Tasty Baking’s financial challenges shows brand recognition isn’t enough, analyst
Tasty Baking announced this week that it is considering a merger or sale due to declining sales and the failure to produce projected savings from its new Philadelphia production facility.
President and chief executive Charles Pizzi said that "unanticipated operational challenges" related to its new bakery in Philadelphia's Navy Yard had lowered projected savings, which decreased from $13m to $10m.
In a statement, the makers of the Tastykake brand said that preliminary financial data available for its fourth quarter ended 25 December 2010 indicated that the company’s new Philadelphia bakery did not achieve its expected operational cash savings in the quarter.
Rise of private label
Mike Hughes, a Datamonitor consumer analyst, told BakeryandSnacks.com that the fiscal problems being experienced by Tasty Baking can be attributed in some parts to internal failings and the collapse of the Great Atlantic & Pacific Tea Company, one of the company’s major wholesale customers.
However, he said it is also down to budgeting of consumers as they continue to struggle with their day-to-day finances, “demonstrating a willingness to give up favoured brands”. The analyst said that the customers will switch to alternative makes if they feel a better deal can be had.
“Indeed over the last 18 months, 35 per cent of American consumers have looked to reduce spend on bread and bakery products, showing no matter how iconic a brand is, it is not immune to changes in consumer spending patterns as people struggle to overcome the impact of the economic downturn,” said Hughes.
According to the analyst, the changes to customer spending patterns have been helped to some extent by improving perceptions of private label.
Hughes said that seven out of ten Americans believe that store own brands are just as good – if not better – than branded products in the food category which means they have a willingness to switch to private label, even in product categories associated with pure indulgence, such as Tastykake.
“This desire to get a better deal on non-essential groceries also increases the difficulty for Tasty Baking to pass on rising commodity costs down the supply chain to the consumer. Currently, 65 per cent of Americans say that food prices are having a significant impact on finances, and any price prices will further reduced levels of brand loyalty,” said Hughes.
Strategic options
Tasty Baking said that it has entered discussions with its bank group led by Citizens Bank, to explore various alternatives to address its liquidity needs.
The company also said it had retained its outside financial advisor to assist it in evaluating various financial and strategic options, ranging from refinancing the company’s long-term debt due in September 2012 to "a potential combination with another company as part of the consolidation occurring in the baking goods industry or a potential sale of the company".
Tasty Baking said that some of its lenders had agreed to defer some payments related to the construction of its new $78m bakery and warehouse. The company also has a second production facility in Philadelphia.
The company said it will continue to operate its two bakeries and to produce, distribute and sell Tastykake products during this process.
