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Arla expects convergence in German bakery sector

By Jane Byrne , 19-Jan-2011

The German bakery sector is set for consolidation, with the dominance of small bakeries unsustainable over the long term, claims the new director of the bakery ingredients division of Arla Foods, who is aiming to increase the supplier’s exposure in that market.

The rising cost of raw materials and downward pressure on prices is putting pressure on local and regional producers in Germany who struggle to compete with the manufacturing and distribution networks of bigger outfits, in particular with the increasing number of in-store bakeries.

And Søren Krarup, newly appointed bakery director at Arla told BakeryandSnacks.com that the time is ripe for larger companies – domestic and foreign – with better economies of scale to make a play for market consolidation in the German bakery sector.

The opportunities for industrial bakeries to expand their business have never been greater,” argues Krarup, who is less than two months into his tenure at the Denmark based ingredients supplier.

The Arla bakery ingredients division has traditionally focused on supplying to markets with “low hanging fruit” such as the UK, Spain, the Netherlands, Portugal and Scandinavia where its concepts like the egg replacer ingredienit, Nutrilac, have long had success, said Krarup.

But he stressed that the push is on now to ensure Germany and the Benelux, while less proven, are firmly on Arla’s radar, with the company aiming to be the number three supplier of bakery ingredients to the German market.

While industrial bakers dominate in Scandinavia, the Netherlands and the UK, craft bakers dominate in southern Europe. Germany has a 40 per cent share of industrial bakers, while Belgium is 50-50.

Germany ihas one of the highest consumption rates of bread in Western Europe. Rabobank puts the value of the sector at around €9.3bn, with unbranded private label bread accounting for 24 per cent of that and artisanal bread having a 54 per cent market share. Sales of wholegrain, multigrain and rye breads in particular are fuelling buoyancy in the bread category, notes Rabobank's food and agriculture analyst Sapna Naik.

Franziska Brandenburger, research analyst for Germany and Austria at Euromonitor International, said that in terms of volume sales, packaged bread grew by 1.5 per cent in comparison to the 0.3 per cent growth for artisanal products in 2010.

However, according to the analyst, the German packaged bread market is already quite consolidated with leading player Lieken AG having a value market share of over 27 per cent. Harry-Brot GmbH, Germany’s second leading manufacturer of packaged bread products, has a value market share of over 12 per cent, while the leading four players combined have a market share of more than 46 per cent.

Meanwhile, Arla’s new bakery director also revealed that other focus countries for the supplier over a four year time frame include China, Russia and India, where demand for Western-style bakery products is rising.

“The task as regard China, in particular, is to team up with the right producers to access local market expertise so that we can optimise bakery products according to manufacturer’s existing formulation and processes ,” explained Krarup.

He said that countries such as India offer huge potential for its functional milk proteins as egg replacers due to the existing food processing challenges related to heat, hygiene and raw material availability, as well as the egg avoidance culture based on religious beliefs.

Navigating commodity price fluctuations and ensuring favourable long term raw material supply commitments will also inform divisional strategy over the coming 12 to 18 months, said Krarup.

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