Three top retailers control half or more of the market in the UK, France, Germany, and the Netherlands, and the trend is intensifying, said the report.
The result will be a spate of mergers and acquisitions, said 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 another round of consolidation is on the way, partly in response to the economic crisis,” he said.
As the bargaining power of large retailers has increased, suppliers have found it more difficult to pass on increases in raw material prices at a time when these have risen significantly. But frozen bakery companies will regain some of their lost bargaining power through acquisitions, he said.
The four other factors driving consolidation were: the mismatch between supplier and customer price agreements, and the need to improve operating performance, develop innovation and build customer relationships.
Mismatched supplier agreements reflected the discrepancy between frozen bakery processors’ periodical price reviews with customers and the more erratic movement of raw materials such as flour. Short-term price rises cannot be passed on until the next review period.
Increasing size will offer more purchasing power with suppliers allowing them to postpone intended price rises until their next price reviews with their customers.
The need to improve operating performance was another factor driving consolidation. Increasing the scale would enable firms to improve the efficiency of their capital investments by lowering costs per unit. But increasing automation could lead to overcapacity and over-emphasis on capacity to maximum efficiency rather than profitability, warned the report.
More able to innovate
The sector also needed to innovate in a number of areas, including ingredients, products and convenience for retailers and consumers. “Bigger companies are more able to innovate more quickly because they have higher research and development budgets, better market research and increased collaboration with external partners such as universities.”
Product innovation will enable producers to react to trends such as the increasing demand for artisan-like products, healthier foods and ethnic products such as tortillas.
Finally, frozen bakery processors need sufficient scale to cope with retailers’ demands for services such as exclusive product innovations.
“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,” said the report.
Frozen bakery products account for 22%, or €13.8bn, of the €59bn European bakery market, up from 20% three years ago.
The UK and Italy are seeing the fastest growth rates while the biggest markets are France, Germany and Spain.
Frozen bakery’s five top challenges
- Large retailers becoming more powerful
- There is a mismatch between supplier and customer price agreements
- Companies need to improve operating performance
- Building intimate customer relationships