Defining trends in uncertain times has proven to be difficult, however, with the help of a data driven approach, context can be given. The macroeconomic shocks due to the COVID-19 outbreak and the war in Ukraine can be understood in the context of the bakery industry.
The bakery industry is unable to pass on the increased costs of raw materials to its customers, with EBIT down significantly in 2020
Ahead of the COVID-19 pandemic, profitability across the European bakery industry was declining, while the growth potential was increasingly limited. Hence, the price of raw materials dictates a large part of the market, which puts margins under pressure. These challenges have intensified while the pandemic struck, with net sales and profitability declining across the board as countries went into lockdown and complexity in supply chains intensified.
The overall upward net sales trend that was observed from 2016 to 2019 was broken: net sales declined by 4% on average resulting from pandemic-induced lockdowns. Although companies that served the retail sector were able to retain a profitability of 3.2%, the foodservice, industry and wholesale sector saw their profitability margins dropping below 1.5%.
The Ukraine war strongly impacts raw material price and availability
With net sales and profitability declining, the vulnerability of bakery companies to rising raw material costs – which in 2021 and 2022 have continued to rise – is stressed. Supply security is a key theme, not only because of the recent raw material prices – but strengthened by this development for sure. The war in Ukraine will push prices up further, as it disrupts the global grain market. Trade statistics show that Russia and Ukraine account for roughly 30% of the global wheat exports. First actions are already visible with the vertical integration of Colruyt in Belgium.
In light of these recent developments, companies that are aware of contemporary market and competitor developments are able to adjust their strategies accordingly. Players that are able to maintain high profitability are the ones that fixed raw material prices in long-term contracts, such as Biscuiterie Willems in 2020.
Winning strategies to ensure long-term continuity: value add & consolidation
In our 2021 trend report we touched upon the winning strategies, which entailed focusing on gaining additional efficiency through automation. As most companies have already optimized operational efficiency and are running lines 24/7, the answer to ensure long-term continuity lies in ways to add value and consolidation.
One successful value add strategy is combining the supply of artisanal retail outlets with industrial-scale production. Bäckerei Schneider, Pappert, Frischbäck and the Polish bakery Oskroba demonstrate the success of this strategy by realizing high profit margins.
Want to explore more successful added value strategies? And know all the reasons why consolidation is a key opportunity? Have a look at our free bakery trend report down below.