Bakeries rebuild margins in 2023, promotions provide an opportunity to regain volumes in 2024
In Rabobank’s Bakery Bites report, Frossard recapped how the baked goods market spent nearly ten years to return to the margins that it experienced in 2013. The changing tide for the industry came when consumers turned to the category for simple comforts during the COVID pandemic, Frossard explained.
“[Before COVID], it was not exponential growth; it was low-single digits, even flat in some categories. Of course, there was still some pockets of growth,” Frossard said. “Everything changed during COVID. During COVID, we allowed ourselves to eat whatever. We went back to brands that [provided] nostalgia because we were looking for comfort in our foods.”
The pandemic also brought with it several supply-chain issues for the category, including higher labor costs and labor shortages. Over time, bakers adjusted to the costs and ran more efficiently, which allowed for margins to improve to 2013 levels, despite higher costs of products and lower sales in volumes, Frossard explained.
The Raboban Margin Index, which is calculated by the bank using publicly available data from the US Bureau of Labor Statistics and US Social Security, rose to 103 basis points, following several years of increase from a low in 2018 and 2019. “The margin is finally back to 2013 numbers after falling consistently,” which came in at 100 basis points for that year, he said.
Promotions provide opportunity to rebuilding volumes
However, like other food and beverage categories, the bakery category is seeing higher dollar sales but lower units sold, he added. Selected bakery categories sales were down 2.7% year-over-year and prices were 10.6% higher for the first 11 months of 2023, according to Circana data shared in the report.
Baked good companies have an opportunity to rebuild volumes in 2024 by investing in promotional activities that are geared towards budget-conscious consumers, Frossard explained.
"The forecast we have on the commodity side is that the peaks are behind us, so that gives a bit more stability for us to predict, to plan, and to have a proper budget for the year, and that may allow promotional activity." Frossard said. “There are some opportunities for promotional activity for specific brands to restore market share or just to restore volume.
Additionally, retailers can tap into the demand of value-minded consumers by providing private-label options, which have started to embrace a different value proposition.
"We tend to talk about private label in its original concept, the cheapest alternative on the shelves," Frossard said." We think that there is momentum for private label. Of course, there is a reason in the macro environment, shrinking discretionary income... Price is extremely relevant, but private label has [shifted] from being the cheapest to the best value."
What’s baking for 2024: Tapping into better-for-you trends
The baked goods market also has an opportunity to grow by focusing on healthier options, like protein and fiber-fortified offerings, Frossard explained.
“Baked goods are indulgent but can also bring a lot on the clean-label side and that healthiness side,” Frossard said. "[Baked goods] can be permissive, it can be indulgent, but it can also be health conscious... It's a very versatile industry. They are well equipped to [handle] these changes."
While consumers might be watching what they eat more carefully, they are also finding opportunities to indulge and engage with the baked goods category, Frossard said.
“The consumer that eats their ice cream or their cake is the same consumer that's also having a salad or doing cross-fit,” Frossard said. “The consumer is dynamic... We learned how to be permissive, and I think responsible indulgence is something we're going to be talking more about.”
