Bakery Bites: The Bakery of 2022

Nineteen months into the pandemic and amid a new surge in cases, we won’t see a sudden end to the pandemic like a light switch being turned off. Even if the pandemic does end very soon, many of our new habits and routines – such as working at home and cooking more – are likely to stick. The bakery of 2022 won’t look like the bakery of 2019. And this is excellent news, as the industry can benefit from the new reality brought by the pandemic. There are four ‘Ps’ that bakers need to consider:
- People: increased consumer interest in baked goods and an expanded and more diverse audience;
- Product: newer consumption occasions and trade-up;
- Place: new diverse channels designed to cater to specific occasions and needs;
- Private Equity: increased capital availability and ongoing consolidation backed by private equity money.

People

Covid-19 has reshuffled consumer behavior for longer than anyone could have predicted. Consumers have consistently looked for comfort in their food, cooking old and new recipes to compensate for fewer dining-out occasions and convenient meals to eat between weekday conference calls. Many of these new habits will likely remain.

Work-from-home is here to stay, at least partially. Working hours away from the office are expected to stabilize at ~20%, or about one day per week. One extra day represents roughly a 20% change in the location of lunch occasions, likely from business areas to closer to home.

Product

While the pandemic is taking longer, the recession it created was fortunately short-lived, and employment recovered so fast that we have a labor shortage right now. Increased discretionary income and reduced spending opportunities have allowed consumers to pay the extra buck for a superior product and overall eating/cooking experience. Consequently, we have seen a trade-up effect for differentiated products and trusted brands throughout different food categories.

These habit changes have significantly benefited the bakery sector. Bakery items have sustained sales throughout the pandemic, unlike other staples that surged only during the hoarding period, like pasta and flour. The growth of pastries and donuts is particularly remarkable. An explanation may be found in retailers prioritizing low-complexity items following labor constraints, benefiting thaw-and-serve products.

Place

Online groceries were the biggest winners in the retail segment. By shifting focus from convenience to safety, e-grocers attracted new audiences and adapted to a more demanding consumer.

Even within the novel online world, new delivery models are expected to continue developing, improving consumer experiences, and shifting how the consumer approaches online grocery shopping. Express deliveries have reduced lead time to minutes, requiring less planning from shoppers and allowing more impulse buying – a key sales factor for indulgent baked goods. (Warm cookies in minutes? Sure, you got it!)

In the brick-and-mortar segment, grocery visits remain below 2019 levels, offset by higher average baskets. However, for short shelf-life and impulse products like baked goods, fewer visits translate into fewer selling opportunities.

Before Covid, we noted the fact that we haven’t seen much change in grocery store layouts or how products are displayed to consumers despite new product launches. Only 11% of shoppers approved of the typical division between the center bread aisle and the in-store bakery, and the majority of shoppers supported the integration of both, preferably in the perimeter of stores.[1] This division has been accentuated by the introduction of frozen baked goods in center-store freezers.

ABA, Power of Bakery 2019

Foodservice spending has risen above pre-pandemic levels, but during different hours and driven by QSR. The recent recovery of breakfast spending and increased lunch/afternoon visits are supportive of foodservice bakery. Likewise, the comparative simplicity of outsourced frozen bakery goods should help restaurants navigate labor constraints and changing demand patterns.

The big question now is how the Delta variant will impact demand. August has already shown some deceleration, and we are just entering the colder months, when outdoor seating will be less available.

Private Equity

Private equity (PE) has become the fourth ‘P’ in the current bakery momentum. The PE community has shown an increased interest in bakery companies, and many have used this financial backing to acquire other companies and expand geographies and portfolios. The number of PE transactions in 2020 was 1.5 times higher than the previous year, and 2021 has shown signals that can match this level.

Conclusion

The future of the bakery is not what it used to be. New habits are expected to stick and sustain sales substantially above 2019 levels. Increased appeal among consumers was followed by increased investor interest, and new and improved channels provide the bridge for desired bakery products to meet demand and add value.