alive."

10. In the upcoming year, what is your bakery's plan for growing sales and encouraging consumers to buy more bread products?
For the most part, the bakers interviewed for this story say they plan to increase bread sales by building brand equity, manufacturing more healthful products and listening closely to what the consumer wants.

"We will continue to focus on the quality and taste of our breads and on providing great service to our customers," Lord says. "There are few other foods out there that have the health benefits of bread along with taste, convenience and value. The baking industry has a great story to tell and we need to do a better job just doing that."

BAKING MANAGEMENT'S STATE OF THE BREAD INDUSTRY PANEL OF BAKING EXECUTIVES Tony Alvarez II is interim chief executive officer of Interstate Bakeries Corp., Kansas City, Mo. He is co-founder and co-chief executive officer of Alvarez & Marsal, a global professional services firm specializing in turnaround management. Since September, Alvarez and a team of senior A&M professionals have led IBC's restructuring. Lynn Gordon is the founder and president of Minneapolis-based French Meadow Bakery, a certified organic, yeast-free bakery that started in her kitchen in 1985. French Meadow Bakery has grown into a dominant force in the functional foods industry, and its healthy breads, bagels and pizza crusts are enjoyed by customers from around the world. Gene Lord is president and chief operating officer of Flowers Foods Bakeries Group, Thomasville, Ga. Flowers Foods produces a complete line of fresh breads, rolls, and snack cakes and frozen breads and rolls. These products are marketed through the company's two operating groups—Bakeries Group and Specialty Group. Larry Marcucci is president of Alpha Baking Co., a Chicago-based bakery that distributes a variety of bread and roll products under such brand names as S. Rosen and Mary Ann. The company distributes these products to supermarkets and the food service industry in the Midwest. Barry McLean is president of Canada Bread Fresh Bakery, an independent operating company of Maple Leaf Foods Inc. Under his leadership, Fresh Bakery operations continue to grow market share in its major brands, including Dempster's®, Olafson's, POM® and Ben's®. Dempster's is the leading brand of fresh bread in Canada. J. Bohn Popp is vice president of Perfection Bakeries, a family-owned company headquartered in Fort Wayne, Ind. The company operates seven bakeries in three states and produces bread and bakery foods throughout the United States, with primary distribution in the Midwest. Shelby Weeda is president of King's Hawaiian Bakery West Inc., Torrance, Calif. He joined King's Hawaiian in 1981 as vice president, sales and marketing, after gaining valuable marketing experience as a division manager for Standard Brands Foods, a division of Nabisco, and an area sales and marketing manager for Gallo Wine Company. Doug Wimberly is president of Butterkrust Bakery. The Lakeland, Fla.-based bakery has baked quality bakery foods for more that 84 years under the Country Hearth, Rich Harvest and Sunbeam brands. The company distributes its products to supermarkets and restaurants throughout Florida.