Bob Evans’ sausage shift

by Eric Schroeder
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BOSTON — Bob Evans Farms Inc. has transformed its food products business over the past several years, and the move has set the company up to achieve margin growth in the near future, said Steve Davis, chairman and CEO.

In a June 25 presentation at the Oppenheimer Consumer Conference in Boston, Davis said a key change has come through a shift away from sausage. In 2009, nearly 43 percent of Bob Evans’ food products business was tied into sausage, with 36 percent in the retail channel and 7 percent coming from either foodservice or frozen, he said. By 2012, the company’s side dishes business had taken over the top spot, followed by foodservice and then sausage. The company’s side dish manufacturing capabilities were expanded in August 2012, when Bob Evans Farms acquired Kettle Creations LLC for approximately $50 million.

“We still pride ourselves on making great sausage, but it now contributes 30 percent,” Davis said. “What that means is, historically, whenever sow prices would go up, you would see a significant impact to our profitability. But because we’ve shifted that mix we have completely transformed the financial profile of the food products business.”

Davis said the growth story at Bob Evans has been simple.

“We’re adding new doors,” he said. “In fiscal year 2005, we were in about 12,000 grocery stores. In 2013, we were in 30,000, and this is with at least one Bob Evans item. And our goal is to get to 40,000 locations. Right now, today, we average about 12 items per supermarket location, which means that we can grow the number of doors, but we can also grow the number of items.”

The launch of a lean manufacturing program, the transition to warehouse from direct-store delivery and the expansion of the side dish business, has helped drive profitability in the food products business to almost $31 million from $16 million in 2009, Davis said.

“The vertical integration of our side-dish business is a key component of driving the 300 to 350 operating margin basis points because it’s only going to help us accelerate product innovation,” he said. “It gives us proprietary manufacturing capability, it gives us an opportunity to drive food service business during our off-peak production, and it also reduces alliance on the sausage business for profitability.

“The one thing we haven’t done yet — obviously we just made the acquisition less than a year ago — is we’re going to take the same tactics to drive the optimization and the profitability in our food products sausage manufacturing operations,” he added.

Whereas the food products business accounts for 26 percent of Bob Evans’ revenues, the remaining 74 percent comes from its 560 restaurants operating in 19 states. Most of the restaurant sales come from dine-in orders, though the percentage has dipped to 87 percent from 90 percent in 2009. By 2018, Davis said Bob Evans expects dine-in orders to drop to about 75 percent of total restaurant revenues.

The shift is part of a transformation within the restaurant side of the business that is expected to result in the elimination of the retail business within the restaurants and a gradual build-up of the company’s bakery and catering businesses.

Davis said Bob Evans also sees an untapped opportunity in beverages, which, if rolled out correctly, could result in a $20 million business.

“We just recently launched our Bold Coffee,” he said. “We’ve got expanded soda options that we are currently testing. We’ve got some tests going on with shakes and smoothies. We’ve been in and out of frozen coffee, but because now we have the Bold Coffee we can make a better frozen coffee. And then there is also some frozen juice — fresh lemonade and fruit fizzes that we can launch as part of our beverage offering.”

By comparison, Davis said the company’s $9.99 three-course dinner platform is contributing more than $70 million in sales, while its Farmer’s Choice Breakfast contributes nearly $50 million and the $6 lunchtime Farmhouse Deals contribute $34 million.
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