Volatile ingredient prices of the last nine months not only have disrupted bakery supply channels, they have tested baker-distributor relationships as never before.
Historically, prices of one ingredient, sometimes two, would climb dramatically and fluctuate as the forces of supply and demand sought equilibrium. Bakery supply houses and bakery operators more often than not rode out the disruptions fairly easily. But, this recent go-around played out differently, and experiences from it offer guidance for distributors and bakers.
“When flour prices began to rise last fall, everyone was caught unaware,” recalls Pete Levangie, executive vice president and chief operating officer, Bay State Milling Co., Quincy, Mass. “Most players in the supply chain were ill positioned to deal with what was coming.”
Volatility increased, and the divergence between operators who became well positioned to ensure they would have flour this crop year and those who would not grew, he says.
Distributors were in a bind because “millers couldn't offer some sense of the markets' direction, and that, in turn, didn't help us with our customers,” adds Kevin Johnson, co-owner, Johnson Bros. Bakery Supply, San Antonio. “Some days we couldn't obtain quotes from millers because wheat futures prices had gone up (their maximum permissible daily) limits. The millers didn't know what they would be paying for wheat.”
The impact on bakery operators was immediate. “We normally book flour for a period of months,” says Tammy Kampsula, bakery director, United Supermarkets, Lubbock, Texas. “But, early this year we sometimes had to go week to week.”
Distributors who filled their flour needs in February purchased flour at their highest prices. Soon prices began easing, leaving those distributors to dispose of their high-priced inventories.
Levangie notes that by early May many distributors had worked themselves out of having purchased flour in February. “The market settled into a trading range, though wide,” he says. “Unfortunately, this created a lot of competitive price tension on the street.”
The price of a bag of flour could vary $5 between two suppliers, depending on when each bought their flour. Because of wide variations in prices, distributors saw some loyal customers begin to cherry pick bakery supply houses for flour prices.
Gary Gardner, president, B.H. Gardner Co., an Indianapolis bakery supply house, cautions bakery operators to not cherry-pick bakery suppliers for lowest price. Bakers generally are better off working with a distributor who can offer a broad range of products and can pass along savings because the operator buys in larger quantities, he says.
“Where it makes sense, bakers should consider buying in pallet quantity if they have storage capacity,” Gardner notes, “and they should buy a pallet every two weeks, rather than 10 or 15 bags every week. The supplier doesn't have to break a pallet and add handling time and shipping expense. This helps keeps costs down.”
Bakers and distributors have to work together with their distributors to get through tough times, says Dan (Klecko) McGleno, owner, St. Agnes Bread Co., a St. Paul, Minn., a specialty wholesaler that consumes 12 to 15 pallets of flour weekly. Klecko explains that his primary distributor was concerned about St. Agnes' continued success.
The contract ensures that “we are guaranteed of having flour for the next 12 months,” he says. “I can tell my accounts with confidence that we're covered, and that they will receive their product.”
Distributors are in the same position as bakers, Klecko adds. “Prices can make or break their businesses if they don't come up with a strategy.”
Increased shipping costs have added a new dimension to selecting suppliers, according to Lynn Shurman, owner, Cold Spring Bakery, Cold Spring, Minn. “We are probably better off buying more products from only a couple of suppliers, rather than get the best price for chocolate icing from one and pay a $20 surcharge for that delivery because that was the only product purchased and shipped,” she observes. “If bakers look only at product prices and do not consider fuel charges, they may be surprised with what they actually pay.”
She adds that her suppliers have increased their minimum size deliveries. As a result, the bakery purchases every other week or monthly, depending on the time of the year. “But, in doing this, we must be sure of our needs for two weeks and not face shortages,” Shurman says.
During the chaotic price increases, some bakery operators turned to foodservice distributors and wholesale club stores for flour. As flour prices began to climb, foodservice suppliers and club stores sold flour, based, as is their practice, on their last cost.
Bakery distributor prices became less competitive because distributors turned inventory more quickly and had to purchase flour at higher prices, observes Ted Heim Jr., vice president, Inter-County Bakers Inc., a bakery supplier in Lindenhurst, N.Y. “Bakers would ask, ‘Why should we buy $50 flour when we can get it for $40?’” Heim adds.
The foodservice channels quickly exhausted their inventories of less-expensive flour and purchased flour at prices greater than those paid by distributors. This made distributors' prices more competitive. The price benefit that the club stores offered was short lived.
During the next run-up in prices, club stores imposed limits of five bags per purchases. “As a result, they didn't sell flour for a month and a half. They effectively stepped out of the flour business,” Heim says. “Then, when prices eased off, they jumped back into the market. This forced distributors to move inventory at below cost.
“Yes, distributors' prices were higher at times, but they had the flour to fill bakers' needs. Club stores and foodservice distributors showed that they are not dependable commodity distributors in the market every day for bakers as are bakery supply houses.”
The volatile prices also revealed that bakery distributors who sell primarily on price cannot compete because they will not always have the lowest prices, Heim adds. “Bakery distributors cannot come into and then leave the flour business like foodservice suppliers.”
Relationships and trust between baker and bakery distributor became critical, he continues.
Bakers, in turn, need to evaluate the value of working with a distributor whom they can trust, Heim says. “When distributors contract for flour, they take risks that prices might decline, but they do this to ensure that they will have flour for customers,” he explains.
For example, Inter-County purchased three months' supply of flour in February. “The price turned out to be a little high, but we didn't know that at the time, and talk was circulating that the mills might allocate shipments.
“I believed it was too risky not to buy. Turns out that the distributor who sat back and bought on the spot market was right,” Heim says. “But, who was to know? With flour allocation being spoken of as a real possibility, we could not risk that our customers would not have flour.”
Distributors report that bakery operators are requesting extended credit terms and higher dollar limits for purchases because of the increased ingredient prices. Concurrently, some millers are tightening their terms with distributors.
Kevin Johnson, co-owner of Johnson Bros. Bakery Supply, San Antonio, observes that distributor and baker alike are being stretched thinly, noting that his firm has experienced a 5 percent drop in gross profit in commodity items. “We are sacrificing margin to help our customers, but we cannot sacrifice receivables,” he explains. “If we extended credit terms, we wouldn't be in business for our customers. We're all in the same boat and have to pay our bills.”
Petroleum's concurrent run-up in prices has only aggravated conditions, exacting heavy tolls on bakery distributors' ability to service customers. Many suppliers have had to impose larger minimum orders, and consolidate delivery routes and/or drop marginally profitable customers.
Johnson points to diesel fuel prices. In April, his firm's fuel costs of $52,000 for the first time exceeded vehicle leasing expenses of $49,000. A year ago, the fuel bill was $24,000.
During the last several years many distributors, such as Inter-County Bakers, have invested in distribution technology, which has improved routing efficiency and helped to curb rising costs. “We've worked hard to ensure that every truck leaves full and does not travel excess miles,” Heim says.
Distributors also should ramp up efforts to help their bakery customers become more successful, Johnson says, including offering ideas about which products to emphasize, which to drop, which items could be downsized without cutting quality, and which new products to consider.
Similarly, distributors will to have to think more about price risk management for their customers, particularly as it relates to commodity-type items, according to Bay State's Levangie. “This will require collaboration of distributors with millers and manufacturers, something that is relatively new, and we have a lot to learn,” he says. “Distributors will need to look back into the supply chain at millers and manufacturers who have more experience with managing commodity volatility.”
Distributors also will have to think more broadly about leveraging their entire baskets of products, he says, because commodity markets are becoming increasingly inter-related as what happens with one commodity often affects one or more other commodities.
“Both businesses grow at best with population growth, even less when you consider the decline in per capita flour consumption,” Levangie explains. “So, we have few opportunities to differentiate ourselves.
“As much as this will be a challenge, the flip side offers big opportunities for those who manage to figure out how to navigate this new volatility. They stand to grow appreciably relative to those who don't.”
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