Brand Marketing, Growth 21 March 2023

Is there an opportunity for a globalized sweet bakery offer?

Sevendots Partners set out to examine the opportunity for a more globalized offer in sweet bakery that can allow for a good margin and growth. Discover the key barriers and ways to overcome them.

In this article, a group of Sevendots Partners set out to examine the opportunity for a more globalized offer in sweet bakery that can allow for a good margin and growth. By this, we mean a category that includes all different forms of baked products, but excluding cookies. This piece provides some initial ideas on the potential barriers to achieve this, as well as how to overcome this.

1. Category size: Understanding a large and important category
2. Category dynamics: Broad and fragmented territory
3. The main barriers to a globalized sweet bakery offer
4. The opportunities to raise the game in Sweet Bakery
5. Boosting category growth and value contribution

Category size: Understanding a large and important category

Consumers around the globe crave sweet products, and sweet bakery represents an important part of the offer they can get. Spread across all the geographies, the sweet bakery category is large and with a decent growing trend. Size was evaluated in between 115 and 145 billion USD in 2020 and with an expected CAGR between 3% and 4% towards 2027⁽¹⁾. The share of stomach within sweet products is close to 14%⁽²⁾ with different incidences across various geographies. In APAC, sweet bakery is the main sweet category with an incidence of around 17%⁽³⁾ in some of the countries.

Consumers link the category to a broad set of consumption occasions, from planned to impulse driven. The variety of formats, recipes and taste profiles allow for a big range of products that can engage consumers across an extended set of need states. These cover everything from pure indulgence through to small or big hunger, whether it is for energy, breakfast, small snacking, or even main meals. Additionally, the category is consumed across most life stages with a very broad consumption target.

The importance of this category is recognized also by retailers who normally dedicate a large space to it. The category is in fact present in many areas within a normal supermarket. Freshly baked products, with their shapes, colors, and smells, are relevant experience drivers for shoppers who discover them at the store entrance. Main shelf products then offer a big variety of formats and recipes, able to meet both planned and unplanned consumption occasions. Frozen bakery provides a mix of convenience and boosted experience through smell when prepared at home. Secondary placements gain attention from consumers through a varied offer. Sweet bakery is also available through many out of home channels that helps increase visibility and accessibility (and often, affordability) of the category.

Category dynamics: Broad and fragmented territory

Sweet bakery is a very fragmented territory ⁽⁴⁾. This fragmentation makes it difficult to correctly define the boarders of the category. The artisanal roots and the easiness of baking are deep in the DNA of the category. This boosts the number of product typologies and makes it difficult to define what can be counted as “sweet bakery”. The subcategories that are normally included in the definition are Cakes, Pastries and Sweet Pies, but then there are more specific segments like Cupcakes, Muffins, Sponge Cakes, Doughnuts, and many others. And all of this can then be fresh, shelf stable or frozen, adding another dimension.

This fragmentation is also reflected from a manufacturer’s point of view. This is a highly competitive market clearly without a dominant player. This is often true in most geographies but certainly true at a global level. Looking at one of the most important manufacturers active in sweet bakery, Mondelez, their global market share in Pastries is 3% and in Cakes 5% ⁽⁵⁾. However, in Cookies it is 15% ⁽⁵⁾. If you expand to the broader definition of sweet bakery, Mondelez share will very likely be no more than 2% ⁽⁵⁾. This is very different for chocolate confectionery where the top 3 players account for almost 40% of global sales ⁽⁶⁾. Global players across sweet product markets tend to only be strong in Sweet Bakery in one region, despite being strong globally in other segments.

The main barriers to a globalized sweet bakery offer

A high volume and low margin set up impacts the category dynamic, which is showing an average EBIT across channels and product typologies of around 5%-6% ⁽⁷⁾.

From a value chain perspective, strong reliance on wheat and other cereals makes sourcing a critical element. Despite employing cost-saving measures across the board, consumers in many countries saw a 5-10% jump in prices for baked goods throughout 2022 ⁽⁸⁾. Supply shortages loom across critically important ingredients such as oils, sweeteners, and even gluten. Recent explosions in input commodity prices include nearly all-time highs for wheat, grains, and vegetable oils. Bakers and suppliers must plan for longer lead times and increased costs for supplies, equipment, and packaging.

Vessel and container shortages and bottlenecks at ports also negatively impacts the smooth flow of trade for both ingredient and supply imports and product exports. As far as other logistics elements go, the baking industry has one of the biggest trucking fleets. Driver shortages in some countries heighten supply chain issues. Increased fuel prices directly impact the cost of freight to ship baking supplies and products. Increased steel and input costs for equipment and longer lead times for machinery supplies means increased pricing and shorter quote timelines for customers. Regarding packaging, increased fuel and oil prices directly impact the costs and availability of materials used to make packaging for elements such as polypropylene.

The benefits of scale and automation are generally expected to come to fruition over 500M USD in net sales ⁽⁹⁾. This clashes with the fact that sweet bakery products usually have a short shelf-life, which requires a de-centralized manufacturing model in opposition to that of centralized global businesses.

Local tastes and preferences as well as specific traditional formats and recipes also push for a preference towards a local offer vs. a more international one. The same can be said for consumption occasions. A lack of strong communication has limited the ability to build more common and replicable consumption models for the category internationally. Additionally, consumers seek out a large range of choices across products and manufacturers therefore require a large portfolio to gain visibility and shelf space. The long tail increases complexity and reduces profitability. Moreover, if the consumer is mainly attracted by formats, shapes and recipes, the level of loyalty remains very low across brands. All of this creates big portfolios that are scarcely differentiated and unable to feed scale.

The opportunities to raise the game in Sweet Bakery

The gap between the importance of the category (for both retailers and consumers) and the high level of fragmentation shows that the category may be ripe for consolidation.

A more globalized approach and offer could facilitate some relevant scale benefits that can boost profitability and provide resources for investments in consumer engagement and in relevant innovation. This can help when requalifying the category, making it more updated and able to capture developing trends. This might include elements such as technology improvements, providing a closer-to-fresh fragrance for the products, or development and introduction of products with an improved nutritional profile, either by removing unhealthy ingredients (such as trans fats, palm oil, colorants, preservatives, etc.) or by including ingredients associated with better-for-you features (such as wholegrains, multigrains, gluten-free options, etc.). Balancing the percentage of protein required to suit the product performance, taste and texture will optimize the eating experience and also impact what people will pay for a product. This opens up an important opportunity to optimize recipes.

There is the possibility to build big brands, linking them to more specific products that are able to travel across geographies with a clear occasion and need association, all of which enables much-needed differentiation. Looking at what Mondelez has done with Oreo in an adjacent category like Cookies, can provide a good example. This is valid as well for Twix from Mars or Kit Kat from Nestle in chocolate confectionery. All these products and brands were able to travel globally effectively and successfully. Inclusions prove the value boost of an approach like this. Nutella muffins, even if limited in distribution, demonstrate the potential of enhanced value propositions for consumers. Focusing on the right segments is an essential part of this exercise. Namely, Cakes and Pastries generally have a higher net revenue per kilogram than Cookies ⁽¹⁰⁾.

Exploring new recipes, with different ingredient mixes that are able to reduce dependence on standard cereals and instead move more in line with consumer demand could be an interesting path. Offering combinations of products to enhance wellness (i.e. dried fruit) or in the opposite direction, to satisfy a craving, could allow for better definition of the role of each product and provide a clearer portfolio articulation. For instance, to satisfy a craving a product might well be blended with different confectionary types such as a nougat or soft fudge or a hard-boiled candy, all of which can boost the experiential side with a surprising and satisfying effect. Exploring ways to ensure a longer shelf life, while keeping the product as natural as possible, can also offer some good upsides.

Acquisitions are an opportunity due to the high fragmentation in the category, but they should be seen more as a capability building exercise than as an industrial capability boost. Recently Mondelez has been most active in terms of acquisitions (Tate’s, Give&Go in the US, Chipita in Central and Eastern Europe) as well as Ferrero (Fresystem in Italy).

Boosting category growth and value contribution

Looking at the overall dynamic of the category, there is definitely space for a more globalized offer that consists of sizeable scale and an optimized value chain. This must be linked to a revised value proposition which captures some of the most relevant emerging trends but that can still be rooted into some established assets (where inclusions could play an important role). Better defining occasions is another key element. An RTM model that can manage the shelf life of the product while allowing for a more centralized and scaled production would be a crucial element to consider. The prize is there for long term success.