Interstate Bakeries files for protection

The low-carb diet craze has forced the U.S. baker of Wonder Bread, Twinkies, Ding Dongs and HoHos to file for bankruptcy protection, and provided a boost to Canadian rival George Weston Ltd.

Interstate Bakeries Corp. said sales of its famous bread and cake brands fell by 4 per cent last year because of changing consumer preferences.

That drop in sales, coupled with soaring ingredient costs, left the Kansas City, Mo.-based company with a $1.3-billion (U.S.) debt and no choice but to seek protection, Ronald Hutchison, Interstate's chief financial officer, said in a court filing.

The company, the largest baker in the United States, also announced yesterday that James Elsesser will be replaced as chief executive officer by Antonio Alvarez, a turnaround consultant.

Interstate, which is 74 years old, lost $26-million in its previous fiscal year, which ended in May, on sales of $3.47-billion.

The popularity of low-carbohydrate diets such as the Atkins and South Beach diets has pummelled bakeries across North America and cut into sales of popular snacks. Wonder Bread and Twinkies have been among the top-selling brands in the United States for decades. Both were created in 1930 and they have weathered countless changes in consumer preferences.

But yesterday, Interstate said consumers have abandoned both, and a host of others, in favour of low-carbohydrate alternatives. The company tried to introduce alternative products, but none could offset the drop in sales of white bread and snacks, Mr. Hutchison said.

Interstate's troubles could be a boost to Toronto-based Weston, which has significant U.S. bakery operations. Weston is one of Interstate's main competitors and it has about 35 plants across the United States.

"It could be [Interstate]closes plants and moves out of markets where they compete with Weston," said Bill Chisholm, an analyst with Dundee Securities Corp. However, he also noted that Interstate could emerge from bankruptcy protection as a leaner and stronger competitor to Weston.

Weston might also be interested in purchasing some of Interstate's 54 bakeries, CIBC World Markets analyst Perry Caicco said in a recent report.

"An unstable Interstate, experiencing difficulty in purchasing, and losing customer confidence in its ability to deliver, could free up shelf space for Weston, particularly in the core Midwest markets, where the two compete head to head," Mr. Caicco added.

But Weston is grappling with its own troubles in the United States, which will limit its ability to cash in on Interstate's woes.

Weston's profit in its bakery division fell to $44-million (Canadian) in the second quarter, down 62 per cent from a year earlier. That marked the fourth consecutive quarter of declining profit and it was largely the result of the popularity of low-carb diets in the United States.

Weston has also recently closed facilities in Buffalo and Chicago. And its efforts to introduce low-carb alternatives have had limited success, analysts said.

Weston spokesman Geoff Wilson said the company is facing "a perfect storm in the United States where you have had a changing consumer, where you have unprecedented commodity and ingredient cost increases and where you have had health care costs skyrocketing, not to mention fuel."

He added that "all of those factors have made for a very challenging environment."

Mr. Wilson said it was too early to comment on whether Weston would be interested in buying any Interstate plants. "We are well positioned to take advantage of any opportunity, but clearly we have had our issues as well. We are not immune."

Weston bakes Wonder Bread in Canada but so far the low-carb craze has not had as great an impact on sales here, Mr. Wilson said. That is mainly because Canadian consumers have been buying whole wheat and other types of bread for years. "If you look at a traditional supermarket aisle in Canada versus the U.S., it looks substantially different," he said.

Carol Culhane, president of International Food Focus Ltd., a Toronto-based consulting group, said the Atkins diet phenomenon is waning. "It has settled down to what it was before this low-carb craze erupted in Canada around 2003 and in the U.S. around 2002," she said.

However, Ms. Culhane said consumer habits have likely changed for good and low-carb choices will remain popular for many more people now than two years ago.

Canada Bread Co. Ltd., which is controlled by Toronto-based Maple Leaf Foods Inc., could also benefit from Interstate's troubles. Canada Bread has two main operations in the United States that specialize largely in frozen bread. A company spokeswoman declined comment on Interstate yesterday. However, analysts say Canada Bread is not a major competitor of Interstate's and any potential benefit would be limited.

George Weston's share price rose 5 cents to $94.30 yesterday on the Toronto Stock Exchange, while Canada Bread's shares fell 55 cents to $30.75.