A modern David and Goliath

27 April, 2007
While the big boys of the baking industry may seem to be in control, it's often the smaller firms who are punching above their weight, argues Plimsoll's David Pattison
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The average customer looking at the bakery section in a supermarket, or indeed someone taking a glance at the industry as a whole, might assume that the giants are in control.
In terms of turnover, that is indeed the case. But dig a little deeper and a different picture begins to emerge. When it comes to performance and profitability, this industry makes the story of David and Goliath look like a cliché. The smaller companies are pun- ching well above their weight and, indeed, could teach their larger counterparts a thing or two about how to do business.According to Plimsoll's latest research, the emerging firms in the bakery sector are:? Increasing sales at three times the rate of their larger competitors? Delivering four times the profitability of the larger firms? Showing five times the return on investment.Why should this be? The answer is simple. The big companies pay their staff more and are less productive. Competition is dri-ving prices down in many areas of the market, but the value-added sector is surviving and, in some cases, prospering.In other words, if you are producing sliced white loaves with a huge workforce, the competition from fellow giants is intense. If, on the other hand, you are making specialist breads with a relatively small staff, your nimble, slick and efficient business model is likely to be paying dividends.In the top 100 companies, salaries eat up 9% of sales. In other words, nearly a tenth of the product on the shelves is doing nothing except paying wages. One of the reasons for this, of course, is that the baking industry has followed the well-trodden path of price deflation. The travel business, the electrical goods sector and the used car market have all been affected by it. While the baking business has had its well-publicised price wars in the past, low prices are now a way of life. And if the customer is not paying, somebody has to.That's why 25 of the top 100 are losing money and 65 are showing what I would describe as signs of extreme tiredness. SolutionsOne of the few ways out - and it's one that a number of companies are actively considering - is to hunt down smaller competitors and buy them out. That's fine if you have the cash or the ability to borrow to fund your acquisitions. Sadly, in the current climate, borrowing is not a wise move for some of the firms in question.The only other option is to slim down and become more competitive. But that raises a whole range of issues - not least changing the whole culture of a staff-heavy business to produce a leaner and more efficient operation. For some, however, there is no choice. It's a case of adapt or die.It's worth noting, however, that there have been big changes at director level in many of the major companies. More than 700 new appointments in the last 18 months, in an industry with 2,100 directors in total, means that we could start to see fresh ideas emerging. The question is: is it too late for some firms?My feeling is that the new kids on the block will continue to snap at the heels of the major players. Some will be bought out, but niche markets and tighter business models are the way of the future in an industry that, until recently, has not been used to them. nl David Pattison is a senior analyst at market analystsPlimsoll Publishing



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