How bakers can accelerate retail growth
November 1, 2016
by Nico Roesler
Bakers are looking for ways to speed up sales growth as shoppers continue to push health trends forward.
Today’s retail market is a kaleidoscope of health trends, label claims, marketing strategies and more, all aimed to connect products to the right consumers. Bakers are finding success by offering a variety of products that attract not only health-minded shoppers but also those craving classic indulgence.
The baking business is approaching $50 billion in sales annually, according to the most recent data from Nielsen, and growth among categories such as cookies, snack cakes, crackers and baked bread are leading the way for baked goods in all channels.
During the past four years, some of the industry’s largest categories — including cookies, snack cakes and crackers — have led the way in absolute dollar growth. Increasers (from categories with sales increases over the past four years) delivered $1.7 billion in gains versus $227 million in losses from categories with sales declines over past four years. As a result, the overall baked goods category experienced a net gain of $1.5 billion over the past four years. Specifically, among those categories seeing increases over the past four years, cookies topped all baked goods with $719 million in growth, followed by snack cakes ($544 million), crackers ($355 million) and baked bread ($68 million).
On the flipside, smaller categories such as refrigerated baked goods, frozen toaster pastries and frozen sweet goods experienced declines over the past four years.
Growth is good, but bakers would like to see more.
The American Baker’s Association (ABA) collaborated with Todd Hale, retail insights thought leader and former senior vice-president, Consumer and Shopper Insights, Nielsen, to define recent retail trends at the 2016 International Baking Industry Exposition (IBIE) held in Las Vegas, Oct. 8-11. Robb MacKie, ABA president and CEO, said the growth of the baking industry across all retail channels shows the power behind the baked goods category.
“When we were in the height of the recession, bakers were satisfied with stable, slight upward growth,” Mr. MacKie said. “Now, the industry is to the point where it’s all about, ‘How do we accelerate growth?’ What Todd Hale and Nielsen really bring to the table is actionable insight data from Nielsen that speaks for itself.”
Baked goods are seeing varying results in different retail channels depending on how each one appeals to target consumers. Whether it’s brands vs. private label, health-and-wellness vs. indulgence, digital shopping vs. c-store and supermarket shopping, success at the cash register depends on who is buying the product. Companies need to identify what trends appeal to which consumer demographics before they can cash in.
Accelerating retail growth can be boiled down to one overarching objective: Reach the right shoppers.
Mr. Hale said that diversity in today’s world creates all new challenges and opportunities. “We have never been more different than we are today in terms of our population,” he said. Between 2010 and 2025, the proportion of the white population in the US will decrease from 64% to 58%. Meanwhile, the Hispanic population will grow from 16% to 20%, and black and Asian population percentages will rise to 13% and 6% respectively. These demographic changes make it harder to win with mass-marketing techniques.
When it comes to brands vs. private labels, brands are much better positioned to capitalize on retail trends than most private labels, Mr. Hale observed. Brands have more capacity for innovation and the ability to target niche markets, and they invest in research to understand where new opportunities will arise.
“Brands that are better connected with population segments that are going to drive population growth in the future stand the best chance of finding success,” Mr. Hale said.
And with each successive generation in the US becoming more multicultural, the importance of growing in non-white markets is even greater. According to Nielsen, the “Gen Next” population, as defined by Nielsen as children under the age of 19, are already reaching the 46-51% multicultural level, meaning half of them are an ethnicity other than white, non-Hispanic. That’s compared to just 24-30% multicultural population in the Boomer generation, ages 50-69.
These population changes present several challenges for the baking industry. For example, snack cakes maintained average sales in white and black households during the 52 weeks ending Dec. 26, 2015. However, that may change as the white population continues to shrink. Meanwhile, snack cakes are performing well below average in Asian and Hispanic households. Mr. Hale cautioned that companies producing snack cakes that are underperforming in these growing markets need to watch this trend closely.
“If you fast-forward, if demand among these groups doesn’t change as we move ahead over time, then it’s going to have a negative impact on some bread and other baked good categories because of underdevelopment of sales today,” Mr. Hale pointed out.
Crackers are maintaining average sales among white and Hispanic households but are underperforming in black and Asian households, according to Nielsen. The largest growth opportunity as identified by Nielsen currently is Mexican products and taco shells, which are both peaking among Hispanic households.
Mr. Hale said there are simple ways for companies to increase sales among these groups through advertising and product differentiation. For example, he said, large pizza chains such as Domino’s, Pizza Hut and Papa John’s, which have websites that allow consumers to order in Spanish, are doing much better than companies that are not adapting to the changing consumer landscape. He said advertisements portraying consumers that resemble the target demographics are also an easy and proven way to increase sales in those populations.
TH Foods, Inc., Loves Park, IL, released a new gluten-free cracker, Crunchmaster Fiesta Lime, made with rice and black beans. The product not only features elements that might attract Hispanic consumers, but it is also non-GMO Project Verified and contains no artificial colors or flavors. The Kellogg Company, Battle Creek, MI, also introduced a Cheesy Quesadilla flavor to its Pringles line this year.
But consumer trends are more than cultural demographics. Trends like health and better-for-you foods are spanning across all ages and segments of society, and the numbers show that the best way to reach them is to match diversity with product diversity.
Winning with wellness
A 2016 Nielsen Global Health and Ingredient-Sentiment Survey found that 68% of respondents noted they’re willing to pay more for food and drinks that don’t contain undesirable ingredients.
In the US, popular wellness claims such as kosher, cage-free, non-GMO, gluten-free, natural and organic are all performing average or above average in white and Hispanic households, according to Nielsen. In the bakery department, trends such as gluten-free and non-GMO are attracting above-average sales among affluent Asians and Hispanics. These claims, and others, have been driving strong sales growth over the past four years, but signs are beginning to appear that progress is slowing.
“There are other big label claims like kosher, natural and gluten-free that have delivered really strong growth over the past four years, and I think we’re going to continue to see growth in many of those claims,” Mr. Hale said. “But it’s going to slow down a bit because we may have reached a demand peak for some of them.”
Mr. Hale added that because so many companies are going the better-for-you route and pursuing the multitude of healthy label claims, there will soon be saturation in the market. He said new claims like no-sugar-added or no added artificial flavors or colors will continue to grow rapidly, but claims such as organic and natural may be approaching their pinnacle in the market. Nielsen data shows that year-over-year sales for products with gluten-free and organic claims have slowed over the past year for baked bread, fresh desserts and snack cakes.
However, Mr. MacKie and Mr. Hale expressed optimism that the baking industry can thrive in the evolving world of health trends. Mr. MacKie said that the common element among many wellness diets is a baked good, be it whole wheat bread on a sandwich, the tortilla on a wrap or even croutons on a salad. “There’s a common element to all of those healthy offerings, and that is a bakery product,” Mr. MacKie said. “It’s the foundation.”
Also important to note, Mr. Hale observed, is that overall sales in these health-and-wellness categories is still just a fraction of overall sales for most commercial bakeries. He said that while it is important for companies to diversify their offerings in the health-and-wellness arena, it’s even more important to stick to the basics. And for many in the baking industry, that’s indulgence.
Indulgence reigns king
The 24-hour news cycle might harp on health trends, but people still like to treat themselves, and baked goods are where they go to indulge.
“While there’s a lot of health messaging out there, the reality of it is that the indulgent categories are really doing well for baked goods,” Mr. Hale said. “Yes, there’s opportunity for growth in health-and-wellness, but you can’t ignore the ‘bread and butter’ of what you do in terms of making the most out of what you are manufacturing.”
The biggest bang for the buck in commercial baking is with sweet goods, as seven of the 10 fastest growing bread and baked goods (in the latest 52-weeks) were pies (+13%), cakes (+7%), muffins (+6%), pastries (+5%), cookies (+4%), ice cream cones (+4%) and snack cakes (+3%). Other categories on this top near-term growth list were frozen bread (+17%), Mexican shells (+4%) and English muffins (+3%). Indulgent baked goods sold in the perimeter or within the in-store bakery are delivering solid near-term growth too and include pies (+28%), brownies and dessert bars (+6.5%), cookies (+4.5%), bagels (+4%), muffins (+3.7%), cakes (+2.6%).
Sales in the baked goods category remain robust year-round, thanks to seasonal opportunities. For example, recent product releases show that the big fall flavor trend this year is caramel apple. Pepperidge Farm, Norwalk, CT, is offering a new Caramel Apple Swirl bread and cookie flavor, and Mondelez International, Deerfield, IL, is offering limited-edition Caramel Apple Oreo cookies.
The continued trend of success in many indulgent products can be felt both in center store and perimeter store sales. However, Mr. Hale noted that perimeter store sales are outperforming items found in supermarket aisles. This is because consumers are flocking to fresh departments to buy everything from meat and cheese to bread. He described opportunities for baking companies to capitalize on this trend by positioning themselves in other parts of the store. Baked goods can reach consumers year-round, but Mr. Hale suggested they just need to be strategically placed.
Choosing the right channel
Supermarkets and large-format stores continue to hold the lion’s share of sales for commercial baking companies, but c-stores and dollar stores are multiplying not only in sales but also in number of stores.
C-store sales continue to be led by tobacco and beverages, but baked goods and snack items are creeping into the top sellers. Mr. Hale said that baking companies need to focus on more snack-oriented products to reach the right consumers through the c-store channel. Nielsen store count data from January 2016 shows that 29,560 new c-stores were constructed since 2001 and 7,735 since 2010. Dollar stores are also growing exponentially with nearly 15,000 added since 2001. These channels are outpacing every other food retailer category in store growth but still remain a small percentage of total sales in the baking industry, according to Mr. Hale.
“When you look at dollar stores, they do about $1.6 million in sales per store, so for them to drive growth long term, they’re going to have to open up a lot of stores — and that’s what they’re doing,” Mr. Hale said.
He added that those relatively small sales numbers affect the products sold there. So, companies need to do research, Mr. Hale suggested, to see if small-format stores are really the best way to reach consumers and whether the on-the-go, convenient and portable trends align with their business plans.
“Is the dollar-store shopper the type of shopper my brand appeals to?” Mr. Hale asked. “For the most part, dollar stores tend to appeal to a lower-income consumer, so if you’ve got a brand that’s very value-oriented in terms of its price position in the marketplace, then dollar stores would be a great opportunity for some baking companies.”
It all comes down to who the target consumer is and how best to reach them. It’s a message Mr. Hale preached at IBIE. Companies need to stay connected to winning retailers and winning channels and reach out to the diverse groups of consumers that will continue to drive growth into the future.