25/06/12

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.

That’s the conclusion of 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, with organic growth being insufficient.

The challenges the sector faces are, according to the report:

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, which means that the bargaining power of large retailers has increased.

There is a mismatch between supplier and customer price agreements: 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.

Companies need to improve operating performance: building scale will allow companies to improve the efficiency of their capital investments by lowering costs per unit.

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

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, notes the report, other strategies are available including focusing on cost leadership, dominating a particular niche or nurturing close relationships with a select few clients.