8 trends that determine the future of the bread market
How healthy lifestyle trend, changeable tastes and lack of free time are changing one of the most conservative industries in the country
The conference «Technologies for production and packaging of bakery and flour confectionery 2020», held in Kyiv on February 20, gathered people who provide the Ukrainians with one of the most basic food.
The theme of the meeting was very accurately characterized by Boris Shestopalov, the initiator of the panel discussion among market operators and co-owner of HD-group, one of the largest food companies in Ukraine. He said: «Whatever we are talking about, sooner or later we are to talk about money».
In this case, they started talking about money early. The large industrial bakers, who have just recently embodied the concept of the bread market, are unlikely to be pleased to see small bakeries and retail chains accumulating more production – the former by using tax preferences and the latter by manipulating the place on the shelves. Apart from that, there is a consumer, whose tastes are becoming more sophisticated and who is more concerned about the impact of bread consumption on health and weight. Due to this selectivity, the product is not only getting rid of the social prefix but also gets higher demands for varieties of its recipes. At the same time, the industry is prone to global influences: global warming may not seem of much relevance to the bread business, but it directly addresses parameters such as shelf life and packaging requirements.
Last year was a good one for the bread market and allowed market participants to build up a margin of safety. But how long the situation will be at best neutral, no one can predict. «We have gathered market leaders – in our niche or region of their operations – to exchange views and answer questions about trends as well as the risks we face», – said Boris Shestopalov. «It is the task of keeping market shares, developing new products and creating new consumer properties in an ever-changing environment».
Mind identified the 8 main trends that determine the future of the bread market and gathered the views of market leaders regarding the impact of these trends on the business.
Trend 1: an increase in bread production in retail chains and a decrease in industrial production
Trading networks have shifted from a sales partner to a competitor which tends to invade the bakers' territory more aggressively than ever before. However, industrial manufacturers are confident that such a tendency will not last long and soon the balance will be back on the shelves.
Iurii Tryndiuk, Board Chairman of Hlibni Investitsii Holding Company
Our holding specializes in the production of fresh and frozen bread. If you look at the dynamics of 2018-2019, we decreased 5% of fresh bread production. I am talking about our company now, but I am sure that the situation is common for other big players as well. It is really difficult to say how long such tendencies will last and how serious they can become.
This challenge does not seem to be worthy of concern since the past year has objectively been very successful for bakers. The price of raw materials fell, energy prices went down, gross margins increased, market participants «patched up» their financial gaps and even made some investments.
But the good years cannot last forever, and we should learn to counter the trends of output decrease. As for us, we roll up our sleeves and just work twice as much. This is work on costs, on logistics, work on new varieties of bread.
Volodymyr Chereda, Chairman of the Board of PJSC «Kyivkhlib»
The market itself will determine the place of industrial baking and retail. This is inevitable – the experience of neighboring countries confirms the renewal of specialization. Some retailers in neighboring countries have already made it a requirement for industrial bakers to remove the capacity that the networks have created at their sites and supply the finished product. Yes, retailers want freshly baked bread, but do not want to incur the cost of servicing the «bakeware» needed for this. While the equipment was new, it did not require such investment as after several years of operation.
Boris Shestopalov, co-owner of HD-group
We can't help but notice the competition with the retailers that have also set up bread baking. Many traders try to reproduce the whole cycle – that is, from kneading the dough to baking the finished bread.
Despite the activity of retailers, I am convinced that this is a temporary solution and the market is to be segmented sooner or later. Those who call themselves «industrialists» will be the producers of large volumes of standardized linear and nonlinear bread, and retail chains will become our partners, not competitors, in terms of baking the finished product.
Vladislav Averchenko, CEO of Concern Khlibprom PJSC
The share of networks is increasing in the structure of distribution channels. Retailers understand that the smell of fresh bread is an anchor for the consumer, and since bread belongs to the categories of goods whose frequency of consumption is one of the highest, they are ready to invest in having this effect.
The situation in Europe is radically different. The level of income together with the high cost of people's time does not allow them to shop every day. So, their supermarket shelves look different. There is a very large number of products with long shelf life, products to be baked, etc.
My prediction is that store chains will stop a full-cycle production as it is very difficult to scale up mini-production at every location. Each food production has certain losses, write-offs, and demand is very difficult to predict. In an industrial setting, this is offset by the averaging of the demand, so we can somehow vary. But networks working separately remain one on one with all the problems.
I think we will find balance on the industrial shelves. We need bread with an adequate shelf life and wide assortment near our consumers' homes.
Trend 2: Product diversification
Buying bread in large quantities for personal consumption is almost an oxymoron. Yet, on their way from work consumers never miss visiting a nearby supermarket for a fresh loaf of bread. And there they want to have a greater choice of product and convenient packaging.
Boris Shestopalov, co-owner of HD-group
One of the most comprehensive trends in the industry, I would name the ever-growing demands for product diversity. We see a steady decline in the market in metric values, but at the same time, we see an increase in quantitative terms. Production is increasing in artificial units. This is the desire of the consumer to have fresh products of instant consumption.
There is hardly a person who buys bread home in large quantities. What is more, the Soviet practice of cutting the bread into halves has been revived in retail. It is because people do not want to stock up – they are ready to buy fresh produce.
The consumer is demanding – and that is good.
Volodymyr Chereda, Chairman of the Board of PJSC «Kyivkhlib»
Retail is no longer interested in packaging, long delivery time. They want to have warm produce. That is, we went back to what was 20-30 years ago and what many of us still remember: the warm soft bread on the shelves. This is not the first and certainly not the last change in consumer preferences. We need to be prepared that the market is constantly changing and we need to progress and to be very flexible.
Trend 3: Increasing influence of unequal tax conditions and unfair competition on the market
The simplified taxation system, as well as liberalization in the part of the state control, distorted the competitive field in the bread market. As the number of small players grows together with their aggressive strategy in the regions, it becomes an increasing problem for businesses that work in open and pay all the taxes.
Iurii Tryndiuk, Board Chairman of Hlibni Investitsii Holding Company
The fact that many manufacturers are not in the legal field is a challenge for the industry. And the competition in the bread market is not always that competitive.
If you pay all the taxes, salaries «in open», income tax and VAT, you lose to those who don't. And if that person spent this money on, let's say yacht, I would only be happy. But he|she invests it into further production. So, when I buy one production line, they buy three. This is an unfair competition.
Volodymyr Chereda, Chairman of the Board of PJSC «Kyivkhlib»
It is impossible to call the bread market uncompetitive, but often this competition is simply unfair.
I see this injustice in the VAT system. Minus 20% and the price on the shelf is completely different. The IMF has been demanding for some time already that Ukraine removes its simplified tax system. We are certain that sooner or later it will come to that.
Vladislav Averchenko, CEO of Concern Khlibprom PJSC
The package of laws on European integration adopted by Ukraine obliges us to carry out liberalization. But in the Ukrainian scenario, liberalization sometimes means a lack of control, lawlessness.
I represent a region where the proportion of networks is not decisive – only 25-30% of retail. And networks, with any regard to them, must be recognized as a barrier to unscrupulous manufacturers, as they impose high quality, documentation and business requirements. Regular retailers, shops and markets in the regions are more loyal to the small local producers who are usually taking advantage of that. Such small players generally work on a simplified form of taxation or a combined model, hiding some of the turnovers. As a result, there is a very serious pricing preference for this category of players. Plus, no one monitors these manufacturers, allowing them to manipulate recipes. They can declare a one product composition, but not always comply with it.
Trend 4: Healthy eating and changing the traditional perceptions of bread
The trend for a healthy lifestyle is no longer just a trend. It has turned into reality. And in this reality, bread is often viewed as an «optional» product.
Vladislav Averchenko, CEO of Concern Khlibprom PJSC
It is unreasonable to ignore that the culture of consumption and attitude towards bread has changed. Bread has ceased to be an essential product in our diet. Simply because, for example, today's choice of produce in supermarkets is much greater than it was 10-20 years ago.
We are receiving an increasing number of requests for product's ingredients, vitamins, minerals, impact on health and weight. The latter seems to be of utmost importance for the consumers.
All of that in addition to various myths about the effects of yeast and its opposition to bread on sourdough (both are basically the same) distorts the consumer's perception of bread.
As manufacturers, we seek long-term cooperation and that is why we need to communicate with the consumer, to explain to him|her the real role of bread in the diet.
We have chosen the format of communication with schools and other educational institutions. Of course, now students are not doing grocery shopping regularly, but sooner or later they will do so. Thus, in other words, we have already started communicating with future consumers. We also have a very effective interaction with the National Olympic Committee – a great platform for bringing our messages to active youth.
We explain what the benefits of different types of bread are and what the difference between them is. We tell about the real benefits of bread, because, once again, contrary to all myths, it is a useful product. Bread is a unique source of microelements and minerals that cannot be replaced by any other product.
Yulia Prikhodko, marketing director of Puratos Ukraine
The triangle of bread requirements remains unchanged which is «quality – freshness – health benefits». There is nothing new as these variables have always been, are and will be decisive for consumers.
We often get questions about healthy eating, whether the trend will last long. We believe that the tendency to take care of one's own body and the desire to eat healthy products won't go out of fashion. And in this regard, bread could not only satisfy hunger but also favor health. Thus, it is necessary and smart to invest in the further development of such a product and the image of its manufacturers.
Volodymyr Chereda, Chairman of the Board of PJSC «Kyivkhlib»
Whenever I hear someone claiming of being able to produce yeast-free bread, I recommend him|her to apply for the Nobel Prize immediately. I am sure they will be awarded with high priority. I will say that once again: yeast has never brought any harm.
Boris Shestopalov, co-owner of HD-group
The cornerstone here is the packaging. According to all surveys, unpackaged bread is somehow still perceived as fresher. Even though the requirements for bread packaging results from the HACCP requirements, hygiene and shelf life.
Trend 5: Changing the format of cooperation with trading networks and a gradual return to initial business specialization
The principle «Bakery to baker» gradually defines the work of retailers in the part of baking. After the boom of their bakeries, retailers begin to optimize the shops and minimize their involvement in bread production.
Boris Shestopalov, co-owner of HD-group
The majority of retail networks and shopping centers are reducing the space they originally set for creating bakeries. There is only one exception, namely a network that continues developing full-cycle bakeries. But I think it is also temporary.
Retailers usually keep the easiest part of the production process, which is baking until ready. But kneading, processing, manufacturing semi-finished products are something they do not want to get involved with. This is not their business. Besides, due to many technological constraints, supermarkets are physically incapable of making whole-grain products, sourdough and rye types of bread.
Thus, the downside of this trend is a growing demand for frozen, pre-heated or on-site heated products.
Yulia Prikhodko, marketing director of Puratos Ukraine
When a consumer says he|she wants to buy bread at the bakery, that does not mean that he wants to see kneading of dough or sacks of flour. This just means that he|she wants to buy bread near home, in a beautiful place that would look like a farm-like shop with delicious freshly-baked bread. This opens up great opportunities for collaboration with networks in which everyone will do what they do best: a baker bakes bread and a retailer sells it properly and nicely.
Iurii Tryndiuk, Board Chairman of Hlibni Investitsii Holding Company
In Western Europe, everyone understands the specifics of frozen bread, but in Ukraine, up to 90% of consumers believe that they produce it at the place of purchase, i.e. in the supermarket. Well, let them believe that.
However, we see an upward trend in the demand for frozen products. Moreover, retail chains are gradually abandoning bakers. They want to get not only ready-made bread but also experts who will bake them until ready. The only thing left for them to do is to put the product on the shelf.
Sergey Solovey, CEO of Puratos Ukraine
I agree that the profitability of producing bread and bakery products in retail will cause networks to change its business model. In neighboring countries that set a good example of industry development, such as Poland, we see that there is a tendency towards a return to industrial bread.
There is no doubt that the future is in the industrial production of bread.
Trend 6: demand for high-margin, craft bread
The belief that bread should be, first and foremost, available is already outdated. Despite any crisis phenomena in the economy, in Ukraine, there is a large market of expensive bread, the main requirements of which are quality, freshness and an exceptional recipe.
Yulia Prikhodko, marketing director of Puratos Ukraine
Retail chains, which are now perceived as competitors to the industrial bread producers, have done the latter a great favor. They paved the way for the high-margin segment, revealing that Ukraine has a market for value-added bread as well as bread with seeds, dried fruits and much more. Several years ago, it was hard to believe in the very existence of such a market, but the networks took the risk and showed the industry a new opportunity. Consumers want craft products and they are willing to pay for them.
Volodymyr Chereda, Chairman of the Board of PJSC «Kyivkhlib»
My colleagues have named the basic requirements for bread, which are quality, freshness, and health benefits. I would also add here security that could be ensured and guaranteed in industrial production. But no one, or almost no one, names the price as a key parameter that affects purchase.
I agree that at least for large cities (like regional centers or million-person city) the cost of bread has long ceased to be a major factor.
Trend 7: the output of transnational players
Bread is perceived as a product with a short or very short shelf life, so it can only be produced in close proximity to consumers. However, the development of technology has enabled the production of intermediate goods, import of which is rapidly increasing.
Boris Shestopalov, co-owner of HD-group
Ukraine is an active importer of bread products and this tendency only grows. Even if legally transnational players are not present in Ukraine, their products are already here. These are global corporations from Eastern Europe which products many retail chains buy for further baking.
We were wondering what was driving this demand. Surely, it is not because retailers want to bring the product from abroad. They just cannot find a better alternative, either in quality or quantity, in Ukraine. This creates a great opportunity. Firstly, to increase the assortment and, secondly, to export primarily frozen bread. I am convinced that Ukraine can be a global player in the European bread market.
Since 2019, the main factor in the weakening of Ukrainian exports is the strengthening of the Hryvnia. For exporters to be willing to sign long-term contracts, we need currency stability.
Sergey Solovey, CEO of Puratos Ukraine
Ukraine has yet to see a multinational business in the bread market. This is inevitable: in one form or another, global players will be here. Industrial production in Ukraine is unlikely to disappear. It is the culture of the post-Soviet countries, and it is still very strong. I think soon enough we will see redistribution in the market and consolidation.
Trend 8: the growth of «bread» street food
As more people start perceiving time as a non-renewable resource, the popularity of the ready-meals-to-go segment increases. In particular, it generates demand for small-scale bread products of a wide range.
Boris Shestopalov, co-owner of HD-group
One of our businesses is the market leader in street food production. We see a sharp increase in the food-to-go segment. This is a worldwide trend as people strongly value their main resource – time. They save it, by reducing the time spent on cooking or eating out as well. Although in Ukraine there is a strong tradition of home-cooking, the change in favor of saving time is very visible.
Therefore, we are certain that the impact of street trading on the bread market will increase as well as the demand for small-scale, ready-to-eat products with relatively long-term storage. A variety of sandwiches, burgers, etc. are delivered frozen and are heated at a street outlet. The main competitive advantages are, of course, the quality, variety, and speed of production.
One of the brightest manifestations of this trend nowaday is the growth of the production of toast bread in the past two years. As known, it is the basis for sandwiches.
Iurii Tryndiuk, Board Chairman of Hlibni Investitsii Holding Company
Time is increasingly valued nowadays. People live dynamically and it is common to have a snack on the move. This should be taken into account and adjusted to daily reality.
What could be countered by this acceleration? That could be new types of bread (customized, fitness, in individual packaging) as well as franchise development.
