Retailers position bread as a loss leader

by Pinar Hosafci, food analyst at Euromonitor International
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Unit prices of bread have been stagnating in Western Europe with several countries experiencing significant declines in price. Bread prices have fallen substantially in several Southern European countries, with Greece and Spain recording CAGR declines of up to 4% over 2009-14, and have also seen a dip in Northern European markets like Finland and Belgium. The decline in bread prices moves in tandem with the modernization of the retail environment. As discounters and supermarkets are becoming more ubiquitous at the expense of traditional stores, they use cheap bread to demonstrate their value credentials. By selling artisanal bread at discounted prices or pricing it below cost to increase footfall and lure bargain-pursuing shoppers, supermarkets and discounters across Western Europe are exerting significant pressure on bread manufacturers’ margins. There are a number of strategies packaged bread manufacturers can follow to prevent their margins from further decline.

Bread enters UK price battle

Together with milk, bread has joined UK retailers’ price battle. Prices of bread have fallen by a 1% CAGR over 2009-14 in the UK, a fall that’s been driven by retailers’ increased pressure on manufacturers to reduce their agreed sales prices. Supermarket chains like Asda and Tesco have slashed bread prices in an attempt to compete with hard discounters like Aldi and Lidl, which have almost tripled their sales over the course of the last five years. As retailers drive for value and range simplification, profits of many leading packaged bread manufacturers are coming under pressure. Allied Bakeries, the baked goods arm of Associated British Foods has recently announced a fall in the first half of its financial year profits and revenues of Premier Foods are expected to decline for the fifth consecutive year in 2014. The UK is not the only market where the retailers’ price war is taking its toll on bread manufacturers. In many markets across Western Europe, unit prices of packaged bread are continuing to decline, forcing profits down at Europe’s major bread producers.

 

C-stores, substitutes offer a solution

To partially offset the decline in their packaged bread sales, manufacturers could explore alternative categories or channels, such as bread substitutes. In contrast to bread, which is dominated by artisanal and private label variants, bread substitutes are characterized by high brand awareness. Private label’s share in bread substitutes stood at 23% in 2014, in contrast to 32% in bread. In markets such as the UK, one single player, Associated British Foods, commands 60% of bread substitutes by value, while in packaged bread the company’s share is a mere 17%.  The relatively slower penetration of private label, coupled with high brand awareness, gives companies operating in bread substitutes the leverage to negotiate with retailers to raise their prices, which might in turn lead to higher profits.

The convenience store channel is another white space that packaged bread manufacturers might look into. Although they account for a much smaller proportion of baked goods sales than supermarkets or hypermarkets, they are growing at a much faster rate than supermarkets/hypermarkets in Western Europe. Prices in convenience stores tend to be higher than other modern grocery channels, and the fact that they are frequented for the purchases of basic staples such as bread and milk could also help bread manufacturers should they decide to explore this channel. Sliced packaged bread in small packs or single-portion variants are particularly appealing to sell through this channel.  As Euromonitor International's data demonstrate there is a move towards smaller pack types with packaged bread under 300 g pack size recording a CAGR of 1% over 2009-14 in contrast to 3% CAGR decline seen in pack sizes above 300 g.

Europe looks to other regions

European bread manufacturers can alternatively explore other regions where packaged bread sales are expected to see an upsurge. The Middle East is one such region. Several Middle Eastern governments are starting to lift, either partially or gradually, the heavy subsides given to artisanal bread, which are resulting in a net increase in artisanal bread prices, prompting many consumers to decrease their daily consumption and/or switch to packaged variants. Over the last five years, artisanal bread prices have increased by 1% in constant value terms while that of packaged bread have fallen by 3%. The primary challenge for manufacturers wanting to expand to these markets is persuading consumers to part with additional cash given just how cheap subsidized bread can be.

With the retail environment getting increasingly more competitive in Western Europe and major retailers using bread as a loss leader, packaged bread manufacturers are seeing their margins squeezed. The gluten-free movement and increasing popularity of reduced carb diets is also putting pressure on packaged bread sales in the region. Against this backdrop, packaged bread manufacturers should explore alternative channels and product categories like convenience stores and bread substitutes and think of diversifying their geographic focus by considering expansion in countries where bread is traditionally a significant part of the diet and the changing legislative environment is skewing the market toward packaged variants.

For further insight please contact Pinar Hosafci, food analyst at Euromonitor International, pinar.hosafci@euromonitor.com.

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