On the money: Promotional activity hits Flowers bottom line

Flowers Foods has indicated an increased level of promotional activity is expected to have a negative impact on margins as US bakers struggle to shore-up volumes in a down market.

The company yesterday (14 August) said it expects earnings to come in at the "lower end" of its 3.5-8% guidance. However, this includes the positive impact of the group's acquisition of regional rival Lepage Bakeries, which closed in July. 

In May, Flowers had indicated that it expected growth of 3.5-8% excluding contributions from acquisitions.

Commenting on the downgraded guidance during a conference call with analysts, Flowers chairman and CEO George Deese said the company had been forced to increase its level of promotional activity in the face of stiff competition as US consumer spending comes under increasing pressure. 

"You hear today how much unemployment we have, about how many people are living in poverty... I think what the food industry has to continue to look at - and I know this is probably being done by all of us - is if volume is down will tremendous price promotions drive that volume back up? Or is it a matter of if it is down, it is down? That is a tough question to answer. Most people are continuing to promote very heavily to try and get that volume back," Deese said. 

In order to maintain its competitive position and retain market share, Flowers has responded to an increasingly promotional environment by increasing its offers.

"We have become more promotionally driven, we lost a little more volume than we wanted so we had to promote heavily to retain market share and remain competitive.... I am confident that that will come back. We are in a time of consolidation where everybody is fighting for that last loaf. But that will pass. The question is how long and I can't answer that," Deese said. 

While Flowers management predicted high levels of promotional activity will continue into the back half of the year, the group revealed it is "in the middle" of pricing negotiations in a bid to offset the impact of this highly promotional environment. 

Management revealed sales volumes had been hardest hit at its regional white bread and bun business. These products are typically purchased by mid- to low-income groups - the demographic that has been hardest hit by the poor economic conditions in the US, Deese suggested. In contrast, Flowers said its higher-end brands, Nature's Own and Tastykake, had proven relatively resilient. 

Despite volume softness, Flowers confirmed its full-year revenue guidance range of 7-9%.

In a note to investors, BB&T Capital Markets analyst Heather Jones noted retail volume "weakness" was offset by private-label and food-service gains. 

"Promotional activity has been most concentrated in the regional white bread space, but breakfast breads, super-premium and some sandwich rolls have also been affected. We estimate that Flowers' volumes in these categories experienced meaningful pressure as overall branded retail volumes were down mid-single digits, despite low-single digit gains in the Nature's Own soft variety business. Overall retail volume weakness was offset by private label and foodservice gains," she wrote.