Grupo Industrial Bimbo S.A. Analysis

  Executive Summary Bimbo has undoubtedly secured its market leader position in Mexico with an astonishing sales growth of 10.5% annually and 90% share in packaged bread market. Though facing challenges, it expanded aggressively overseas, becoming the top packaged bread seller in several Latin America countries and the second largest tortilla seller in Texas. This report analyses its successful business strategy to vertically integrate, build extensive distribution network, joint venture/acquire competitors and conservatively manage finance. These strategies are applied coherently as a whole to support Bimbo’s vision and operations. Furthermore, This report examines domestic threats such as increasing bargaining power of buyers, greater degree of rivalry and inefficient infrastructure as well as threats in the US including fragmented markets and changing consumption patterns. Lastly, this report provides plausible actions to overcome the challenges and increase profits in the next five years. Recommendations include 1) joint venture and consolidate family brands and local players in the US in order to penetrate and increase market share in the US, region by region; 2) repositioning Bimbo as a global brand rather than Mexican brand through regional and national campaign; 3) innovate to increase varieties of product for different customer segments such as healthconscious customers and white collar workers; 4) establish long-term supplier relationship with Canadian wheat farmers to ensure long term price stability of inputs. The actions should be conservatively financed according company’s minimal debt principle to reduce exchange rate risk and ensure investors’ confidence.  

 

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1. Successful Business Strategy 1.1 Vertical integration By 1997, Bimbo built and acquired five flour mills in Mexico with 2,000 tons capacity per day and sourced 80% of annual requirement for flour internally, making Bimbo the second largest demotic flour producer. By backward integrating into flour milling, Bimbo drives down cost, builds barriers to imitate and ensures its product quality. Firstly, Bimbo is able to further increase profit margin by eliminating middle flour retailor from its value chain and retain more profits from farmers and consumers. After lowering cost of flour, Bimbo makes its products more price-competitive (10-15% lower than competitors) in stores and hence attract more customers who tend to be price sensitive and have low switching cost among many alternative baked goods. Secondly, Bimbo’s brand vision is to sell high quality baked products. Hence, controlling the source of ingredients and being able to trace products back to specific manufacturing bakery are vital for quality control and standard setting. This differentiates Bimbo and leads to greater customer satisfaction because consumers prefer consistent high quality food free of defects, creating path dependence and reducing competition for Bimbo. Lastly, having strategic control over flour deters new entrants who can only purchase from independent mills which often have high mark-ups. 1.2 Distribution Network Bimbo has 430 distribution warehouses worldwide and has acquired top distributors in overseas market such as Suandy Foods and Pro-Alsa Trading in the US. Its major products are bread and pastries, which are perishable and time-sensitive by nature. Through extensive transportation routes, Bimbo can shorten number of days of products flowing through the supply chain, minimized stockpiling of inventory and increased availability to customers at Point of Sale. Bimbo uses direct store delivery to customers which consist of 25% supermarkets and 75% of mom-and-pop shops. Hence, putting

 

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  bread on shelf before stores open in the morning and replenishing stocks throughout the day are extremely crucial to ensure product quality and freshness and achieve higher sales than competitors who may have less extensive routes. Second, a national scale of delivery networks moves down along the Economics of Scale curve as distribution volume increases, creating a high barrier to entry which further defends Bimbo’s profits. 1.3 Joint Venture and Acquisition Bimbo fuels its overseas growth by forming alliance with or acquiring local sellers, distributors and bakeries. It has leveraged on local players’ delivery routes, truck drivers, customer base, shelf space, manufacturing plants and brand equity to sell Bimbo’s product and offered expertise and financial resources in return. As a result, Bimbo though unfamiliar with local environments, is not wasting resources to start from scratch. This keeps cost low and saves time by selling straight to customers through local player’s established networks. Through its acquisition of Mrs Baird, Pro-Alsa trading and Suandy foods, it become second largest tortilla seller in Texas. Furthermore, Bimbo is familiar with small family business due to its own history and hence is able to better handle sensitive and emotional issues associated with acquisition than large corporations. Hence, Bimbo’s overseas success is largely attributed to its acquisition and joint venture. 1.4 Finance Management Bimbo’s conservative financing and price hedging created cost advantage when peso is allowed to float against dollar. For financing, it has low debt ratio (Exhibit 1) of approximately 26% to 33% from 1994 to 1997, which was significantly lower than average debt ratio of approximately 63% for Dow Jones 30 companies. Minimal leverage gives Bimbo high credit ratings and shareholders’ confidence for stock (200% rise in stock price), allowing Bimbo to have freedom and flexibility to pursue business goals. Its competitors’ debt drastically increased when peso dropped against dollar. Bimbo’s biggest competitor: Gruma in fact abandoned its plan to open a bakery in Mexico in collaboration with Toronto due to sharp rise in dollar.

 

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Bimbo instead uses internal

  financing by reinvesting a increasingly higher proportion of earnings to finance its new plants, engineering and R&D (Exhibit 2). For price hedging, Bimbo locked up historical low prices for raw materials in 1998 and set up brokerage accounts to exploit hedging opportunities, creating greater bargaining power against suppliers and hence protecting itself against inflation, exchange rate risk or potential unionization of suppliers in the future. Therefore, through sound finance management, COGS rate of change decreased from 21% to -0.7% from 1995 to 1997 (Exhibit 2). 2. Domestic Threats 2.1 Higher Bargaining Power of Buyers Since Mexico joining the NAFTA in 1994 and Mexican economic reforms, increasing trade, investment and rapid urbanization at home have boosted national income per capita and given birth to more supermarkets or hypermarkets retailors that gradually replace small mom-and-pop stores. They are more consolidated than mom-and-pop stores and have larger size and better customer accessibility, allowing them to command lower purchasing price from Bimbo. If supermarkets are vertically integrated and carry own private labeling, this further squeezes Bimbo’s shelf space and profit margin. 2.2 Greater Degree of Rivalry Competitors at home present a threat to Bimbo especially in its corn tortilla, bread and cake markets. Gruma, its closest competitor has set forth to build construction plants in Monterrey and leverage on existing tortilla delivery network to expand production into bread and bakery market given the bread market in Mexico was projected to continuously grow 5% per year. A growing pie does not guarantee Bimbo’s market leader position if it does not react to Gruma’s competition. Secondly, 60% of Bimbo’s wheat flour was imported and subjected to exchange rate risk; and its cooperative farming has failed. At the same time, Gruma has become the number one flour seller through acquisition of ADM. This urges Bimbo to source cost-efficient wheat flour suppliers. Thirdly, international brands such as Pepsico and Nabriso take advantage of freer cross trade because of

 

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  NAFTA to penetrate into snacks and pastries market in Mexico. As MNCs they have huge financial resources to advertise, build network as extensive as Bimbo’s and charge premium price due to high brand equity, taking away Bimbo’s already slim snacks market share of 15%. If these international players are willing to penetrate Mexican market, Bimbo’s barrier to entry such as delivery network is not insurmountable to them. 2.3 Inefficient Infrastructure and Privatization Changing political policies due to economic reforms in Mexico has lead to more privatization of land and ports since 1994.

Bimbo imports over 60% of wheat grain

requirement but it cannot always ensure timely delivery due to overcrowded ports and restrictive use for private ports. This causes downtime in the value chain and impedes its production from keeping up with increasing demand. The condition will only worsen as more ports are to be privatized in the 2000s. Second, farmers now follow price signals of crops to decide how much resource to allocate to farming. They lack the incentive to produce crops as prices reached historical low in 1998. This pressurized Bimbo to find sustainable long-term wheat supplier to prevent stock out. Lastly, Mexico is still a developing country with inefficiency railway and road. This prevents Bimbo from achieving interrupted delivery between farmer, plants, warehouse and supermarkets. 3.

US Threats

3.1 Mature and Fragmented Market Slower growth rate of 2% in the US compared to 5% in Mexico combined with overcrowded local brands in highly regionalized market makes entrance into US market challenging to Bimbo. Growth rate for packaged bread in US is slower because there are many substitutes offering the same carbohydrates breakfast as packaged bread such as rolls, cereal, pancakes, buns, muffins, artisan bread, bagel or doughnuts. Many local brands are deeply entrenched and have their loyal habitual buyers. Facing vast amount of choices, consumers have low switching cost and low willingness to pay for Bimbo’s

 

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  cellophane wrapped bread. Bimbo could find this high degree of substitutability a threat to its niche area of packaged bread. Second, each State in the US has cultural nuances that are hard to capture without deep customer analysis or simply operating history in US. Bimbo’s Hispanic-centric products like corn tortillas and taco are well received only at Hispanicized cities. It is likely to face initial resistance trying to gauge customer preferences in the US due to its sheer size and dynamic nature. Third, just like the variety of choices offered, US has many local brands such as Nature’s Own, Campbell and Flowers Foods selling pastries, bread and roll and each brand has their established customer segment, delivery routes, suppliers and retailor. Supermarkets such as HEB, Wal-mart, Wholefoods have private labels and they own bakeries right inside the stores providing fresh products, samples, discount and coupons to walk-in customers. Therefore, Bimbo faces stiffer competition from the US competitors. 3.2 Changing Consumption Patterns A shift towards low-carb diets has led to even diverse product categories for bread and roll, pastry and snacks markets. Traditional packaged fine-grain white bread is less appealing than freshly baked whole grain bread. Many gluten free snacks start to mushroom on the shelf and sell out quickly to women on diet and

health-conscious

teenagers. Bimbo’s packaged bread, without innovation or repositioning will lose the health-conscious portion of customers. Hence, on top of adapting to different region’s consumer preferences, Bimbo has to keep up with the overall trend in food industry through research, advertising and innovation. 4. Recommendations 4.1 Acquisition/Joint ventures and Consolidation in US market Besides Bimbo’s current acquisition of Pacific Pride, Mrs Baird, Suandy Foods and ProAlsa Trading, it can continuously purchase or form joint ventures with local bakeries, plants or distributors by offering financial resource and engineering expertise in exchange

 

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  for the use of delivery routes, truck drivers, warehouses and brand equity. Not only should Bimbo acquiring plants, distributors and other bread producers, it can broaden its product categories by acquiring companies selling salted snacks, rolls or doughnuts to cater to varying customer preferences in the US. However, Bimbo should start from southern states and move upwards as the southern parts have more similar Hispanic culture compared to Mexico. The budget for acquisition and joint ventures is estimated to be $700-900 million and it should be debt financed in denomination of US dollar. This reduces the exchange rate risk for repayments. 4.2 Brand Positioning The word “Bimbo” has a negative connotation of “empty-headed attractive women” in English and potentially leads to brand confusion or rejection. To raise brand equity in English-speaking countries, it should clarify its name and attach positive core values to the name and logo through advertising campaign on TV and supermarkets. It can start in Texas, California and Illinois where Bimbo have achieved a visible presence followed by other States. Suggested themes could be Healthier Family Breakfast with Bimbo Bread or Happier Childhood with Blue Bear Bimbo. It should project itself as a global brand rather than Mexican brand to attract brand-conscious American consumers. To do so, Bimbo could leverage on social networking sites to increase brand recognition. The budget is estimated to be $47 million and it will be financed using profits from overseas market. 4.3 Innovation In US, Mexican or Latin Americans markets, Bimbo should start innovating and deepening product line by launching more varieties to cater to different consumer segments. Rather than offering packaged bread to a mass customer group, it can differentiate customers through age group or different nutritional needs. It can introduce calcium-enriched bread for elderly and kids, high fiber gluten free multigrain bread for women or fruity bread for children. Hence, facing competition from Gruma and other competitors, Bimbo could

 

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  defend sales through high quality as well as diverse products. It can also offer online delivery service within city area to increase product accessibility as increasing number of families now order grocery online. $20 million is the budget for innovation and most of the research can be done at Mexico where Bimbo has the most established plants and bakeries. It is financed using profits from Mexico market. 4.4 Long-term Supplier Relationship In Mexico, Bimbo faced challenges such as increasing privatization of land, farmers with no incentive, number one position in wheat flour market by Gruma and Mexico’s poor quality wheat. It can establish long-term supplier relationship with Canadian farmers to source higher quality wheat which is essential to produce quality product. Bimbo can promote social schemes like micro-financing or free bread for farmers’ kids as incentives. It can position itself as a socially responsible producer to attract customers who are prefer ethically sourced ingredients and products like royal customers of Starbucks. The estimated budget is $44 and it will be financed through debt.

 

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Exhibit Items  

1994  

1995  

1996  

1997  

Debt  Ratio  

26%  

31%  

33%  

29%  

Profit  Margin    

10%  

7%  

8%  

9%  

Sales  Growth  Rate  

 

10%  

16%  

6%  

COGS  Rate  of  Change    

 

21.0%  

18.0%  

-­‐0.7%  

35%  

60%  

58%  

Reinvested  Earnigns  as  a   percentage  of  net  income  

26%  

Exhibit 1: Financial Data of Bimbo from 1994 to 1997

 

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  70%   60%  

60%  

58%  

50%  

Profit  Margin    

40%  

Sales  Growth  Rate   35%  

30%  

COGS  increase  

26%   21.0%  

20%   10%  

10%  

10%   7%  

18.0%   16%   8%  

0%   1994  

1995  

9%   6%  

Reinvested  Earnigns   as  a  percentage  of   net  income  

-­‐0.7%   1997  

1996  

-­‐10%  

Exhibit 2: Trend for profit margin, sales growth, COGS and Reinvested Earnings

 

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  Options    

Items  

Expenes    

Source    

$700-­‐900  million  

Debt  financing    

Distributors   Acquisition/

Bakeries    

Joint   Venture  

Plants     local  brands    

Brand  

Supermarkets    

Positioning  

TV  

   

Social  networking  sites    

profits   $47  million    

   

overseas   markets  

   

Aministration    

Innovation    

product  research    

   

packaging  

   

labelling  

Supplier    

Longterm  contract    

   

Social  schemes  for  farmers     $9  million  

$20  million  

Profits  

from  

Mexico  

$35  million  

Exhibit 3: Budget for next five years

 

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Debt  financing