Grupo Bimbo Acquisition Part of Changes in Fresh Bread Market

 |  Includes: FLO, GRBMF, HSH, IBCIQ
by: Rick Shea
The fresh bread market has gotten a lot more interesting in the last few months. Grupo Bimbo (OTCPK:GRBMF) recently announced the acquisition of George Weston Bakeries. Grupo Bimbo (a Mexican company) owns the leading West Coast brand Oroweat, along with Mrs. Baird's. George Weston brands include Entenmann's,Thomas English Muffins and fresh bagels, Arnold,Brownberry and Stroehmanns breads.

The purchase by Grupo Bimbo is a reunification of the Bestfood Baking brands that were sold and split up in 2002. The combined company will provide the first truly national footprint for premium bread and baked goods. This is important as it will provide them greater access to key feature ads at mass merchandisers like Walmart (NYSE:WMT), Target (NYSE:TGT) and Costco (NASDAQ:COST). This will in effect turn up the heat vs. their key competitors like Sara Lee (SLE), Flowers Foods (NYSE:FLO) and Pepperidge Farm - a division of Campbell Soup (NYSE:CPB).

In addition, Interstate Bakeries (OTC:IBCIQ) (owner of Wonder, Home Pride and Hostess brands) continues to work on financing for exiting bankruptcy. Interstate Bakeries was to have received additional funding from several firms including GE Capital and Ripplewood holdings. This, along with concessions from the Teamsters, was the main plan for turning IBC around and improving sales and profitability. IBC recently announced that 4th quarter operating loss increased to $41mm perhaps casting a doubt on its ability to exit bankruptcy. Interstate's attempts to turnaround their struggling business so far have proven unsuccessful.

Lastly, the decline in grain prices and the steep drop in gasoline prices bodes well for bakers. These two commodities make up a large percentage of all baking companies' P&Ls. Flour is obviously the chief ingredient in sliced breads, and gasoline and route costs are one of the key cost components for distribution of fresh bread. Most fresh bread companies operate utilizing an independent operator system where the cost of gas is paid by the independent operator. As gasoline has increased, there has been increased costs with bread manufacturers subsidizing their Independent Operators to keep them servicing their customers on a regular basis. This additional fuel charge has now gone away. As a result, baking companies' margins are projected to improve over the next few months. Of course, the flip side is consumers are more price sensitive than ever.

So what does all this mean? Look for Grupo Bimbo to consolidate its premium breads under the Oroweat brand name for national distribution. Flowers will look to respond with further geographic expansion and possible additional acquisitions. IBC's situation is still the big unknown but bet on more poor operating results or a possible combination. Sara Lee will also likely be forced to make a move. With continued consolidation occurring in the industry, don't bet on significantly lower bread prices for the consumer, even with lower commodity costs and a recessionary environment.