Vie de France Corp., the nation's largest baker of French breads, croissants and related products, is developing a new recipe for rising profits.
"We're making the transition from a small company to a mid-size company," said President Lloyd J. Faul. The company is also changing the direction of its growth from wholesale to retail expansion.
The transition is not entirely smooth. After several years of strong earnings growth, a drop in third-quarter profits reflected the costs of shifting priorities and marketing missteps.
"We're catching our breath," said Faul, who guided Vie de France through its aggressive wholesale expansion. The company, based in Vienna, Va., has established 26 wholesale bakeries and distribution depots nationwide, adding 15 in just the last two years.
Founded in Rockville in 1972, the company also operates a retail network of 32 French cafes and mini-bakeries. More than 70 Vie de France mini-bakery franchises sell baguettes, rolls and croissants through shops in 26 states.
The company's product line includes numerous variations of the basic flaky croissant, which the company calls its "crowning glory." Dessert croissants contain delicacies such as coconut cream cheese and pineapple cream cheese. "Entree" croissants are stuffed with fillings including beef burgundy, Italian vegetables, and spinach and feta cheese. New products include "gourmet" French bread hamburger rolls and "gourmet" cookies in 12 flavors such as mocha chunk, orange chocolate chip and fudge melt.
The "very furious pace of expansion" was aimed at gaining nationwide exposure for the company's name and products and at laying the foundation for development of its retail operations, said Faul, a former brigadier general who managed logistics systems during his 25 years with the U.S. Army.
Financially, the results were mouth-watering -- until recently. Over the past five years, sales have increased by more than 500 percent while profits have increased from less than $500,000 in 1980 to nearly $6 million. Earnings for the fiscal year ended June 30, 1984, were up 35 percent over the previous year to $5.9 million, while sales rose 28 percent to $55.2 million. For the first half of the current fiscal year, profits increased to $2.9 million (27 cents) on sales of $29.7 million, compared with net income of $2.4 million (24 cents) on sales of $24.2 million in the same period of fiscal 1984.
But lower third-quarter results reflected a number of changes under way. Vie de France reported profits of $1.6 million (15 cents per share) for the three months ended April 6, down 6 percent from net income of $1.7 million (17 cents) in the same period of the previous fiscal year.
Net sales, however, grew to $18.8 million, compared with $16 million in the third quarter of last year.
"It appears that the yeast was omitted from the recipe in the third quarter of fiscal 1985," said Eliot Benson, vice president and research director of Ferris & Co. He said, however, that the drop primarily reflected good management decisions that will strengthen the company for the future.
The decision to slow wholesale expansion meant deferring the construction of new bakeries, thereby losing investment tax credits and increasing the company's third-quarter tax rate.
Earnings also were dented by the cost of hiring four new executives to improve and develop the retail operations. Faul said their tasks will include upgrading restaurant menus and designing a free-standing restaurant building, a break from the policy of establishing the cafes in office complexes and shopping centers.
In five years, the company hopes to own and operate 100 restaurants in three major metropolitan areas, Baltimore/Washington, Chicago and Los Angeles, with franchises elsewhere.
The third-quarter results also reflected the disappointing performance of the company's new line of frozen baked croissants, sold in supermarkets in three major markets, Faul said. Vie de France had expected the new products to generate sales of $14 million in fiscal 1985, but has lowered that projection to $3 million, he said.
Faul said the supermarket freezer products were "positioned incorrectly," side-by-side with Sara Lee croissants, at a comparable price. "We didn't know much" about the field, Faul said, adding that Vie de France "is learning very rapidly."
"We forgot what our niche is -- premium products at a premium price, marketed selectively," Faul said. Vie de France has suspended promotion of the supermarket products, is reevaluating its marketing strategy and plans to "do it the right way," he said.
Because of the third-quarter results, Ferris & Co. has lowered its earnings estimate for the fiscal year ending June 30 to a range of 62 to 65 cents per share from 70 cents. Such results would still represent an increase over earnings of 58 cents per share in fiscal year 1984.
Vie de France "has all the ingredients for continued success," Benson said before the third-quarter results were released. After evaluating the latest figures, Benson said he still recommends purchasing the stock "for aggressive accounts."
Ferris & Co. also sticks with its original earnings estimate of 85 cents for fiscal 1986, Benson said.
After completing the current transition, Vie de France will see a re-acceleration of its overall growth rate over the next six months, Faul said. "We are more optimistic about the future than ever before."
One key to the company's success is the quality of the product, Benson said. Vie de France's bread is "exceptional -- no question," he said. "It's not inexpensive, but it's really outstanding . . . .Their rapid growth is testimony to the quality of the product."
The company takes great pains to ensure that its French bread is authentic. The flour used is prepared according to a formula developed by Grands Moulins de Paris, the largest French flour miller. Grands Moulins helped launch the company by sending French bakers to the United States to supervise production and continues to test samples of the bread periodically, the company says.
Grands Moulins acquired a 26 percent interest in the company in 1974, and had gained majority control by 1977. The French company now controls 65 percent of Vie de France, which made its first public stock offering in February 1984.
Vie de France says that even with the French flour formula, its bread was not right until it built special French ovens, with bricks imported from France, to recreate the correct heat and humidity levels.
Today, each wholesale bakery is run by a "master baker" trained in "authentic French baking techniques" at the Vie de France Baking School in Alexandria. The products include no artificial ingredients or preservatives, the company says.
The wholesale bakeries deliver fresh-baked products daily to Vie de France's own retail outlets, franchise units and unaffiliated restaurants, hotels, supermarkets and gourmet shops. They produce and deliver frozen baked products to establishments beyond the 50-mile radius of each bakery.
The wholesale operations, serving 4,000 businesses nationwide, now account for 60 percent of sales and 85 percent of operating profits.