From shake to bake

Restructuring the sector

The recent spate of mergers and acquisitions in the U.S. baking industry has reduced the playing field to two or three large players, a few medium-size companies and numerous smaller operations. Much of this redistribution of wealth can be traced to corresponding consolidations among the retail, distribution and ingredient sectors. In response, larger players in the category went into an acquisition mode and smaller ones merged, the idea being to capitalize on economies of scale. Subsequent growth relied on volume driven innovations, producing Giants that rewrote the rules on procurement, manufacture, distribution and logistics. In the meantime, larger retailers centralized in order to reduce costs, making the procurement of retail shelf space even tougher for small bakeries. These retailers also imposed slotting fees and performance guarantees on manufacturers, prompting many smaller companies to sell to competitors with better distribution, or acquire or form strategic partnerships with other bakers in order to achieve a critical mass in the areas of production and distribution. 

Innovation and differentiation often are the big losers in the battle among food industry giants. In fact, innovations, if they occur at all, generally belong to the realm of smaller players and suppliers. These companies are often acquired by larger players hoping to leverage differentiation as a competitive advantage, though more often than not the outcomes are eclipsed by the "commoditization culture" of the acquirers. 

So it has been with the baking industry. The Goliaths focused on economies of scale while the Davids opted to differentiate. The former leveraged distribution and logistics while the latter employed technology and science to achieve presence and market share.  

As a result of in-store labor problems, large retailers have turned to commissaries to produce fresh-baked, consistent products. Along with automation, commissaries allow in-store bakeries to meet the growing demand for convenient, portable, healthful, premium products that are fresh and healthful, albeit at the expense of wholesale bakeries. In the meantime, smaller bakeries have turned to prepared mixes and blends to produce artisan quality breads, cakes and desserts at a fraction of the price of in-store bakery offerings. By paying greater attention to consumers' needs, and by leveraging their creativity and customization capabilities, artisan bakeries captured market share from wholesale bakeries. 

Regardless of their size, more and more baking companies are outsourcing for expert assistance in the areas of new product /process development, testing and quality assurance. Gretchen Stewart, Principal and Vice President with Kansas City-based CII Laboratory Services, a leading laboratory for the baking, milling and grain industries, says CII is receiving numerous requests for shelf life testing studies , previously the purview of in-house labs. "Our competency affords them peace of mind while our capability allows for efficiency at a fraction of the cost of a dedicated laboratory," she says.

The baking industry is, without doubt, in a state of flux.  Consolidation, distribution and logistics are no longer enough to sustain leadership in this category. These days, the key to success is providing differentiated products and services to an astute and diverse market. Along with science, keen insights about the American appetite will serve as the foundation for reinvention.