According to industry analysts, IBISWorld, Australia’s bread industry is not only going through a number of changes – its also facing challenges that is forcing it to both rationalise and innovate, writes Branko Miletic.
The recently released (July 2015) IBISWorld Industry Report has found that bread manufacturers are facing numerous challenges. This has particularly been the case over the past five years.
Growing competition from supermarkets’ instore bakeries and the consumer shift away from factory-baked bread towards specialty and artisan retailers have caused the industry’s share of the overall bread market to fall.
Additionally, volatility in prices over the past five years has dampened industry growth prospects and squeezed profit margins.
Evolving nutritional concerns, especially those relating to carbohydrate consumption and the related increases in gluten intolerance, have all combined to work against the industry.
However, the report also found that the industry’s prospects, modest as they may be, present a number of niche growth opportunities. The functional and fortified bread segment for example is expected to drive demand, as are new low-carb and other healthier bread offerings that appeal to increasingly health-conscious consumers.
The best thing since sliced bread
Increasing demand for specialty high-value breads will drive growth in niche and artisan bread products over the next five years. Bake-at-home products, par-baked and flash-baked premium bread products targeted at the food – service sector will also drive growth.
However, industry growth will be restrained by competition from instore supermarket bakeries, as Coles and Woolworths continue their aggressive push into the fresh food segment. As a result of these conflicting variables, IBISWorld expects industry revenue to grow by an annualised 1.8 per cent over the next five years, to total $2.8 billion in 2020-21.
It's all about the dough
According to the IBISWorld report, in 2015-16, industry revenue is expected to grow by 1.7 per cent, mainly driven by the increasing number of premium products offered, and new pricing models.
In 2015-16, industry revenue is forecast to reach $USD2.6 billion. Although growth is weak, it is still an improvement relative to the industry’s performance in 2010-11 and 2011-12.
It's breadsticks at 10 paces
Over the past five years, the bread industry has faced intense competitive pressures that have pushed down both prices and volumes for numerous participants.
To combat downward margin pressures, many operators have attempted to improve production efficiency by increasing automation, however, the report noted there has also been a growing focus among operators on higher margin products, including artisanal breads. Revenue from Goodman Fielder’s artisan bread business for example increased by 75.0 per cent in 2013-14.
Another significant threat comes from supermarkets aggressively increasing their share of private-label bread by baking their products instore, to compete directly with franchise bakeries and branded bread products. Sales of private- label bread have increased over the past decade, and now account for more than 30 per cent of retail supermarket bread sales.
Bread pricing wars have driven this development, with the two supermarket giants attempting to attract customers and gain market share in the bakery products segment by selling $0.85 loaves. Coles and Woolworths together control over 70 per cent of the grocery market, with private-label products accounting for nearly one in three products on supermarket shelves. At the same time, it is interesting to note that George Weston has supplied home-brand bread to Woolworths for the past decade, while Goodman Fielder supplies rival Coles.
Taking the (white) bread out of our mouths
Australians have also become more sophisticated in their bread consumption said IBISWorld, opting for a greater variety of international and artisan breads. This includes seeded, wholemeal, organic and gluten-free loaves, along with sourdough, rye breads and focaccias.
The increase in the number of artisan bakeries, particularly in capital cities, is further testament to this trend. Some industrial bread manufacturers are seeking to exploit these changing consumer tastes, widening their product ranges to incorporate more premium products as they gradually move away from the traditional white loaf said the report.
The industry’s performance will also be influenced by the rise of external competitors. Instore supermarket bakeries and artisan bakeries, which are not included in the industry, are a considerable threat.
Coles and Woolworths together operate over 1200 instore bakeries, and this number is forecast to rise over the five years through 2020-21 as they continue their aggressive push into the fresh food market. In response, industry players will need to focus on catering to the increasingly sophisticated tastes of the foodservice sector, to counter volume and pricing pressures.
Added to this figure is the higher consumer expenditure on restaurant and cafe food, which in the medium term is expected to translate into stronger demand for artisan breads, including a range of sourdough, ciabatta and flatbread varieties.
Gives us this day, our daily bread
The rise of health consciousness is known to be the primary driver of innovation for the industry, which is in the decline phase of its lifecycle. Growth in demand for healthier and more convenient substitute foods, such as snacks, biscuits, cereals and fruit, will partly lower the demand for bread.
This will be particularly true for factory-produced white bread. However, the continued introduction of new premium and ‘better-for-you’ products such as fortified breads, gluten-free loaves, high protein bread and fruit or nut breads will help offset this trend, as bread manufacturers market towards health-conscious consumers.
In the five years through 2020-21, industry revenue is expected to increase by an annualised 1.8 per cent to total $USD2.8 billion. This includes growth of 1.3 per cent in 2016-17. Despite revenue growth, enterprise, establishment and employment numbers are expected to continue declining as the industry continues to consolidate.
On a brighter note, a shift towards higher value artisan breads and other premium bread products will help boost profit margins, partially offsetting the effects of intense competition. According to most industry pundits, international trade will remain negligible.
Kneading to know the future
Over the next five years, the IBISWorld report predicts growth in high-margin premium breads is likely to drive revenue growth. However, this positive trend will be largely offset by the growth of private-label supermarket products that are baked instore.
Branded industrial producers of bread, such as Goodman Fielder, are expected to respond to changing consumption trends by altering their product mixes to reflect demand for gourmet and artisan breads.
Despite this shift, white bread still accounts for 43 per cent of total bread sales and will remain the dominant product segment until there is significant narrowing of the price difference between artisan and industrially baked bread.
Production levels will be dictated by downstream demand. Industry players are expected to face a tightly contested domestic market as retail and supermarket bakeries gain market share, particularly in specialty product segments. This means that growth in the volume of bread produced will depend on the major participants’ success in developing high-value products.
The wider introduction of higher margin branded products, and their increasing importance in the industry’s product range, will play a role in raising prices. An opportunity for some players exists in expanding food-service sector offerings, to meet the growing demand for pre-baked artisan breads with quick preparation times.