Rabobank: Frozen Bakery Sector Set for the Next Round of Consolidation

These challenges are best met by increasing the scale of operations, according to Rabobank analyst Marc Kennis. “However, organic growth will not be enough to meet the challenges and so companies will need to join forces with rivals.

25 June 2012 --- Europe’s frozen bakery industry is set to see a spate of mergers and acquisitions in response to five major challenges that it faces in coming years, says a new report from Rabobank Food and Agri Research.

These challenges are best met by increasing the scale of operations, according to Rabobank analyst Marc Kennis. “However, organic growth will not be enough to meet the challenges and so companies will need to join forces with rivals. The process is already under way, with about two dozen deals having been completed in the last four years but Rabobank believes that another round of consolidation is on the way, partly in response to the economic crisis” he adds.)

The challenges the sector faces are:

Large retailers are increasingly powerful

In countries such as France, Germany, the Netherlands and the UK, the top three retailers control 50% or more of the market, and the trend is intensifying. The same trend has not happened in food processing including the frozen bakery sector, which means that the bargaining power of large retailers has increased. This has made it more difficult for suppliers to pass on increases in raw material prices at a time when these have risen substantially. Building scale through acquisitions should enable frozen bakery companies to regain some of their lost bargaining power.

There is a mismatch between supplier and customer price agreements

Another reason the industry has struggled to fully pass on higher raw materials costs to their customers is that agreements with suppliers are not aligned with the duration of agreements with customers. While frozen bakery processors typically conduct periodical price reviews with their customers, input prices of raw materials such as flour move much more erratically. However, these price changes cannot be passed on until the next review period. Bigger companies will have increased purchasing power with their suppliers that could enable them to postpone intended price rises until their next price reviews with their customers, thus eliminating the mismatch.

Companies need to improve operating performance

Building scale will also allow companies to improve the efficiency of their capital investments by lowering costs per unit. However, what works for the individual company can damage the sector as a whole. Increasing automation can lead quickly to overcapacity, leading companies to “think marginally”, focusing on using capacity to maximum efficiency rather than profitability.

Innovation

The industry needs to innovate in a number of areas, including ingredients, products and convenience for retailers and consumers.

Innovation in ingredients focuses mostly on increasing shelf life, switching to less expensive products and improving the taste and feel of products. Product innovation allows producers to react to trends such as the increasing demand for artisan-like products, healthier foods and ethnic products such as tortillas. The sector can also make it easier for retailers to process and prepare products and also make products easier for consumers to handle and eat, for example by improving packaging and offering smaller portion sizes.

Bigger companies are more able to innovate more quickly because they have higher research and development (R&D) budgets, better market research and increased collaboration with external partners such as universities.

Building intimate customer relationships

As retailers have grown they have become more demanding, looking for services such as exclusive product innovations that are unique to them. To provide this service cost-effectively, frozen bakery processors need sufficient scale.

For those companies that do not have the option of growth through acquisition, other strategies are available including focusing on cost leadership, dominating a particular niche or nurturing close relationships with a select few clients.