Serving an enduring 'knead': What’s behind the bakery boom expected in 2024?

Despite tightening belts by consumers amid rising food costs, the bakery sector is forecasting a prosperous 2024, marked by substantial revenue and profit growth. According to a recent survey conducted by L.E.K. Consulting and Houlihan Lokey, 53% of bakery executives anticipate significant revenue increases, while 74% expect a notable rise in profits. Even more striking, 95% of surveyed bakery executives predict volume growth, showcasing the resilience of the bakery industry in the face of rising costs and labor shortages.

What’s behind the optimism?

The upbeat outlook is driven by a combination of innovation, investment in automation and strategic capacity expansions. With 58% of executives planning to boost capital investments in 2024 – with only 11% anticipating spending less than they did in 2023 – the focus is squarely on increasing production capacity and improving operational efficiency through automation. These investments are crucial as bakeries respond to shifts in consumer preferences and attempt to mitigate labor shortages and rising input costs.

The industry’s reliance on innovation to boost revenue is a key trend highlighted in the survey. Bakers are leveraging new flavors, formats and tech to appeal to evolving consumer tastes.

For instance, Otis Spunkmeyer capitalized on the popularity of red velvet cake by introducing a cookie version of the treat, catering to consumers' love for indulgent baked goods. Similarly, Subway's Sidekicks snack collection, which includes footlong versions of Cinnabon churros and Auntie Anne's pretzels, has seen tremendous success, with nearly 30 million items sold within five months of its launch in early 2024.

Innovation extends beyond product offerings to bakery processing itself. As consumer expectations shift toward healthier, more sustainable options, bakers are exploring new ingredient formulations and production methods.

This includes the incorporation of plant-based and gluten-free alternatives, as well as cleaner label ingredients. These advances not only meet the growing demand for better-for-you products but also create opportunities to attract a broader customer base, including those with dietary restrictions.

Addressing industry challenges

Despite the optimism surrounding revenue and profit growth, bakery manufacturers face challenges on several levels: the three topping the survey’s leaderboard are declining volumes (32%), labor availability (26%) and rising input prices (24%).

Labor shortages remain a significant concern, with the American Bakers Association (ABA) projecting 53,500 open positions in the industry by 2030.

Rising wages, which have been increasing by 3%-5% annually, are putting additional pressure on margins, especially as consumers become more price-sensitive. In response, bakery operators are prioritizing automation and efficiency improvements to mitigate labor costs and maintain profitability.

So, it’s not surprising that 68% of the survey respondents indicated automation as a priority for 2024, to improve efficiency, reduce labor costs and maintain consistent product quality. Automated processes, such as robotic mixing, proofing and packaging, are increasingly becoming the norm in modern bakery operations, allowing companies to streamline production while maintaining high standards.

Additionally, there’s a growing uptake of artificial intelligence (AI) systems, being used to optimize everything from ingredient mixing and oven temperatures to predictive equipment maintenance. These intelligent systems enhance precision and efficiency but also offer real-time insights, enabling operators to reduce waste, improve product consistency and adapt quickly to changing consumer demands.

Rising ingredient costs are another challenge for the industry. Prices for key inputs have surged, with cocoa prices, for example, increasing at a 30% CAGR since 2020. To address these challenges, many bakers are turning to value engineering, using lower-cost ingredients to maintain product quality while reducing overall costs.

Additionally, bakers are keeping a close eye on macro-trends that could impact demand. The rise of plant-based and ketogenic diets prompted concerns about declining demand for traditional baked goods, however, industry responded by introducing new products that cater to these dietary preferences.

Furthermore, the growing popularity of weight-loss drugs like Ozempic and Wegovy has led some consumers to reduce their consumption of baked goods. A separate L.E.K. survey found consumers on GLP-1 medicines spent 49% less of sweet baked goods and 41% less on bread. While brands expect these trends to have some impact on the industry, they remain confident that innovation and strategic planning will help mitigate any potential challenges.

Capital investment, consolidation and expansion

On the bright side, mergers and acquisitions, investment and expansion are expected to soar in 2024, with 84% of bakery manufacturers prioritizing capacity growth as part of their investment strategies. The sector is seeing significant expansion efforts, with companies like Irresistible Foods Group and Martin’s Famous Pastry Shoppe leading the charge.

Known for its King’s Hawaiian sweet rolls, Irresistible recently announced plans to open a 300,000-square-foot facility in Indiana, while Martin’s is adding 295,000 square feet to its Pennsylvania plant. These expansions are essential for meeting the anticipated rise in demand and ensuring that bakeries can continue to deliver high-quality products at scale. Then there are smaller-scale projects like Hope Baking Company’s $37m expansion of its facility in Hope, Arkansas.

Dealmaking is on the table as well. According to the survey, 87% are actively exploring M&A opportunities in 2024, continuing a trend of consolidation that has been prevalent. Notable deals include Vandemoortele’s acquisition of Banneton Bakery and La Lorraine’s joint venture with Bakery de France, as European players expand their presence in the North American market.

Private equity firms are also showing strong interest in the bakery sector, with deals such as Stellex Capital Management’s acquisition of J. Skinner Baking and Encore Consumer Capital’s purchase of Chalet Desserts highlighting the attractiveness of the industry to investors. This wave of consolidation is expected to continue as bakery operators look to achieve economies of scale, expand their geographic reach and enhance their product portfolios.

Sustaining growth

Overall, the outlook for the bakery industry in 2024 is positive, with opportunities for growth driven by innovation, investment and consolidation.

As bakery producers continue to navigate the raft of challenges, automation and efficiency improvements will be key levers for maintaining profitability. Moreover, the industry's focus on new product development and responding to evolving consumer tastes will help ensure sustained demand for baked goods across various channels.

The bakery sector remains a dynamic and resilient part of the food industry, well-positioned to capitalize on emerging trends and deliver long-term value to consumers and investors alike.