Bread margins under pressure as price remains at eight-year low, reports ABF

22-Feb-2016 - Last updated on 22-Feb-2016 at 12:43 GMT

Bread margins are being squeezed by price war. Photo: iStock - EwaPix

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Bread prices are at their lowest level for eight years and are continuing to put pressure on bakery industry margins, according to Kingsmill brand owner Associated British Foods (ABF).

The company – which also owns ingredients supplier AB Mauri and the Dorset Cereals brand – has today (February 22) issued a trading update ahead of its half-year results, due on 19 April.

ABF said it expected total revenue and profit in the first half to be close to last year at a constant currency rate, although down slightly on actual exchange rates. It added that overall margin would “continue to show progress”.

Grocery

ABF described the UK bakery market as remaining “intensely competitive, with retailers choosing bread as a means of highlighting their value for money to shoppers”.

It said average prices had been stable for the past six months, but remained at their lowest level for eight years. IRI data highlights the impact the UK supermarket bread price war has had on the category (see box-out below).

ABF said Kingsmill had grown its share of the bakery market, with a “substantial increase in sales volumes”, but added bakery margins as a whole remain under pressure.

Cereal brand Dorset Cereals continued to perform well, said the company, and has now been launched in Australia and was in “good distribution in the two major national retailers”. The Jordans and Ryvita brands has also made progress internationally, growing in Australia, Canada and France.

Revenues at George Weston Foods in Australia were ahead of last year across all businesses. The Tip Top bakery brand had undergone a redesign with new packaging across the range, and the cost base continued to be more efficient, said ABF.

Ingredients

First-half revenues from the ingredients division are expected to be ahead of last year at constant currency but lower at actual exchange rates. Operating profit will be “well ahead” of last year, said ABF, with further recovery in yeast and bakery ingredients.

The AB Mauri yeast and bakery ingredients businesses had fared well in Hispano America and Brazil in difficult economic conditions, with a focus on craft bakeries.

AB Mauri leads the North American market in ingredient technology for industrial bread production, claimed the business, adding it had launched USDA certified organic bread improvers and had worked to further reduce sugar and salt in bread formulations.

In Europe, the continued integration of bakery ingredients business Gb Plange, acquired in 2014, had brought rationalization of warehousing and distribution in Iberia. A new technical center was opened by the business in the UK in November.

Sugar

Sugar supply business AB Sugar has performed steadily in the first half, according to the company, adding that although world prices remained low a tightening of EU and Chinese stock levels had strengthened domestic prices in those markets.

UK price war drives 10.5% slump in market value in one year

Price of large loaf — Average price of 750g-plus loaf from Kingsmill, Hovis, Warburtons and own-label ranges. Source: Brand View

More than 10% has been wiped off the value of the UK bread market in the past 12 months in the wake of deep price cuts.

IRI data for the 52 weeks ending 2 January 2016 shows total value sales of pre-packed bread have crashed £170m ($240m) to £1.4bn ($2bn) – a £10.5% year on year decline.

With volume sales falling 3.6% over the period, the steeper value decline has been driven by price cuts as bread is used as a key weapon in the ongoing price war.

In absolute value terms, Associated British Food’s Kingsmill brand has been hit harder than its main rivals Warburtons and Hovis. Sales of Kingsmill pre-packed bread has fallen 20.7% year on year to £265m ($374m) – a drop of £69m ($97m) - on volumes down 11.6%.

And, although ABF said in today’s trading statement that average prices had stabilized (see main article), industry observers last month warned this site that further cuts could happen.

“If the big retailers continue to focus on the price of staples to try and fight the discounters then it’s a possibility bread prices will fall lower,” said Mintel senior global food & drinks Analyst Chris Brockman.

Further cuts would add to the pressure on a UK bread industry that – in addition to the drop in prices - is suffering a decline in volume sales as a result of health concerns and a shift to alternatives such as thins and wraps.