Two leading UK bakery firms are raising customer prices in order to combat high commodity prices, a strategy they say is now necessary to keep sales profits high.
As prices are rising at almost unprecedented levels, passing costs on is a business strategy that bakers can seemingly no longer ignore, even at the risk of angering consumers.
According to the Confederation of European Food and Drink Industries (CIAA), prices for wheat in the EU rose by 35 per cent in 2007, for dairy products by 50 per cent, and for sunflower oil by 25 per cent.
The regions's reserve stocks of grains are also running low, having shrunk to 2.5 million tonnes from 14 million tonnes, mainly composed of maize held in Hungary.
UK-based bakery Premier foods yesterday said in a trading update it increased consumer prices in 2007 to face this 'impact' of higher prices, after having spent more on wheat and dairy last year.
The company achieved sales growth of six per cent in its bread bakeries, and seven per cent it the cake division, but admitted that 'challenging conditions' will continue to put pressure on the company in 2008.
Similarly, UK cake manufacturer Finsbury Food Group yesterday reported double digit sales growth across all divisions, but warned of 'unprecedented' price increases for commodity items such as flour, egg and dairy.
Finsbury said it has not yet finalised the exact financial details of passing on the costs, but is confident that "the greater part of these cost increases will be recovered by the end of January 2008."
Both companies remain confident for 2008 - Finsbury said it will "meet market expectations for the full year", while Premier Foods forsees sales growth of 165 per cent - however the strategy of passing costs on to consumers is still viewed with caution by shareholders.
Indeed, both companies saw their share value fall by the end of trading yesterday. Finsbury closed down 0.5 at 81.5p, and Premier shares fell more than 13 per cent to 163.5p.
Many regulators and retailers are opposed to the idea, and, in November last year, German retailer metro pulled all Kellogg products from its shelves, saying that the cereal manufacturer's price hikes were "absolutely not acceptable."
Unfortunately however, if costs keep going up at the same rate as in 2007, putting up prices may be unavoidable for UK bakers.
According to Mintel, the UK bread and cake markets are together worth over £4.5bn (€6.7m).
Finsbury is currently number two in the cake market, focusing in recent months on speciality products such as low fat cakes. Turnover for the tax year 2007 increased 50 per cent to £109.8m (€158m), while operating profit increased 95 per cent to £5.4m (€7.8m), from £2.8m (€4m) the previous year.
Premier Foods did not weather the commodity storm so well over the same period, as sales decreased 1.1 per cent in the bread bakeries segment to £398.4m (€589m) compared to £402.8m (€595.8m) in the same period the previous year, leading to a drop in organic profit of 49.9 per cent.