“If a recession occurs in 2024, I think it's going to be short and shallow. I do think that overall consumer sentiment and spending will remain resilient, and candidly, I've even less fear for the bakery segment. I think it [has] demonstrated considerable stability throughout various economic cycles. I think consumers continue to seek small indulgences and pick-me-ups, even in down economies. So in other words, I think 2024 will not be without continued choppiness, [but]... I think the bakery market will remain attractive.”
Consumers turn to the grocery perimeter for donuts, croissants
Many product categories have seen high inflation, but “the branded bakery space has had one of the highest rates of inflation,” Gibson. Bakery prices increased 15.3% in Q1 2023 vs. a year ago, tied for the second highest with frozen meals, and dairy saw prices increase 19.2% per the same time period, according to Circana data.
“There has been an important slowing of quarter-over-quarter inflation in the perimeter bakery space. We have not seen the same trend in center aisle... [Perimeter] inflation, while still growing, has declined over the last couple of quarters starting in Q2 2022. I think, hopefully, this is a positive indicator and may suggest that ... our consumers will be increasingly turning to the perimeter for their baked good needs.”
As inflation cools, perimeter bakery sales have increased, and units have declined. Sales came in at $18.1bn, and units declined by 0.9% for the 52 weeks ending July 30, 2023, according to Circana data. However, several perimeter bakery segments saw sales and unit growths, including donuts growing 26.9% in dollars and 8.2% in units and croissants growing by 16.7% in dollars and 3% in units, per the same Circana data.
“Goldstar to the donut category, which had the largest price and volume increase amongst all subcategories. I think that highlights a broader positive trend in breakfast baking categories. You can see a number of those had both increases in price and volume, and I think that speaks to the consumer shift away from cereals towards baked goods.”
Smucker’s acquisition of Hostess shows category is still relevant
Though the market will continue to face challenges in 2023, Gibson believes "that there are some very strong fundamentals supporting the bakery market" and acquisitions like Smucker’s acquisition of Hostess show investors still see growth for the category, Gibson said.
When it comes to exit strategies and acquisition, bakery companies can either be acquired by large strategic acquires (Mondelez acquiring Give and Go), a private-equity backed hybrid strategic (Second Nature acquiring Brownie Brittle), and private equity firms selling to a larger one (Dessert Holdings was sold by Gryphon Investors to BainCapital), he explained.
“Over the last 12 months, all three categories of buyers have been active in the bakery M&A market, so for example, Smucker’s made a big splash ... by announcing the acquisition of Hostess, Flowers bought Papa Pita, which actually had been a co-packer for their business historically, and Bimbo acquired National Choice bakery, a bagel manufacturer.
He added, “In the hybrid strategic camp, you had PNC River Arch acquiring Backerhaus to combine with their Costanza’s bread business... and at the same time, the pure private equity community has been active with new platform investments. So, for example, E2P made two bigger investments in 2023, including Fulani foods, which is the garlic-bread category."