The bakery industry is well placed to serve up another year of M&A interest among investors and food manufacturers, with the speciality sector, particularly better-for-you and other niche areas, attracting attention.
With the health trend appearing to be gathering pace, partially induced by the pandemic but people also choosing to adopt a healthier dietary regime, speciality bakery offers a myriad of alternative investment options.
There’s plenty of appeal, especially around sugar-free and low-sugar, extra protein, fibre- and grain-enriched products, vegan varieties and allergen-free, and portion control with bite-sized treats.
However, the dynamics playing out behind the category momentum also feature fresh bread, rolls and buns, staples in many a household that continue to attract investment capital.
Similarly, on the indulgence side, traditional pastries, cakes and other sweet treats are also gathering appeal. We’ve already seen significant deals in this area in the last 18 months, with US-based Hostess Brands bought by JM Smucker and the Evirth frozen cakes business in China acquired by Mondelez International, for example.
Take a walk down the perimeter bread aisle of your regular store and one is almost overwhelmed by choice – packaged breads, flatbreads and wraps to name a few, and boxed cakes and other delights in the adjacent fixture. Such variety suggests a category ripe for further consolidation, as well as investment opportunities, particularly among those leading in product innovation.
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By GlobalData
Bakery overall was among the stand-out categories last year in terms of M&A activity and it’s likely to remain a hot topic in 2025.
Jeroen van den Heuvel, a managing director and head of European consumer investment at Oppenheimer, says 2024 was a “blowout” with respect to the number of transactions and the new year won’t look much different.
Bakery was a category hit more than most by the rise in energy prices but the pass-through effect from pricing has improved profitability, and while that same profitability might now be a bit bloated, it makes for an attractive investment opportunity, van den Heuvel suggests.
“I think there’s no end to it. Ten years ago, I had this discussion with people who said baked goods, there’s little volume growth, it’s a mature category, it’s going nowhere. That opinion has proven completely wrong,” he explains.
“Ten years later, if you look at every single year, there’s been very robust growth and there’s been innovation. I think the category is resilient.”
Indicative of the potential in the more indulgent bakery segment, the global packaged cakes and pastries category is worth some $95bn and $14bn in China alone, Mondelez’s CEO Dirk Van de Put suggested in October as he presented the snacks giant's third-quarter results.
That same month, Mondelez took a minority interest in UK-based better-for-you doughnut and bakery business Urban Legend via its venture capital arm, a company that uses patented air frying technology to reduce sugar, fat and calories.
In September, Mondelez also took a majority stake in China’s Evirth, adding to deals in 2022 and 2020 for Chipita and Give & Go, which produce baked goods, and cakes and pastries, respectively.
Van de Put said in October the packaged cakes and pastries market remained “highly fragmented”, presenting “significant opportunities for bolt-on M&A, as well as organic growth”, as he estimated the category was a higher value proposition than biscuits by weight.
Victor Martino, a US food industry consultant and regular contributor to Just Food, suggests we could see more deals in the frozen bakery category this year like the Evirth transaction, along with acquisitions elsewhere in the industry that are centred on healthy products like gluten-free and also ethnic bakery goods.
Consolidation is likely to be driven by smaller players seeking a partner with heavier clout to foster growth but there will also be interest from established bakers such as the likes of Grupo Bimbo and Flowers Foods pursuing greater depth by acquiring businesses for added scale and innovation, Martino says.
“There are numerous smaller, regional companies in the bakery category and many of them are niche or speciality innovators that have created products that are appealing to big bakery companies,” he adds.
“There is much growth in speciality and better-for-you categories, for example, and these innovative companies are regularly being approached by both big baker companies and investors like private equity.”
One such investor is Pritzker Private Capital, which owns the US bakery business C.H. Guenther & Son (CHG) and is actively seeking to expand its position in the industry with acquisitions in North America and Europe.
Chris Trick, an investment partner at the US private-equity firm, told Just Food before Christmas that consolidation of small bakery companies, particularly those focused on speciality areas, will form a key part of the M&A environment going forward, especially among larger producers and investors.
“There's no shortage of phone calls we're making trying to continue to build out CHG's presence,” Trick said, pointing to what he described as a “long list of one-facility operations [with] very niche products” and “hundreds of small bakeries” in North America as potential targets.
“I think there's new businesses coming to the market all the time as they focus on clean-label breads and buns and other things,” he added. “That also helps drive innovation in the industry but will also lead to consolidation in the future.”
Par baked or the bake-off segment is an area gathering momentum, mainly revolving around convenience but also due to cost pressures on manufacturers and food retailers.
The rising interest in speciality bakery has fostered consolidation and investment deals in the industry, with acquisitions driven by a mixture of the larger food companies and private equity, according to Jon Cox, head of European consumer equites at Kepler Cheuvreux.
“While the overall bakery market is relatively saturated, the speciality market is growing given the convenience factor for retailers, foodservice operators and bakeries to bake-off products at the point of sale, leading to less waste and reduced preparation time and costs,” Cox says.
“Consolidation is being driven by the benefits of scale, allowing for improved profitability. In addition, while the world may be nominally getting healthier, sales in the indulgence segment are relatively robust.”
The bakery industry isn’t without its challenges, however, despite the staple consumption element of some products.
Europastry, for instance, the Spain-based frozen bakery producer, put its plan to go public on hold last October for a second time, citing the wider market environment, but said an IPO remained a “strategic objective”.
And Ryals McMullian, the chairman and CEO of Flowers Foods, said in November that fresh packaged breads were facing “headwinds” amid shifts in consumer spending patterns.
Additionally in cakes, he said the business had been “hampered by weak category trends”.
As a means to counter those challenges, McMullian indicated Flowers Foods was open to further M&A as the company also turns to innovation for growth, such as keto breads and keto hamburger buns.
“The deal market is active, and we are carefully evaluating potential acquisitions with the goal of strengthening our position in core categories and finding new revenue streams across the baked foods category,” McMullian said as he presented Flowers Foods' third-quarter results in November.
Those comments were made before Flowers Foods opened up the new year with a sizeable $795m deal for Simple Mills, a US better-for-you business more focused on snacks such as crackers and biscuits, although baking mixes form part of the portfolio.
There were plenty of acquisitions in Europe's bakery industry last year, too, and the market is likely to remain active in 2025 as well, according to Andreas Kulcsar, a managing director at European investment bank Bryan & Garnier Co., who described 2024 as “strong” in terms of M&A for the category.
“We anticipate more M&A activity in the near term as smaller regional players will want to join forces with multi-national players,” Kulcsar says.
“More niche bread companies that have a differentiated product and well-established operations to provide consistent quality at scale will likely be on the short list of larger corporates, who are looking to offer their B2B customers something different.”
Private-equity investors will also continue to be attracted to the category because it remains a “sizeable and evolving market”, Kulcsar suggests, pointing to endeavours in product innovation and the diverse channel distribution available to bakery manufacturers in which to drive sales.
Industry players have bolstered their financial position, too, in the wake of the Covid-19 pandemic and the war in Ukraine, streamlining operations in some cases to cut costs and rewarded with an attractive margin proposition to potential investors, Kulcsar says.
Martino adds that achieving greater scale will be a key factor behind bakery M&A for 2025 to offset the rising competition and to counter the “major challenge” for branded manufacturers posed by private-label peers, particularly in the bread segment.
“Acquisitions are a cost-effective way for big bakery category companies to outsource innovation when they can't achieve it in-house,” he explains, adding smaller, regional players will be an active target.
“We will see more activity in which larger bakery companies and private-equity firms take non-majority stakes in such companies, in addition to acquiring them 100%.”
