Post-Pandemic Normalization Will Bring Some Challenges For Grupo Bimbo
Summary
- Bimbo saw significant and volume share gains in North America during the pandemic, but post-pandemic normalization will threaten those volumes and the operating leverage that came with them.
- Product innovation needs to remain an ongoing focus of management, as does further supply, manufacturing, and logistics improvements in the North American and European markets.
- Value-destructive empire-building through M&A remains a prime concern among many analysts, though smaller deals to add scale in the profitable QSR business and sub-scale geographies could make sense.
- Low-to-mid single-digit revenue growth and modest margin improvements can support a share price 20% higher than today's price with decent ongoing potential beyond that.
As people stayed home during the pandemic, Grupo Bimbo (OTCPK:BMBOY) (OTCPK:GRBMF) was one of the packaged foods companies to benefit. The company definitely saw a hit to its foodservice channels, as well as vending and convenience stores, due to the lockdowns, but increased at-home consumption of breads and other bakery products drove strong growth in North America and Europe, leading to meaningful operating leverage.
As consumer habits normalize once lockdown restrictions go away and people feel more confident going out, I expect Bimbo face some challenges. Just as a shift to staying at home drove volume growth, a shift back toward pre-pandemic behaviors should pressure volumes. With that potential volume pressure, it will be even more important for management to execute on supply chain, manufacturing, and distribution initiatives (many of which were delayed during the pandemic) to offset volume/scale pressures.
I was lukewarm on Bimbo shares back in September, and while the shares have since underperformed the S&P 500, they have done pretty well relative to other packaged food companies. The shares do look undervalued today, with 20% or more upside in the near term.
These shares look roughly as undervalued as Gruma (OTCPK:GPAGF) (OTCPK:GMKKY), but I’d note that where Gruma has a strong ROIC and operating track record, and minimal M&A risk, Bimbo has a poor M&A track record and more work to do on operating efficiency. Gruma, then, is a more defensive play with some offensive/growth characteristics, while Bimbo is more of an ongoing self-improvement story.
Holding On To Volume Gains Will Be Challenging
Bimbo saw double-digit growth in its North American operations throughout the pandemic (all four quarters of 2020), led largely by volume growth that was driven by pantry-stocking and a shift to at-home eating. While there were negative impacts to the company’s foodservice channels, the greater skew to quick service restaurants (or QSR) helped, as these businesses saw less negative impact on their businesses. Likewise, while there was some negative impact to volumes in areas like vending and convenience stores (C-stores), that’s not as big a part of the North American business as other regions.
Bimbo didn’t just benefit from an overall shift towards more at-home eating. Based on Nielsen numbers, Bimbo’s sales of breads and similar baked goods grew well above category averages, as the company actively gained share. Looking at comparable numbers on Flowers (FLO), it looks as though private label took the brunt of the share hit.
This was confirmed talking to some supermarket purchasing managers who told me that in many cases they couldn’t get the products they wanted. Producers were prioritizing their own brands (branded food companies often produce store-brand products as well) and simply didn’t have the capacity to service the private label demand.
What happens later in 2021 and into 2022 is the big question. I’ve read arguments that people instinctively turn to trusted and recognized brands in stressful times, but it may also be that some of the Bimbo share gains were a product of their literally not being store brand options available to buy. Either way, when people are no longer stressed about the pandemic, will they continue to preferentially buy Bimbo brands?
The bigger negative impact is likely to be simple normalization of consumer behaviors. As the pandemic restrictions leave, people will eat out more and most likely return to office-based work, reducing in-home eating. Bimbo will pick some of that back up through the foodservice channels, but this is fundamentally a low-to-mid single-digit revenue growth company, so I do think there will be some hits to volume in 2021 and 2022.
The North American business was the biggest beneficiary of the behavior shift, but Europe also benefited, so a lot of the above does apply to that business segment as well. In Mexico, the company is more leveraged to snack foods and as consumer behaviors normalize, the company should see volumes pick up.
Innovation And Execution Will Be Important
With volume pressures likely to intensify in North America in 2021 and 2022, Bimbo management will have their work to cut out to maintain revenues and/or offset the margin pressures from reduced volumes.
On the volume/revenue side, product innovation remains an ongoing priority for the company. Management has been devoting more resources toward the development of “health and wellness” products like low-carb/no-carb baked goods, gluten free products, multigrain products, and so on. There’s not as much competition here from private label, and Bimbo does benefit from large shelf space allocation relative to more specialty health brands that are often literally placed out of the line of sight on store racks.
Product innovation should also involve test-marketing successful products in other regions. Artesano has been a successful brand extension of the Sara Lee bread line in the U.S., but it came out of the company’s Colombia business. Likewise with Takis, which were invented in Mexico and introduced in the U.S. about a decade later.
Innovation and premiumization are long-term opportunities that take time to build. In the meantime, Bimbo is going to have continue to execute on margin-uplift opportunities from improved sourcing, manufacturing efficiency, and distribution in North America. The company has been working on this for a while and it’s fair to wonder how much is left in that tank, but management has confirmed that there were projects that got deferred in 2020, so the tank is likely not empty.
Looking at markets like Europe and Asia, I’m not sure operating efficiency can do much in the near term. These are still sub-scale businesses in many cases, and I really don’t think the market wants to see them bulked up through more M&A, as the company’s return on investment from past M&A has been pretty poor. One exception is on the QSR side. That is a pretty good global business for Bimbo, and one that the company should be able to leverage better in the coming years as consumer behaviors normalize.
The Outlook
For better or worse, the Bimbo story is pretty straightforward – keep doing more of the good things. Continue to innovate, continue to support and develop the brands, and operate the regional businesses as efficiently as possible. If management does that, the market will reward them. In the meantime, though, I expect ongoing worries that the company isn’t finished “empire-building” and will again look toward large-scale M&A.
I’m expecting Bimbo to generate low-to-mid single-digit revenue growth over the next decade, more or less in line with growth in packaged and baked goods consumption. There are opportunities for outgrowth in some markets, but I’m treating that as a “show me” opportunity.
On the margin side, I do still see room for improvement over time. EBITDA margins could look a little flat for a couple of years, but given the jump from 2019 to 2020 (around 70bp), flat-to-gradual improvement from 2020 in 2022 and 2023 would still represent a pretty good trajectory, especially in light of what I expect will be volume challenges.
I’m not looking for huge FCF margin improvement over time, but 80bp from starting point of 3.5% (the trailing long-term average) is still quite significant and can drive double-digit FCF growth.
When valuing Bimbo, I use a lower EBITDA multiple than I do for Gruma (7.5x versus 9.5x) to reflect the weaker profitability and returns (ROIC, et al) from Bimbo.
The Bottom Line
I do believe that Bimbo should trade at a discount to Gruma, but that discount is reflected in the share price and both companies seem to offer relatively similar upside now – 20% or better near-term upside and mid-to-high single-digit long-term total annualized returns thereafter.
Bimbo remains a story largely about self-improvement. The company has good brands and good scale in its core markets, but management needs to continue innovating and driving operational improvements, while also growing the business in sub-scale markets without value-destructive M&A. I do favor Gruma, but at today’s price I do think Bimbo is worth a look as well.
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