While many food sectors struggle, the bakery industry still shines as a success story. Unlike big names like dairy company Danone, which face declining sales and profits, bakery companies are able to keep reporting overall volume growth, even in Q2 2023. But how are they able to sustain such growth?
In the past year, the bakery industry faced challenges from the Russian-Ukrainian war and soaring raw material and energy costs. Despite these hurdles, it experienced remarkable growth, with all major players reporting significant increases in net sales.
The industry's secret to success lies in a smart move during 2022 - raising prices led to higher profits. This article delves into the factors driving the bakery’s largest players financial results (namely Aryzta, Flower Foods, Grupo Bimbo, Hostess Brands and Mondelez), from strategic pricing decisions and innovative supply chain solutions to strategies that add value and cut costs. We will also put specific focus on the very recently published Q2 2023 financial updates by Mondelez and Grupo Bimbo to anticipate any trends emerging for the rest of the 2023 fiscal year.
Price Increases lead to growth in net sales
Net sales have seen a considerable boost across the board, with varying degrees of growth among different players, due to the ongoing price increases set in 2022. As a result, US-player Hostess Brands experienced a +4% increase in revenues, while European Aryzta recorded a +23% surge in Q1 2023 year-on-year.
This price increases outbalanced other reductions for some of the analyzed players. For example, US-based Flower Foods reported a 13.6% increase in net sales, despite a 7% decrease in volume, mainly due to pricing. Similarly, Hostess Brands experienced a significant effect from price adjustments, resulting in a 14.6% increase in net sales.
In most recent numbers for Q2 2023, we see that Mondelez and Grupo Bimbo's growth rates are somewhat declining, which was quite unsurprising given the strong (price-driven) growth in 2022. And excluding the exchange rate effects that largely dictate Grupo Bimbo's net sales performance, both players were still able to report volume and year-on-year growth.
Operational Profitability Soars Globally
The bakery industry successfully translated higher sales prices into increased operational profitability. The total operating income pool of the analyzed players experienced a significant increase of 33%. For example, Aryzta's EBITDA rose by 116.6%, while Flower Foods reported a staggering 683% surge in operating income. This trend is seen globally, as companies like Grupo Bimbo and Mondelez report increased operational profitability across various geographic regions.
Additionally, in Q2 2023, Mondelez and Grupo Bimbo were able to further hold onto to this profitability. In their recent earnings calls they mention that they are able to increase prices accordingly. This is a broader finding, and directly correlated to the size (and therefore market power) of these large conglomerates. Our analysts draw the conclusion that, generally, smaller bakery players are less able to convert higher costs to higher selling prices.
Strategies and actions to drive profitability
In response to the significant cost surge in 2022, bakery players have been investing in operational efficiency. Aryzta, for instance, emphasizes improved operational leverage and a strong focus on controlling fixed costs. Flower Foods has leveraged digital capabilities, upgrading their ERP system and streamlining technology infrastructure as part of their cost-cutting initiatives.
Bakery giant Mondelez shared in their Q2 2023 earnings call that they have witnessed a trend in North America of increasing demand for frozen products by retailers, that can be baked in-store and are therefore perceived as fresh by consumers. In terms of product strategy, they aim to focus on the growth of its cakes and pastries business in the coming period, expecting valuable growth in that area.
Although energy prices have returned to pre-war levels, bakery players faced temporary challenges with higher wheat costs and associated supply chain disruptions in 2022. And in this year, Russia announced they will withdraw from the Ukrainian grain deal, something that will undoubtedly drive up the grain prices even more. It is likely that this will create a similar situation as in the beginning of 2022 where overall costs in the bakery sector will increase. Setting right and fair prices with customers will become increasingly important for the bakery sector, but mainly smaller players will struggle.
Smaller companies with lower market power have had less opportunity to raise prices in the past, which means that both the starting price is lower and that they have more often used more reserves. Additionally, they will have less market power going forward and are more dependent on large players. And based on our insight, players that are dependent on retailers tend to struggle in terms of financial performance.