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Why Maple Leaf pushed Canada Bread toward the checkout counter

It should come as no surprise that Maple Leaf Foods Inc. is exploring options for Canada Bread Co., its publicly traded bakery business, including a possible sale of its 90-per-cent stake. The McCains have been struggling to turn around their food empire for years, but they keep stumbling onto sharp objects.

One problem is that the company operates in two of the slower-growth segments of the food business, amid rising input costs and tighter margins. It has also been tough to pass along costs to major supermarket customers, which are caught in a fierce battle of their own for market share. Worse yet, on the supermarket floor, health-conscious shoppers have been reducing their consumption of packaged meat and bread products, while buying more fresh food. When they do turn to meat and baked goods, they are increasingly looking for items with less fat, lower sugar and cholesterol and more complex carbs.

In the past, CEO Michael McCain has fended off suitors seeking Maple Leaf's bakery operations, arguing that it fit together well with its core meat business (for which he also rejected offers). But with continuing pressure from investors for stronger results and a costly restructuring as the only real alternative, it would be hard to resist legitimate offers this time around. If Maple Leaf can get something of a food fight going among international and domestic bidders, it might even be able to extract a price above Canada Bread's current market value of about $1.7-billion.

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In the wake of the anti-gluten health craze, that may be a challenge. A U.S. study earlier this year found that nearly 30 per cent of Americans try to steer clear of gluten-loaded bread, pasta and other baked goods, even though the actual number of people who must avoid gluten because of illness or sensitivity may be less than 2 per cent. The gluten-fearing crowd is willing to shell out considerably more money – 242 per cent more, according to a Canadian study – for gluten-free foods.

Food packagers are responding to this lucrative opportunity, as well as other changing consumer tastes. Innovative products that meet a receptive audience can do wonders for the bottom line. But innovation costs big bucks, and it's expensive to keep up with the latest fads.

Speaking of diet fads, the anti-carb crowd has been down on white bread and pasta for years. But now along comes a best-selling book like Grain Brain: The Surprising Truth about Wheat, Carbs, and Sugar — Your Brain's Silent Killers, whose neurologist author, Dr. David Perlmutter argues that avoiding grains, gluten and sugar can ease or eliminate a host of brain disorders from Alzheimer's to depression.

Did any of this play a role in Maple Leaf's decision to put the bakery business on the block? It's hard to believe it wouldn't at least have been on a list of weaknesses, along with higher commodity costs, when assessing Canada Bread's longer-term prospects. But it also may come into play when prospective buyers start kicking the tires. As a result, the business may not bring nearly the return Mr. McCain and his board would like. But Option No. 2, a hugely expensive revamp, doesn't sound like a more appetizing alternative.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More


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