Skip to content
Business
Link copied to clipboard

Tasty Baking in financial squeeze; sale possible

Tasty Baking Co.'s state-of-the-art, $78 million bakery at the Philadelphia Navy Yard was designed to lift the company beyond the nostalgia that makes Tastykakes beloved by many but for decades has failed to boost cupcakes and Krimpets out of their slow growth rut.

Inquirer business columnist Mike Armstrong analyzes Tasty Baking Company's current financial predicament and its future.
Inquirer business columnist Mike Armstrong analyzes Tasty Baking Company's current financial predicament and its future.Read more

Tasty Baking Co.'s state-of-the-art, $78 million bakery at the Philadelphia Navy Yard was designed to lift the company beyond the nostalgia that makes Tastykakes beloved by many but for decades has failed to boost cupcakes and Krimpets out of their slow growth rut.

Now, the $100 million in debt used to build and move into the new bakery, coupled with a failure to gain all expected cost savings from the new plant, have put Tasty into a financial squeeze that could force a sale of the firm - identified with Philadelphia like few others - three years from its 100th anniversary.

Tasty said Wednesday that it skipped a debt payment due Jan. 1 and has until Jan. 14 to work out a deal with its banks, led by Citizens Bank of Pennsylvania, to avoid default.

The company also hired Philadelphia's Janney Montgomery Scott L.L.C. to explore the possibilities of refinancing debt due in 2012, raising money from investors, or selling the company - an unpalatable option to the locally dominated board a decade ago when the idea was last seriously explored.

Tasty's banks, Bank of America, Sovereign Bank, and M&T Bank, in addition to Citizens, play a key role in the future of Tasty, which took on a huge amount of debt just before the economy tanked and needed everything to go right to be able to pay it because its business has thin profits.

"We all agree Tasty Baking is an iconic Philadelphia brand. The bank group is in discussion with the company to review their proposals," Citizens spokeswoman Sylvia T. Bronner said.

Charles P. Pizzi, who was hired as Tasty's chief executive in 2002 after leading the Philadelphia Chamber of Commerce for 13 years, declined to be interviewed. In a statement, he said: "There is no question in my mind that in order for Tasty Baking to thrive, the steps we took were the right ones."

Philip J. Baur Jr., son of a Tasty Baking cofounder and former chairman, said that he had great confidence in Pizzi and agreed that it was imperative to move from the inefficient, cluttered, six-story bakery in Philadelphia's Nicetown neighborhood that Tasty had occupied since 1922.

"We had to get out of that building on Hunting Park Avenue. Paul Kaiser tried to find a way to do it. Nelson Harris and I tried to do it. Charlie Pizzi is the one who achieved it," said Baur, referring to earlier CEOs.

The challenge for Tasty was always that the two-week shelf life for its products meant it had to have two plants running at once during a move to keep customers supplied, Baur said.

"Charlie, with his contacts, his knowledge, figured out how to do that," Baur said.

The new bakery was supposed to allow the company not just to save money on production, which would allow it spend more money on expansion into new markets.

"Tastykake has been stuck in this corridor for years," said Robert Costello, of Costello Asset Management in Huntingdon Valley. "They tried to go to California; it didn't work. They send a tractor-trailer to Florida every evening. That's good, but it passes all these states where people don't get Tastykakes, they're eating pecan pies from Flowers," said Costello, referring to Flowers Foods Inc., a larger Georgia competitor that is often identified as a potential buyer.

The plant was also designed to make it easier to produce a wider range of products and bring new products to market more quickly. Past efforts at new products, such as full-size cakes and pies and sugar-free snack cakes, have either been quickly abandoned or failed to make a big impact.

Bakery experts have described Tasty's new bakery as the best that money can buy and all of its anticipated benefits could still materialize, but in the first year it has failed to deliver the all-important $13 million to $15 million in savings. Production problems at the plant have even held back sales - $4 million worth in the third quarter.

As of Nov. 1, Tasty still expected annualized savings to be $13 million this year, but because of "unanticipated operational challenges" the figure is expected to be $10 million," the company said.

The company statement issued today also cited the Chapter 11 bankruptcy filing Dec. 12 of the Great Atlantic & Pacific Tea Co., a major customer whose Philadelphia-area presence is best known through its Pathmark, Super Fresh and Food Basics stores. Another reason cited for the liquidity problems was a steep rise in commodity costs.

What is going wrong? Adjusting to ultra-fast computerized baking lines has been harder than expected, a person familiar with the operations said.

At the old plant, when workers started up an oven, they might have needed to throw away 1,000 cupcakes because they weren't quite right. Because the new lines run so much faster, they might have to throw away 3,000 cupcakes before they come out right. That eats into the savings.

"I think Tasty has been hit by a combination of factors, which includes the economy, perhaps the plant coming on a little bit late, difficulty getting the efficiencies they expected, and certainly has to include the rapid rising commodity costs," said Gerald B. Shreiber, CEO of J&J Snack Foods Corp. of Pennsauken. "It may not be perfect storm, but it's a lot of headwind. It's a lot of rain."

The stock closed at $4.05, down 37.01 percent ($2.38).