Bread industry a little stale

bread-instrudustry_200Bread and cake retailers have faced intense competition over the past five years, due to new entrants like supermarkets, convenience stores and milk bars attempting to boost their share of this market. Competitive trading conditions led to modest growth in industry revenue of 2.1% per annum to total $5.5 billion over the five years through 2011-12.

Retail sales during this period were affected by fluctuations in real household disposable income, changes to shop trading hours and the high price of wheat. Demand was also driven by changing consumer tastes and preferences across a number of bread and cake categories, along with the rising popularity of products that meet dietary requirements, like gluten-free products.

Growth in product availability has been fuelled to some extent by the introduction of instore bakeries across the major supermarket chains, along with increasing consumer awareness about the benefits of eating multigrain bread as opposed to traditional white bread. The strength of supermarkets as a one-stop-shop for grocery products and the establishment of bakeries to supply freshly baked bread on a daily basis effectively muscled out many independent retailers and franchise operations. Industry revenue is expected to increase by 2.0% in 2011-12. The stable rise in sales will be driven by overall growth in consumption.

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Bread and cake retailing is expected to post modest growth over the next five years, rising by 1.5% per annum to reach $5.9 billion by 2016-17. Independent bakers and retailers are expected to combat the competition from supermarkets by introducing fresher, more innovative loaves and investing in marketing and advertising campaigns to increase brand awareness by focusing on their points of differentiation such as artisan and specialty breads. Consumer demand during this period will be driven by steady income growth and continued education and social acceptance about the health benefits associated with eating more protein-rich bread varieties such as brown, multigrain and rye. The market is expected to remain highly competitive, with supermarkets looking to increase their share of the bread sector by expanding their product lines and stores and through aggressive promotion.

Industry outlook

Bread and cake retailing is expected to post modest growth over the five years through 2016-17. Independent bakers and retailers will combat the competition from supermarkets by introducing fresher, more innovative loaves. They will also invest in marketing and advertising campaigns aimed at increasing brand awareness by focusing on points of differentiation such as artisan and specialty breads. Their renewed focus is expected to lead to steady growth in industry revenue of 1.5% over the next five years to a total of $5.9 billion in 2016-17.

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Competition and cost pressures

The single largest barrier to growth for retailers will be the increasing level of market dominance exerted by supermarket and convenience stores over the bread and cake market. In a bid to increase their influence, supermarkets will continue to invest in bakeries to provide a fresh and appealing product to consumers. Supermarkets will further expand their grasp on the bread market via their affiliation with petrol stations (e.g. Coles Express and Caltex Woolworths or Safeway). Much like convenience stores and milk bars, petrol stations will join the race with an increased focus on promotional deals. Convenience stores will be particularly attuned to offering consumers a quick, easy and convenient shopping experience.

Industry sales will benefit from slower growth in the domestic price of wheat (compared with the previous five years through 2011-12), which will help stabilise the cost of production for retailers with in-house baking facilities and will lead to stable product margins. As a result, the overall costs of wheat-based products should change little over the next five years, except for the effect of other factors (e.g. transportation and labour). Despite forecast stability in input costs, industry profit will remain volatile due to strong price-based competition from supermarkets, which have already engaged in aggressive price wars in other categories (i.e. dairy).

Importance of innovation

Given the maturity of the market, innovation and new product development (NPD) are inextricably linked to future industry growth. The health and wellbeing movement provides a strong and tested backdrop for producers to use for their NPD strategies. The recent success of wholegrain and multigrain loaves, and organic and fortified breads with healthy additives such as omega-3, is testament to the strength of clever and timely innovation. Opportunities also exist within the specialty and premium bread segment as consumers have expanded their palate and willingness for pay for products such as Turkish bread, focaccia, sourdough, panino, and other artisan breads.

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Packaging innovation has also become increasingly important for bakery products as manufacturers have sought to adapt to changing eating habits and demographic and social trends. The increase in snacking has been particularly influential with regard to packaging, leading to innovations aimed at convenience and portability. The maturing of many markets has also meant that packaging has become an increasingly significant factor in generating value sales through the development of value added products with higher margins. Retailers must adopt these trends in the products they choose to stock and the types of breads they choose to bake.

Forecast performance

Industry revenue is forecast to rise by 1.7% over 2012-13. Despite the intense competition within the bread and cake market, industry retailers will continue to reinvent themselves in terms of product mix and target markets. Following this, revenue growth over the four years through 2016-17 will be driven by mounting demand for organic products. Due to increasing concern about chemical residues and additives, a possible niche market will be the production and sale of bread, cakes and pastries using organically grown inputs. Demand will be primarily driven by the push from consumer groups regarding the health benefits of buying organic goods versus traditionally grown and baked foods. Associated reductions in the price gap between traditional and organic goods will further boost consumer demand.

Enterprise numbers are expected to increase by 0.4% over the next five years, largely due to strong competition. As a result, it is likely that profit margins will be affected, despite increased consumption expenditure. Growth in the number of bread and cake stores will be weak at just 0.1% per annum, with newer chain and franchise stores expected to replace the older style traditional bread and cake stores. Growth in store numbers will also be driven by the expansion of supermarkets’ instore bakery networks. Despite the weak rise in store numbers, operators will place greater focus on customer service levels, leading to anticipated growth in employment levels of about 0.4% per annum over the five years through 2016-17. Wages are expected to increase at a stronger rate of 0.7% over the five years through 2016-17.

Key success factors:

  • Having a clear market position: Businesses need to have a sound marketing positioning that projects a clear and consistent image of the company. In doing so, they are able to attract the right target market and maximise their appeal to impulse shoppers.
  • Production of goods currently favoured by the market: Operators benefit from being able to supply goods that are in local demand (e.g. ethnic concentrations demand different bread types). Retailers also need to cater for various consumer trends such as high-energy varieties and diet-conscious options.
  • Proximity to key markets: Operators should ensure they are in a good location (e.g. strip shopping centre or large shopping centre location with other food shops) to maximise their exposure to potential clients.
  • Experienced work force: Stores require experienced staff to ensure customers receive the best possible store service. This builds a positive rapport between consumers and staff and fosters repeat buyers.
  • Attractive product presentation: Stores require products to be displayed in clean and aromatic surroundings. Products should be clearly labelled and priced, with daily specials given prime exposure to passing traffic.
  • Optimum capacity utilisation: Stores should ensure they have adequate stock turns to maintain or increase efficiency.

Karen Dobie is the general manager of IBISWorld, Australia’s richest source of business information.  

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