KANSAS CITY, MO. — The baking industry, and the economy, are at a tipping point as rising input costs and sustained consumer demand push and pull on the industry. BEMA Intel data for Q1 of 2021 revealed rising logistics costs putting a pinch on the baking industry but not enough to slow down investment.
“The specter of sustained higher costs is not enough currently to take project opportunities out of the pipeline,” said Jason Ward, president of AMF Bakery Systems and BEMA board member.
Ninety-eight percent of equipment manufacturers who responded to BEMA’s Member Pulse Survey, conducted by Cypress Research, reported a positive outlook for their business for the next 6 months, down from 100% in Q4 of 2020. And while equipment manufacturers are reporting a slowing in bookings — only 44% reported bookings were up in Q1 as opposed to 51% in Q4 of 2020 — Mr. Ward isn’t worried.
“The industry experienced an exceptional pace of bookings in Q3 and Q4,” he said. “It would be hard to keep up that pace in demand.”
All of this capital investment, however, is under the cloud of rising ingredient and logistics and transportation costs. Bakery ingredient indexes for white pan bread have not fallen much from their 2020 Q4 high of 187.9 and remained dramatically higher than a year earlier. Ingredient indexes for shortbread cookie, cake donut and devil’s food cake all jumped from 2020 Q4 numbers. Bakery ingredient indexes also rose for bagel, saltine cracker and pasta.
Compounding this rise were increased logistics costs. Diesel prices hovers just under $3.20 per gallon, the highest since January 2019, reported in the BEMA Intel data. And this isn’t taking into account the recent Colonial Pipeline ransomware attack.
“What we’re hearing and what everyone is talking about is the cost of everything is going up,” said Jennifer Lindsey, vice president of global marketing for Corbion. “A lot has to do with supply and demand, but also transportation and logistics have been obscene in terms of increase in cost, so even transporting raw materials they are at a point where they have to recoup those costs.”
While the BEMA Intel data for Q1 shows that consumer price indexes for bakery products have remained steady, that will most likely change, Ms. Lindsey said, referencing the announcement by CPG companies that they will be raising prices to reduce some of the pinch from transportation and raw material costs.
Despite these challenges, however, the baking industry appears to be strong. IRI data reported in this quarter of BEMA Intel shows sales for bread, hot dog and hamburger buns, bakery snacks, crackers, and salted snacks in the commercial aisle held steady from 2020 Q4 to Q1 of 2021. Sales for categories in the in-store bakery were steady and even up in categories like cookies, pastry/doughnuts and cakes. With consumers still showing an appetite for baked foods and the strength of the grain-based foods share index, Ms. Lindsey is optimistic that any pass-through price increase won’t result in a demand drop-off.
“The baking industry is a healthy industry, and the data may seemingly point to a potential undercurrent,” she said. “We simply have to see, over the next few quarters, what the data is telling us, and at this time we don’t know if this is a negative indicator. If CPG companies and the ingredient suppliers are able to increase prices to cover increased input costs that will be to the benefit of those companies if demand stays where it is.”
Mr. Ward agreed that data is critical as the baking industry navigates this tipping point.
“It’s been really fortunate that we launched this BEMA survey when we did, during such an incredibly unusual time during our industry and the world,” Mr. Ward said. “We’ll now be able to see how things change on a quarterly basis. We’re able to look 6-12 months ahead, and it’s just an awesome tool for all of us.”
One of the most significant changes from Q4 in 2020 to Q1 in 2021 was a significant jump in confidence in the Member Pulse Survey in the restaurant and foodservice channel, with 70% reporting a positive about the restaurant/foodservice channel’s business outlook compared to only 33% in 2020 Q4. An incredible 99% of equipment manufacturers reported positive outlooks for the industrial/commercial channel.
“What we don’t know is whether demand will stay high in all channels,” said Tim Cook, chief executive officer, Shick Esteve, and first vice chair of BEMA. “As foodservice and restaurant continues to increase, we will probably see a balance or decrease in the other channels.”
Ms. Lindsey referenced analysts’ predictions that it will be another 12-18 months before the foodservice channel fully recovers, giving both bakers who supply to retail and those who supply to foodservice a timeline to prepare for the eventual pendulum swing.
Confidence in the global bakery equipment industry was also up in the BEMA Member Impulse Survey with 95% of respondents reporting a positive outlook for the next six months. Asia Pacific and North America were the strongest.
“It makes sense that Asia and North America are the most positive regions because they are the farthest along in recovery,” he said.
Much of the rise in transportation and logistics costs may be traced back to disruptions caused by the pandemic as well as the Suez Canal obstruction in March. These disruptions will take time to unwind. The global nature of supply chains today has amplified these challenges as countries around the world are in different stages of pandemic recovery.
“Countries that weren’t impacted at the beginning of the pandemic are now being impacted, and many companies source a lot of raw materials from those countries,” Ms. Lindsey explained. “Just because we’re recovering in the US doesn’t mean the countries that supply our industry are in the same place, so we’re still having to contend with this.”
This supply chain disruption has become more top-of-mind for equipment suppliers, according to the BEMA Intel Member Pulse Survey.
When listing their company’s biggest challenges transportation and logistics costs as well as increased raw material costs rose in concern. These numbers were up significantly compared to 2020 Q2 and Q3. The number of survey respondents citing COVID-19 and workforce attraction and retention as their biggest challenges was down.
“The concern about finding a quality workforce actually went down versus Q4, and my prediction is that we’re going to see that concern trend upwards this year,” Mr. Cook said. “With backlogs at a very high level and demand not yet slowing down the need for quality workforce is just going to increase, so I think that is going to be more of a challenge that shows up in future surveys.”
Despite the significant headwinds the baking industry faces in terms of supply chain disruptions and rising costs, bakers continue to invest in projects and bakery equipment manufacturers are focused on the positive outlook in front of them.
“With successful vaccine distribution, particularly in the US, the industry has more confidence that this is a sustainable economic recovery,” Mr. Ward said. “You couple that with the strong volume and business results the baking industry has seen over the past year and low interest rates and that creates a good environment for investment.”