The bakery industry, which was previously struggling for growth (see our trend report on the bakery industry for more details ), is now experiencing double-digit growth numbers in 2022. This growth is primarily driven by increased energy costs, which have resulted in higher net sales across the industry.
However, the consumption of plain bread has been declining for years. In this article, we take a closer look at some of the bakery industry giants. What are Finsbury Food Group, Aryzta, Lantmännen Food, Vandemoortele, and Flower Foods doing to overcome rising costs and declining consumption of their core products? We explore the key factors below.
Net sales
The bakery industry sees record sales for most companies, with double-digit growth numbers across the board. The energy-intensive industry is specifically targeted by high-cost inflation due to the risen energy prices.
Net sales have increased by double digits, fully driven by higher prices as volume growth generally stays behind.
• Although all players have recovered volumes y-o-y, mainly due to lower volumes during COVID, price is the largest driver of the net sales increase, with Vandemoortele Bakery even reporting a price effect close to 20%.
• Aryzta has increased net sales by 21.7%, of which most is price effect: 18.5% in the calendar year 2022. In the last half of 2022, the company reports the effects to be much higher in Europe (+20.5%), while in its South-east-Asian/and Oceania business price effects were also in the double-digits with +11.5%.
• Finsbury sees volumes slightly decreasing, with sales growth fully being price driven. The company’s sales were up 10.9% in UK Retail, and even 22% up in its food service business in the last half of 2022.
• North American player Flower Foods solely experiences a net sales increase due to price effects. The company sees its branded retail products increase by 9.2%, which is partly due to the strategy shift in focusing more on value-add brand products and less on volume growth.
• Lantmännen Food, and specifically Lantmännen Unibake, report slight increases in volumes, but the company does acknowledge most of its net sales increase is price driven, without giving exact numbers.
Note: For Lantmännen Food volume and price effects are unknown.
Margins
Although further pressure has thus far stayed out, companies are trying to find increased profitability in increased operational efficiency or added value.
In terms of operational performance in 2022, the view differs among the industry players. Although all players mention experiencing inflationary pressures, economic downturn, consumer sentiment, and supply chain challenges, some players were able to put prices on to their customers more easily than their peers. Two players specifically stand out, although for opposite reasons: Lantmannen Food and Aryzta.
• Lantmännen Food blames the drop in its operational profitability (-2.7%-point) fully on the increased costs of raw materials and reports not being able to fully offset the negative effects of the increased prices on its customers.
• Aryzta has struggled for years to get profitability up to healthy levels, and its years of focus on operational efficiency and the discontinuing of its unprofitable business units are specifically paying off. The company has sold all of its North- and South American businesses, now only focusing on European and South-East Asia/Oceania. Although the cost of restructuring weighed on the company in previous years, it has made the company’s profitability robust to the cost increases. The company has even improved its operational profitability.
• Both Vandemoortele Bakery and Flower Foods mention that their go-to strategy is to improve value-add in their products. Vandemoortele Bakery shifts its focus away from bread to pastries and sweets. Flower Foods tries to achieve value-add focus through its branded retail products.
• The margins are low in the capital-intensive bakery industry. As mentioned in our 2022 trend report, the returns on assets are generally below the cost of capital, which emphasizes the importance of the search for meaningful and profitable investments.
Investments
How are these companies set to overcome the challenges, despite the decreasing demand for bread? As shown in our bakery trend report in 2022, the return on assets is in the bakery industry well below the cost of capital. This means bakeries will increasingly struggle with attracting funding – it is more readable to put your money in the bank. Investments are generally focused on increasing margins by one of two things: increasing operational efficiency or focusing more on added-value products.
If earlier sustainability pressures have not put pressure on the bakery industry to make their energy-intensive production process more energy-efficient, the risen energy prices sure have. Across the industry, companies are investing in operational efficiency, with Lantmännen Food investing in operational efficiency with net automated cold stores in Sweden and Vandemoortele in automation equipment for several of its packaging sites. Flower Foods' entire investment strategy is focused on streamlining its business operation. Also, Finnish bakery Fazer has just announced the investment in new energy-efficient machinery, which aims to reduce staff (costs) and energy prices and use, and Aryzta has just divested its inefficient North- and South American divisions.
As mentioned before, increasing value-add remains a go-to strategy, whereas investments in the core product – bread – generally stay out. Lantmännen Food is investing in a new burger bun line, and Vandemoortele invests in a new pastry line. Simultaneously, the larger companies are challenged on their core product by smaller companies such as Pandriks, which are increasingly taking a larger piece of the pie. Pandriks, which focuses on organic bake-off bread, has been able to achieve large growth in the last years.
Final thoughts
This article shows that the bakery industry is dealing with challenges on multiple fronts. Both the volume and the value growth are obstacles the giants are trying to overcome. Simultaneously, product innovation in bread may be done more by smaller, more flexible companies, such as Pandriks.
With the search for the advantage of larger companies, we notice some companies utilizing their value chain integration both horizontally (Vandemoortele with their oil/margarine business), and vertically (Lantmannen Food being part of the large cooperative Lantmannen). On top of that, the bakery market is generally much more fragmented compared to other food and agriculture industries, with a relatively larger share of smaller companies.
Are the added-value markets large enough for the giants to recoup some profitability, or is operational efficiency the way to go? And, once profitability can be improved, are the bakeries able to hold on to the additional margins? Or are larger companies down the value chain too powerful? The answers to these questions will determine the trajectory of the bakery industry, as the decisions made by these companies could have important consequences on their profitability and ability to compete in the market.
