Alberta's Wholesale Bakery Industry Synopsis

Introduction

This profile of Alberta's wholesale bakery manufacturing industry is intended to guide strategies that support industry growth and to establish benchmark information on Alberta bakery manufacturers. The information came from secondary research and interviews with over 80 per cent of Alberta's wholesale bakery manufacturers.

Bakery Industry Defined

Products manufactured by commercial bakeries include, but are not limited to: fresh and frozen breads, specialty breads, biscuits, bagels, cakes, pastries, doughnuts, croissants, pies and unleavened bread.

These products fall under the North American Industry Classification System (NAICS) codes 311812 and 311814.

The Canadian Market Situation

In 2003, baked goods rang in over $2.8 billion in sales in Canada (excluding frozen goods.) Consumer demand for high-end products that “taste good and are good for you” is on the rise. Particularly popular are nutritionally enhanced specialty breads such as rye, oat or spelt wheat breads with added ingredients such as olives, flax or sunflower seeds or nuts. New Canadian regulations requiring more detailed nutrition labelling have contributed to the increased popularity of health food products as Canada's aging population seeks better quality and healthier products. However, Canadian consumers are still willing to indulge in comfort foods like sweet baked goods, decadent desserts laden with chocolate, and specialty breads.

The consolidation of the retail grocery sector has impacted the bakery industry. Fewer retailers result in smaller commercial bakeries being pushed out of the market as larger establishments compete on price and volume through economies of scale. The level of competition across Canada within the bakery industry is fierce. Companies rely on product innovation, differentiation and value-adding to maintain or grow market share.

There has been steady growth in Canadian consumption of grain-based products, with a 23 per cent increase from 53.3 kg per person in 1992 to 65.6 kg per person in 2002. Wheat flour accounted for 82 per cent of all cereal products consumed. Since 2002, the “low carb” trend has impacted the bakery sector but by 2004, demand for “low carb” products declined.

The opportunities for greatest expansion will be in wheat-based, ready-to-eat baked goods in frozen, ready-baked or par-baked frozen dough and mixes. Bagels have increased market share at the expense of the muffin and doughnut market. Ethnic and hearth breads are high in demand. Wraps, tortillas and other flat breads are emerging as the trendy new baked food as well as popular yeast raised breads such as focaccia, ciabatta, panini, French baguettes and brioches, and German sourdough. The dessert category, specifically value-added products with chocolate, sugar and confectionery items, netted an average growth of 5.5 per cent each year between 1992 and 2001.

More than 80 per cent of all bread is sold through supermarkets and mass merchandisers. The major franchise outlets (e.g., Tim Hortons) are gaining market share from supermarkets, while supermarkets are gaining market share from large-scale wholesale bakeries. The trend to buy 'fresh' supports the growth of in-store retail bakery outlets. Consumers perceive bread baked by in-store bakeries to be less processed. Bread as a staple has given way to market trends offering more variety, flavours, competitive pricing and convenience over small corner bakeries.

Escalating ingredient prices, specifically butter, eggs, flour and flavour ingredients such as cocoa, are impacting the bakery's bottom line. Historically, consumers are resistant to price increases in staple products such as bread, but are more willing to pay higher prices for specialty goods. Over 50 per cent of Canadian bakeries buy their own ingredients through local suppliers. In Alberta there are approximately 10 flour mills, representing about 15 per cent of the Canadian wheat milling capacity. The majority of production comes from ADM Milling and Ellison Milling. Wheat prices, which directly affect the cost of flour, were volatile in 2003 and contributed to climbing bread prices. Alberta flour manufacturing shipments increased from $817,349 in 1990 to $1.23 million in 2001, at an average compounded rate of 3.5 per cent per year.

The bakery industry is considered a low-margin industry. The average return for an independent bakery is approximately five per cent (i). The cost of manufacturing includes three major factors: labour, materials and supplies, and fuel and energy costs. Material costs for Canadian commercial bakeries increased from $696 million in 1993 to $1.1 billion in 2002, at a compounded annual growth rate of 5.2 per cent. Fuel and electricity costs increased from $51.8 million in 1993 to $65.9 million in 2002, at an average rate of 2.7 per cent (ii).

Labour productivity, measured by the value of shipments per production worker and the value-added per production worker productivity, was among the lowest in the food processing categories. Perhaps it is more efficient and more profitable to use more labour and less capital in these sectors in comparison to other sectors; however, labour shortage is also an issue.

(i) McMurdy, Deirdrie, Bakers Cope with Rising Costs of Ingredients, Edmonton Journal. November 20. 2004
(ii) Industry Canada. 2004. Commercial Bakeries and Frozen Bakery Product Manufacturing

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The Alberta Bakery Snapshot

Alberta has approximately 70 commercial bakery manufacturers that are primarily involved with processing products for wholesale distribution, including: bakery mixes, frozen dough and pre-formed products, perishable (fresh) products such as bread, buns and pastries, and cake, pastry and cookie production.

These products are distributed to retail grocery stores, food service operations and institutional establishments. Bakery food manufacturers purchase key commodity ingredients such as flour, canola oil, sugar, dairy products, yeast and food extracts, and flavourings.

Bakery goods not manufactured in Alberta in significant volume include: pretzels (soft and hard), crackers, health and breakfast bars, and croissants.

Alberta's bakery industry is recognized as a mature industry, with well-established multi-national companies dominating market share and limiting new market entrants. Although the largest product categories (white and brown bread) have gained minimal sales growth (one to two per cent) over the last several years, the bakery industry's total annual average growth rate, as measured through value of shipments, was recorded as 5.3 per cent. This was calculated from 1990 to 2002. This growth may be partly due to a rise in consumer demand for freshbaked specialty breads made with new high-fibre ingredients, ethnic and artisan breads and quick-frozen
partially-baked (par-baked) breads.

Estimated retail sales in Alberta totalled over $135 million in the bread and tortilla sector in 2003. Using the NAICS 3118 to monitor sales activity, these sales were generated in over 400 retailers within the province.

Figure 1: Size Distribution of Alberta Bakery Manufacturers

Source: Alberta's Agricultural Processing Industry Directory 2004

An estimated 91 per cent of the bakery manufacturers in Alberta are small to medium enterprises (SMEs) with staff levels at less than 100. Weston Bakeries and Canada Bread collectively hold the majority share of the Canadian bakery market (81 per cent). Although accounting for only about nine per cent of Alberta's bakery manufacturers, the larger companies with 100 or more employees dominate the Alberta bakerymanufacturing sector. They mass-produce bread products (a category with a small, but steady growth factor of only one per cent over the last several years) and sub-contract specialty goods to smaller plants.

Alberta plays a significant role in Canada's bakery industry, mainly due to the number of large-scale wholesale bakeries. These include: Weston Bakeries/Ready Bake Foods, Canada Bread Company Ltd., General Mills Bakeries and Foodservice, Mrs. Willman's Baking Ltd. and Lucerne Foods Ltd. (A Division of Safeway).

Mid-sized companies have difficulty competing, even though consumer demand for a wider variety of products has given SMEs opportunities to carve out a niche in the ever-diversifying bakery market by creating specialty products such as artisan breads, desserts, biscotti and pita bread. SMEs also have the ability to customize orders by doing shorter plant runs for their clients.

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Alberta to Canada, Industry Benchmarks

Table 1: Commercial Bakeries and Frozen Bakery Product Manufacturing (NAICS 311814) 2002

Benchmark	Alberta	Canada	Alberta Share in Canada
Number of manufacturing establishments *	60	709	8.5%
Number of employee *	1,853	22,542	8.2%
Value of shipments (millions $) *	201.2	2699.1	7.5%
Growth in value of shipments (1994 to 2002)	51.1%	29.4%	N/A
Value-added shipments (millions $) *	108.9	1524.2	7.11
Exported shipments (millions $) *	34.7	476.3	7.3%
Imported shipments (millions $) **	7.9	200.9	4%
Investment in capital machinery and equipment (millions $)**	N/A	$207.6	N/A
Per capita expenditure on bakery products (2001) ***	$112.93	$123.63	N/A
Gross Domestic Production (billions $)	170.9	1,218.9	14%
Population (million)	3.2	32	10%

* Statistics Canada Annual Survey of Manufacturers, including only those with revenues over $30,000
** Derived from Statistics Canada trade data and NAICS concordance
*** Derived from Statistics Canada, Food Expenditures in Canada

The bakery industry (NAICS 3118) represents approximately 3.6 per cent of Alberta's total food and beverage shipments; an estimated $316 million in manufactured shipments in 2003. Although the growth of the industry in terms of number of companies has been minimal, total growth in value of shipments from 1994 to 2002 was over 51 per cent, compared to Canada's growth at only 29.4 per cent (NAICS 311914). This can be partially attributed to the expansion of Canada Bread and Weston Bakeries' facilities in the province, to mergers and industry consolidation, and to product specialization by individual companies.

Figure 2: Alberta Bakery Manufacturing Shipments (NAICS 3118), 1995 - 2003

Source: Statistics and Data Development Unit of Alberta Agriculture, Food and Rural Development, Market Activity Update #3

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Key Findings

• An estimated 65 per cent of the companies interviewed expressed an interest in exploring market development outside of Alberta, predominantly in the United States.
• Bakery manufacturers are operating in a mature, highly competitive industry. Market dynamics demand product innovation, research and development of new products, re-launches of improved products or new packaging and reducing manufacturing costs.
• Operational costs (energy, Workers' Compensation Board fees, freight and labour costs) were cited as key threats to Alberta's bakery manufacturers.
• The industry continues to consolidate, with recent closures of smaller SMEs and mergers where larger manufacturers (100 plus employees) buy smaller companies to gain market share and product diversification.
• White bread dominates category sales. However, because whole wheat and multi-grain products are high in fibre they are the biggest product opportunity categories according to the Baking Association of Canada.
• Low-carb diets and trans fat health issues have negatively impacted the industry with an estimated drop of four to six per cent in overall sales as consumers completely walk away from the bakery section of food retailers.
• Retailing trends for consumers to purchase 'fresh' from franchised restaurants and in-store supermarket bakeries will continue to challenge major manufacturers with branded (wholesale and retail) products.
• The industry employs over 1,800 production workers and administrative personnel. There is a critical shortage of master bakers, food technologists and other specialists in the bakery industry.
• Small to medium enterprises are pursuing niche markets with distinctive products that are high in quality and uniqueness. This presents a challenge, considering the limited number of master bakers and industry specialists.
• The trans fat and new nutritional labelling regulations will encourage SMEs to operate more effectively, better differentiate products and select only the best selling products for market.
• Access to competitively priced financing options for working capital and fluctuating cash flow due to inventory turnover times are viewed as leading issues of concern for bakery manufacturers.
• General market risks include changes in commodity prices (primarily wheat), interest rates and foreign exchange rates.
• Small to mid-sized bakeries often focus on providing specialty products to a local geographic area and do not consider focusing on larger markets. To grow from a mid-sized bakery to a large bakery may require investments from $200,000 to $2.5 million.
• The annual aggregated growth rate provided by Statistics Canada shows the bakery industry in Alberta has grown at the average compounded rate of 5.3 per cent (1996-2002.)