(Reuters) - Consumers are turning their noses up at bread and other baked staples, much to the surprise of Canadian food processor Maple Leaf Foods Inc MFI.TO, which on Wednesday reported a drop in quarterly profit.
Maple Leaf, which owns the country’s largest single bakery, widely missed analyst expectations, and its shares fell as much as 7 percent, before ending regular trading on the Toronto Stock Exchange down 5 percent, at C&12.27.
Weak fresh bakery sales were the main reason for the lower profit and are an industry-wide problem that “popped up quickly,” said Chief Executive Michael McCain.
The company said lower bakery volumes partly offset the benefit of price increases the company implemented last year.
Changes in dietary trends, demographic shifts and more cost-conscious consumers are possible reasons behind the drop-off in bakery sales, McCain said in a conference call with analysts.
“The elephant in the room is bread consumption is down. And it’s down around the world,” McCain said, citing a drop in branded commercial bread volumes in the last 12 weeks in Canada, the United States and the UK of 3 percent to 5 percent.
Maple Leaf expects its bakery volumes and margins to improve later in the year as the price of wheat declines in the second half and as the company cuts costs and markets the health benefits of bread.
“I believe these things are infinitely addressable with good marketing,” McCain said. “Bread has been around for 2,000-plus years.”
But McCain also said that the outcome of a systemic change in consumer behavior is hard to predict and fixed costs are difficult to change quickly.
Rival Canadian food processor and distributor George Weston Ltd WN.TO said on March 1 that it expects its profit for the year to drop as increased costs at its grocery affiliate dent margins. The company, which also includes the bakery affiliate Weston Foods, will report first quarter results on Tuesday.
Maple Leaf, whose brands include Dempster’s bread and Schneider’s meats, closed two Toronto-area bakeries during the quarter as it consolidated production at a new bakery, Canada’s largest, in Hamilton, Ontario, which opened last autumn.
The company’s bakery is called Canada Bread Co Ltd CBY.TO, of which it owns 90 percent. Canada Bread said Wednesday that it earned a quarterly profit after a loss in the year-before quarter, when it incurred restructuring costs.
Maple Leaf’s net earnings for first quarter fell to C$800,000 ($808,000), or nil per share, from C$10.5 million, or 8 Canadian cents, the year before.
The company incurred C$20.4 million in pretax costs for a $560 million multiyear plan to close some meat plants and modernize others, as well as for closures of a poultry plant and several bakeries.
A strong Canadian dollar and high raw meat and wheat costs have been persistent obstacles for Maple Leaf.
The Canadian dollar was weaker during the quarter, boosting the sales value of pork exports, but price increases for Maple Leaf meat products were not sufficient to offset higher raw material and inflationary costs, the company said.
Adjusted earnings per share slipped to 11 Canadian cents from 18 Canadian cents a year earlier.
Sales rose 1 percent to C$1.16 billion.
Analysts, on average, had expected Maple Leaf to earn 17 Canadian cents a share on sales of C$1.17 billion, according to Thomson Reuters I/B/E/S.
Adjusted operating earnings fell by nearly three-fourths for the bakery group and by 17 percent for the meat segment.
Reporting by Rod Nickel in Winnipeg and Bangalore equities newsroom; Editing by Gerald E. McCormick, Maureen Bavdek, Peter Galloway and Steve Orlofsky