McMullian stresses the urgent need to evolve Flowers

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THOMASVILLE, GA.
Viewed from many angles, Flowers Foods, Inc. is unrecognizable from the past, the company‘s top executive said. While proud of Flowers’ long tradition as a major commercial supplier of fresh bread and snack cakes, A. Ryals McMullian, President and CEO, said in an interview that entirely new approaches are needed for success. of Flowers in the years to come.

“Our business is nothing like what it was when it started or when it went public or what it was in the 1980s or even five or six years ago,” Mr. McMullian in an interview conducted in March in Tallahassee, Florida.

The interview was Mr McMullian’s first since becoming the seventh CEO in Flowers’ 103-year history. To be published by Milling and Baking News in a series, the candid and insightful exchange details changes being undertaken or planned for the company, offers background on Flowers’ CEO, and recounts how Flowers landed Dave’s Killer Bread in 2015, a transformational acquisition for the company. The interview discusses the state of the company’s four strategic pillars, namely building its brands, building its management team, increasing efficiency, and growing through mergers and acquisitions.

President and CEO since May 2019, Mr. McMullian offered an overview of how change has played out at the Thomasville, Georgia-based company. He said the catalyst for change was a finding by management in the mid-2010s that a growth playbook tracked from the 1970s through the first 15 years of the 2000s had run its course.

“For much of Flowers’ history, growth has been driven by geographic expansion,” he said. “As you know, we made about 115 acquisitions. Most of these purchases were to buy the next family bakery and expand our geographic territory from Thomasville. It was the growth strategy for a long time and it was very effective.

After acquiring the various bakeries, Flowers generally continued to sell the regional brands acquired in the transactions locally while adding the Flowers’ Nature’s Own brand to direct-to-store delivery routes. The strategy has proven successful over time, making Nature’s Own the top-selling variety bread brand in the United States. Mr. McMullian said that description, while accurate, does not paint a complete picture of what happened after the acquisitions. Although a great success in hindsight, Nature’s Own took longer to gain traction in many markets than is generally thought.

“Nature’s Own was introduced in 1977, and when you entered a new market, nobody knew what Nature’s Own was,” he said. “So to keep those factories full, we’ve taken on restaurant and private label business while raising awareness of Nature’s Own.”

McMullian said that just as the gradual growth of Nature’s Own is part of Flowers’ legacy of geographic expansion, so is the growth of foodservice and private label.

“The thing is, you had to take on some of that unit volume to cover your overhead,” he said.

Moving away from reliance on commoditized, low-margin businesses and instead focusing on national brands is “the centerpiece of our strategy today,” he added.

The transition to this new approach has not been easy.

“We had to change a lot of mindsets and thinking to get there,” he said. “By the way, this is not a criticism (of the previous approach) because it was the right thing to do at the time.”

Over time, however, focusing on unit volume without considering the value of that volume is a losing proposition, McMullian said.

FlowersFoods_RyalsMcMullian_sized.jpgA. Ryals McMullian“If you sell low, you won’t make money,” he said. “Because at the end of the day, as someone I know very well said, we’re not here to make bread. We are in business to make money. We are a public company and we are accountable to our shareholders to make money and maximize shareholder value. In the meantime, we produce a quality product that we and consumers can be proud of. But we have to make profit for the shareholders. Our brand business is where we generate most of our margin. The difference between then and now is also that we have a portfolio of #1 brands, Nature’s Own, Canyon and Dave’s Killer Bread are all #1 in their segments. Dave’s owns 70% of the organic space market. Canyon accounts for approximately 35% of the gluten-free segment. They have gone from #4 when we acquired them to the category leader today.

Despite difficult bread volume trends over the past year, McMullian said innovation in the bread category in recent years makes him optimistic about the outlook. He contrasted current innovation with an extended period in which few exciting new products were introduced.

“I think for a long time those of us competing in the traditional bread segment were just trading unit shares back and forth, and nobody was really doing anything innovative,” did he declare. “No one was bringing the customer anything new and different – ​​flavor profiles, shapes, time slots, whatever. I think that’s starting to change. ‘ve done with Dave’s. I think we’ve also done it with Canyon and (Nature’s Own) Perfectly Crafted. The retailers I talk to are clamoring for innovation. It’s the first and last thing that comes down to every meeting we have. ‘Bring us more innovation.’ And that is why we intend to invest heavily in it.

Consumer reaction to innovation can leave hardy varieties in a diminished position compared to the past, McMullian said.

“When you have the option of enjoying a Perfectly Crafted loaf or a loaf from Dave’s Killer Bread, do you really want 100% whole wheat every day?” he said. “So I think what you’re going to see over time is kind of an ongoing migration from that traditional bread area to those specialty segments.FlowersFoods_CanyonBakehouse_HawaiianSweet.jpgCanyon Bakehouse, Dave’s Killer Bread
and Nature’s Own are all top-selling brands
in their brand segments.

“Consumer habits have declined across the whole traditional sliced ​​bread category… And so if a business doesn’t evolve with the environment around it, it will eventually become irrelevant. It may not happen tomorrow. It may not happen in a decade, but it will eventually.

“We still have a private label. We always have catering. These are important parts of our business. But these are support pieces. The main objective is not to keep our factories full of volume. The main goal is to keep factories full of as much mark volume as possible. And we have bakeries doing it today. They have almost no private label.

While super premium bread commands the highest retail prices, these brands have not always generated the highest margins in the past, either due to lower volumes, higher return rates or other obstacles. At Flowers, while its more expensive brands have gained market share, margins at Dave’s Killer Bread and Canyon Bakehouse have increased near the top of what Flowers generates, McMullian said.

“That wasn’t the case at first because Dave wasn’t very well known outside of the West Coast,” he said. “They would distribute frozen foods at Costco. But in Thomasville, Georgia, or Tallahassee, Florida, very few consumers knew about Dave’s, even though they were regular shoppers of other organic and non-GMO products. So at first we were very outdated. This is no longer the case. It’s just on par with Nature’s Own. Now maybe a little higher. Canyon is actually the highest margin brand in our portfolio.

Also in the mid-2010s was Hostess’ 2014 bankruptcy, described by Mr McMullian as a “watershed moment” for Flowers and the industry.

FlowersFoods_Wonder_HamburgerBuns.jpgHostess’ bankruptcy in 2014 was a “watershed moment” for Flowers and the industry.

“It gave us a national brand of white bread and buns in Wonder,” he said. “It affected the industry more than anything else because it removed all that excess capacity. What was fascinating was that the hostess disappeared from the market overnight. And the industry absorbed all the capacity, which had created inherent inefficiencies in the industry.

Much of the change instituted at Flowers in recent years stems from Project Centennial, a restructuring initiative launched in 2016. The initiative developed a strategic plan and reorganized – centralized – the management structure of the company.

Mr. McMullian called the Centennial project — carried out in consultation with Accenture — difficult but necessary.

“We needed to shake up the organization,” he said. ” It had to happen. There’s no way we’d be where we are now if we hadn’t ruffled some feathers and shaken up the organization to change mindsets. It was painful to cross. We learned a lot from it – things we did well and things we did wrong that we are applying now.

Describing the bakery industry today as “fundamentally consolidated,” McMullian said opportunities for future geographic expansion are limited and require new growth strategies.

While mergers and acquisitions remain a top strategic priority for Flowers, McMullian said “it’s been pretty quiet on that front” since the company acquired Canyon Bakehouse in 2018.

“Let me rephrase that,” he added. “It was quiet until we made a transaction. It wasn’t quiet when it came to finding candidates. We looked at at least a dozen over that time. Some more in-depth than others, but for some reason they just didn’t work. commercial, operational and financial convictions to make a deal. There are a lot of deals to be made out there, and we have a lot of money to make them. Our balance sheet is clean. We have a lot of dry powder to make n any deal we want. It’s the bad deal you make that can really hurt you.

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