The bakery market has been shrinking for years, triggered by the growing range of bakery products in other segments of the food retail sector, as well as in the snack and catering sector. The performance of the German market in 2019 is reviewed in the light of its post-pandemic evolution.
By Prof. Dr. James Bruton
This study is based on the annual financial statements and management reports of 101 larger, predominantly artisan bakery companies published in the Federal Gazette and provides a detailed overview of the economic situation of the industry, relative to company sizes. The year 2019, before the COVID-19 crisis, is compared with 2020, when the first pandemic wave of illness led to widespread economic problems – and became an existential issue for many. Generally, 2020 is also the year for which published financial statements are available, so the data represents the current state of reporting. In the case of a different financial year, i.e. with a balance sheet date during the year, the financial statements with the financial year ending during 2020 were used as a basis. These only relate to a handful of companies.
The advantage of using published data certified by auditors is obvious. Admittedly, it should be noted that companies not subject to public disclosure requirements (e.g. partnerships in the form of a KG or OHG or as a GmbH & Co. KG with at least one natural person as a general partner) cannot be included. The same applies to micro-enterprises, which only have to publish a balance sheet and no profit and loss account, so these are also missing from the sample. This finding is important because about 80% of the businesses generate a turnover of less than EUR 1 million, with half of these generating less than EUR 250,000. In this respect, this is not a representative study in a scientific sense. Nevertheless, the large number of companies of all sizes in conjunction with the comprehensive analytical tools used here are suitable for reliably depicting the market situation at the turn of 2020.
There is another special feature that needs to be taken into account: the bakery companies analyzed have different business models. The classic concept of a craft bakery is that of a company that produces for its own sales outlets. With the concentration that has prevailed in the industry for many years, there is often a need to manage a large number of sales outlets. Today, companies with less than about two dozen sales outlets are already almost leading a niche
existence. The pressure to expand has now led to franchising models, in addition to supplying their own outlets and cafés. Moreover, there are also companies, usually large operations, that ‘only’ bake and deliver to food retailers. Such companies cross the border to industrial production and the concept of craftmanship fades into the background while the idea is nevertheless held prominent for reasons of marketing. In selecting the companies for this study, an attempt was made to include those companies that, grosso modo, still embody the art of artisan baking. Some company figures, such as staff size, can only be interpreted correctly against the background of the business model.
Furthermore, it should be noted that the data for the study had to be transferred manually from the Federal Gazette. With over 5,000 data records, transfer errors can therefore never be completely ruled out. However, the control procedures used guarantee an error rate of less than 1%, so that the general statement is not limited by individual errors. On the other hand, no liability can be assumed for possible errors in individual cases.
The development of the bakery market
The bakery market has been undergoing a consolidation process for years, triggered by the growing range of bakery products in other segments of the food retail sector, as well as in the snack and catering sectors. Consolidation means a shrinking number of companies are striving to operate more effectively and efficiently with an annually decreasing number of employees. This is accompanied by strong growth pressures and a high degree of ‘chainisation’, with industry sales climbing steadily upwards despite a declining number of companies and employees. The result is a widening gap as shown in Figure 1.
Fig. 1: Development of operating figures and net turnover of bakeries
On the one hand, we see a turnover trend here that has been steadily rising since 2012, until a slump caused by the pandemic set in, which, however, quickly recovered. On the other hand, the gap between turnovers and the number of operations has been widening continuously since 2013. A look at the following Table 1 reveals more details.
In the 10 years between 2012 and 2021, the number of companies decreased by 3,701 – from 13,666 down to 9,965, a decrease of 27.1 %. From 2019 onwards, the curve slightly flattens: the year-on-year decline in 2019 = 4.0%; 2020 = 3.0%; 2021 = 2.1%. Perhaps a gradual calming of the consolidation process is emerging here or the development is due to the pandemic. After all, the percentage values are comparable to those immediately after the financial crisis in 2010 and 2011. We will only see the cause in retrospect after a few years.
Parallel to the decline in the number of enterprises, the number of employees and apprentices also declined. Until the COVID-19 crisis, the number of employees declined by 1-2% annually. With the onset of the pandemic, the decline shot up to 4.0% in 2020 and even to 5.7% in the following year. This development seems to be crisis-related. Apprenticeship numbers look even bleaker, probably due to difficulties in recruiting new people. In an online survey conducted by the Central Association in mid-2020, almost 30% of the responders stated that they had no recruitment problems due to the crisis. At the same time, however, around 20% of them saw hygiene measures and access to general education schools as complicating matters.
The reason for this development lies in the creation of turnover potential through increased ‘branchisation’ and the takeover of discontinuing operations, while at the same time exploiting synergies and cost degression. The expansion of chain stores is not only due to insolvencies; rather, it is often not even possible for small businesses to find a successor, which favors the takeover of branches by large bakeries. Increasing turnover is promoted by a general social development, namely the increase in out-of-home consumption with many snacks in between.
In connection with the lockdown times in the COVID year 2020, GfK (Consumer Index 12, 2020, p. 9) states the following:
+ Sales of bread and bakery products increased by around 9% compared to the previous year, a lower increase than for the other main fresh categories meat/sausages and fruit/vegetables and also less than the average increase for fast-moving consumer goods as a whole.
+ The 9% results from a growth of 6.5% in total bread and 12% in fresh fine bakery products (biscuits, small fine bakery products). The growth in light bread (especially toast and sandwich bread with a volume increase of approx. 9 % compared to 2019) was almost twice as strong as in the dark varieties.
+ The price per kilogram of bread/baked goods was just under 4% above the previous year’s level.
Companies included in the study
The 101 companies in the sample were divided into size classes to enhance comparability within the groups. The basis for the classification is the annual gross profit and not the annual turnover. The latter figure is largely unavailable because most companies take advantage of the size-dependent simplifications of the German Commercial Code (HGB) and prepare the profit and loss account with the gross profit as the difference between sales revenue and material input. The following table shows the classification of the companies into size classes.
The following tables, 3 to 7, list the bakery companies in each case with the gross profit for 2020 and the comparative figure for 2019.
Central results of the study
The key figures shown in Figure 2 were used for the analysis. In addition to these key figures, the personnel density was also evaluated as a proportion of total personnel expenses in relation to gross profit. The results shown with the average were measured with the median, because so-called ‘outliers’ upwards and downwards are not included in the average.
Profitability has improved significantly in the sample compared to the previous year. This finding is in line with the general trend of increasing turnover according to industry statistics. The average return on assets increased by over 2 percentage points across the sample, from 9.95 to 12.11%. The cash flow return on gross profit also increased, from 8.84 to 9.47%. This trend is almost universally evident throughout all size categories. It can thus be concluded that, compared to the previous year, all the capital employed was used profitably and there is still gross profit left over for investments, debt repayments and distributions.
The strengthening in profitability is also accompanied by an improvement in financial stability. The cash flow ratio, and the liquidity generated to service short-term liabilities, respectively, rose by a full 12.38 percentage points, across all size categories. The equity ratio, which is of great importance from the point of view of moneylenders in assessing creditworthiness, also rose slightly from 21.43 to 22.27%. The dynamic debt/equity ratio, which expresses the debt repayment period in years, is at 0.0 in both periods also unproblematic.
The asset structure provides information on the efficiency with which fixed assets are used to generate cash flow, on investments made and on the age of production equipment and facilities. It also provides information on how much net working capital is available for inventories and for managing the production process. The asset efficiency rate averaged 34% in both periods. It has risen for mediumsized companies; however, it has fallen slightly for very large and very small companies. The investment rate declined slightly overall, but increased for the two large groups M and S. The asset utilization rate was lower for the very large and very small companies. The asset wear and tear ratio is stable at 68.5% in both years – an acceptable value. The working capital ratio was consistently negative in 2019. The median was -24.17 %. The tide turned in 2020, when it became +10.04 %. For groups M and S, it was still negative at -0.61 (yoy -26.09%) and -19.01% (yoy -44.32%) respectively. This means that the capability of the enterprises to finance themselves has improved considerably.
Personnel density has decreased by around 2.5%, to 54.7%. Due to differences in the business models, the personnel density lowers as the company size grows, which is expected. Thus, the spread between group XL (with 51%) and group XS (with 59%) is 8 percentage points. As a result of an online survey by the association in mid-2020, the companies named short-time work, the reduction of working time accounts and holidays as measures to cope with the challenges of the pandemic. Far fewer resorted to compulsory redundancy. Nevertheless, the search for suitable, skilled personnel remains one of the industry’s biggest problems. Only recently, the author spotted a notice in a bakery branch offering a ‘welcome bonus’ of EUR 500 for a new part-time colleague!
Figure 2: The system of key figures used
The expectation of around 70% of respondents (as of mid-2020) in the above-mentioned online survey that sales would be worse in 2020 than in 2019 has fortunately not come true, by and large. On the contrary, the figures from this study show that bakery companies have come through the pandemic quite well. This is, of course, speaking from a high vantage point: at the level of the individual companies, the results turn out quite differently. For further information, please refer to the detailed results of the study on the Internet.
About the author A tax consultant, Prof. Dr. James Bruton also teaches business and corporate ethics with a focus on sustainability and CSR at the International Institute for Management and Economic Education at the European University of Flensburg. He is the author of the book “Corporate Social Responsibility und wirtschaftliches Handeln. Concepts, Measures, Communication”
