Bakery firms can become recession proof, claim analysts
Industry analysts, Rabobank, in a new report Bakery Sector beyond the Downturnsaid weak consumer sentiment, the credit crisis, input cost volatility and structural pressure from retailers have impacted the performance of several bakery companies but have also triggered the emergence of new drivers for success.
However, the analysts report that while demand has fallen for more discretionary consumer goods such as electronics and clothes, there has been less pressure for manufacturers of staple food products during the recession. And, they expect bakery demand to remain stable in terms of volume but growth in value to be impacted.
Hedge the buns
Nevertheless, the report predicts that baked good firms will need to hedge raw material prices and introduce joint buying and long term supply arrangements with other players to tackle what the analysts expect will be continued volatility in input prices in the medium term outlook.
They said that several companies were caught off guard by steep input prices during 2007/08 and did not foresee the price behaviour, meaning they became locked into long term contracts at the price peak and could not benefit when the market price decreased sharply.
The analysts claim that targeting new channels such as discounters and foodservice chains would help lower dependency for the bakery manufacturers on the increasingly demanding larger supermarkets and also reduce overcapacity.
The researchers found that the rising level of retail concentration and competition has been a key factor in a delicate struggle for power in the retailer/supplier relationship in a sector "already riddled with overcapacity in some segments."
“Supplying to discounters is likely to boost volumes, although value is expected to see slower growth. When supplying to foodservice, the changing terms of contracts may be key.
For example, some large foodservice chains have been guaranteeing returns on investment to their suppliers, and focusing on regulating quality and ensuring continuity in supply,” states the report.
The market researchers maintain that a focus on health trends such as fortified and gluten free foods in tandem with the development of value added items such as savoury bakery products will be critical for maintaining sales momentum and profitability when the market picks up again.
Another factor that can help boost margins up to 2013 will be in the area of logistics management and cost efficiency to control product quality and timely delivery, continues the report.
The analysts maintain that fresh bakery products need to be delivered directly to the retail outlets on a daily basis instead of distribution centres to ensure adherence to regular and strict store timings.
“The key demand driver for frozen products is the ability to offer ‘fresh’ products to the final consumers at peak shopping/consumption moments without specialised trained personnel,” the researchers state.
They stress that a seamless delivery system and an unbroken cold chain are crucial to ensuring a high standard of service to retailers and the reports claims that bakery firm alignments might enable this more readily.
Shift from local
In addition, said the researchers, a European bakery company, previously focused on the local market, will now have to expand further to remain competitive.
“Addressing growth pockets in multiple geographies for the appropriate products is critical and will become a key consolidation driver,” claim the market researchers.
And the report predicts that mergers will continue to play a role in the European bakery sector with frozen bakery players and private equity groups driving this dimension.