Bakery Market Analysis: trends in net sales, profitability and returns

Jeroen Lustig
Published on
March 25, 2022

Profitability in the European bakery industry was already in decline ahead of COVID-19, with limited opportunity for growth. These challenges have only worsened since the pandemic took hold, according to our latest trend report on the sector.

Net sales and profitability declined across the board for bakery players, as countries around the world went into lockdown and complexity in supply chains intensified. Meanwhile, raw material and input prices continued to rise from an already high base, putting further cost pressure on the industry.

Incorporating newly updated information for 2020, our analysts examined the data of the top 300 bakery companies in Western Europe focusing on growth, profitability and returns over the years 2015-2020. These indicators provide valuable insights into how bakery companies, and the bakery market as a whole, are developing. Below we provide an overview of some of the key findings.

Bakery industry struggles to create shareholder value

Return levels indicate that the bakery industry is no longer delivering shareholder value. Return on assets was significantly below 5%, which is close to or below the cost of capital. Therefore, there is little space for investments, while low returns make it difficult to achieve the financial robustness necessary to survive the more challenging coming years.

Net sales declined by 4% on average in 2020 compared with a 2.5%+ average sales growth per year for the bakery industry over the full period (2015-2020). It came as no surprise that companies with foodservice and wholesale sales channel focus took the hardest hit, both in terms of net sales and profitability. These falls were largely on the back of enforced lockdowns due to the pandemic, which cut off sales routes for these companies, often with little warning. Retail and industry-focused segments proved more resilient.

At product level, due to reliance on the foodservice channel, frozen bread and pastry take the biggest hits, with both seeing severe sales and profitability declines. Fresh bread was squeezed given low margins and high reliance on large retail customers, while profitability for the cookies and cake segment remained stable. There may be opportunity for these players to diversify into more healthy products, offering sugar-free or naturally derived products, for example.

Shelf-stable bread was the only product category to achieve sales and profitability growth in 2020. This was driven by a combination of its strong presence in retail channels and initial panic-induced hoarding of staple food items towards the beginning of the pandemic.

Rising prices squeeze margins

The bakery industry has so far been unable to pass on the increased costs of raw materials to its customers and margins reflected this. EBIT was down significantly in 2020 compared to previous years, especially for companies focused on foodservice and industrial sales. This highlights the acute vulnerability of bakery companies to rising raw material costs, which have continued to rise in 2021 and 2022. Trade statistics show that Russia and Ukraine account for roughly 30% of the global wheat exports so the war in Ukraine will push prices up even further, causing severe disruption in the global grain market.

Companies focusing on raw materials were less impacted by the negative effects of the pandemic as they benefited from the high commodity price cycle. This cycle, however, put downward pressure on the profitability of other product groups, as uncertainty grew around the success of harvests globally. Most companies have already enhanced their operational efficiency, so this leaves limited opportunity for profitability growth.

The power of a cost advantage in the commoditized bakery market was also evident in the continued outperformance of Polish companies, which achieved sales growth of 12% overall, most notably in the German market. In this case, lower staff costs were the primary driver.

Specialization becomes crucial

The value of specialization is becoming ever more apparent, with Pandriks as a prime example. The company already focused solely on the bake-off segment and disposed of its milling and toast activities during 2020, resulting in healthy profit margins, with EBIT of 5.1% and EBITDA of 12.3%. Netherlands-based company Cérélia is another example. Focusing on the niche segment of fresh dough and pancakes helped the company achieve good margins and increase its sales by 17%.

Negotiating power is key

Looking ahead, companies that can negotiate with retailers are in the best position to protect their position. Lotus Bakeries’ branded portfolio allows them to take a stance against retailers, for example, ‘We need higher prices to maintain profit margins and to invest,’ the company said in its recently released 2021 results. ‘If a customer does not want to accept that, we will not free up production capacity for them’.

Bakery players must act now to survive a challenging years ahead, and to ensure long-term presence in the sector, by exploring avenues for specialization and unique branding while also boosting their negotiating position within the value chain.

For the detailed analysis on these key trends, including how top performers in the bakery industry generated returns during 2020.

Want to find out more about the entire bakery industry and its trends and developments? Download our free bakery report below.

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