Premium cakes have enjoyed juicy growth over the last two years, but with food inflation, house price fears and financial instability, will the top-end market hit the skids? When it comes to tightening the belt, it helps if you don’t eat luxurious cakes. But that’s enough of the diet tips. How do you sell premium cakes when people have less money to spend?

Late in 2007, market analyst IGD predicted big growth in premium, translating to a more than doubling of the premium cake market over the next five years. Yet few can truly predict the effect on consumer shopping habits of the gloomy economy.

"The last time we had an economic recession in the UK, the retailer premium brands didn’t exist in the way they do now," says Dave Brooks, MD of Finsbury Food Group, owner of supermarket supplier Memory Lane Cakes (MLC). "So, being absolutely blunt and realistic about it, no-one knows what’s going to happen to those products."

One argument puts a modern spin on Marie Antoinette’s cakey advice to those poor people subjected to food shortages under her reign: "Let them eat ’Taste the Difference’". That is, people will still treat themselves when times are tough. And there’s still little evidence of people ’trading down’. Three price increases on premium cake over the last 15 months have not greatly affected the volume of sales, insists Brooks. "Half of the commentators would say people have stopped trading up and are trading down; the other half would say that treats will become even more important," he says. "I suspect that, in reality, the net effect may be nil."

It doesn’t help when ingredients costs push up price points. MLC gets through a whopping 3.5 million kg of flour, 3m kg of sugar, 2m kg of eggs and 1.5m kg of butter a year. The cost crunch added 10% to the bottom line over the last year, and the group had to absorb £1m of increased input costs. What this has done, though, is kick-start NPD on the neglected mid-range lines. "We need to be ready as a business for any eventuality; if people do start trading down, then there are £1.50 products at the ready," says Brooks.

The past couple of years have been dominated by a push for premium. Now, Tesco is talking about range realignment, Morrisons’ growth has, to some extent, been driven by their standard brands, while Sainsbury’s is looking again at standard range NPD. There is a conscious decision from the retailers to ensure they offer a full spread of price points. Celebration cakes were starting to fragment around the £5 and £9-£10 levels; now, a lot of NPD is towards filling the gap with £7 cakes. Similarly, while much of the ambient cake packs are sold two for £2, coupled with inflationary pressures driving up premium lines to around £1.90 per pack, this has created a gap in the middle.

"Work is being done to close those gaps, and all the retailers are conscious of giving all consumers a choice. Some of the standard brands are in need of a kick-start again," says MLC’s MD, Mike Woods. "In the next 12 months, we have to be careful that what we do has a macro-economic perspective, making sure we understand the price point before we start [NPD]."

For the moment MLC is sitting pretty. Last year saw massive growth in its two strongest categories. Healthy and premium cakes have outstripped the growth shown by the overall cakes sector, which saw a 7% growth in 2007 (source: TNS); the healthy cake sector went up 15% while premium soared 41%. "There is still a theoretical gap in premium that could be filled," believes Woods.

Finsbury’s strategy has been building towards a full premium cake retail category offer. "The biggest fundamental change for Finsbury has been MLC going from offering a 5.5-inch cake/loaf-cake element, to being able to provide 27 lines along with our Scottish businesses, segmented as premium, and we can manage that segment." In fact, he sees huge opportunities for the Weight Watchers brand, which has become the dominant low-fat brand in the market, and recently had three launches: Belgian Chocolate Slices, Apple Crumble Slices and Mini Victoria Sponges.

Brooks ominously predicts a spike in input costs over the next few months and is taking steps to prepare for it, although being contracted on flour has softened the blow. "Consumers aren’t going to be majorly excited about inflation-busting increases on their food products, so we’ve got to work carefully and cleverly with our multiple grocer customers to minimise the impact on consumers. We’re saying: ’We can see this coming in September, so how are we going to handle it?’

"People will still pay for quality. Whether that’s the same in six or nine months’ time, we’ll wait and see."


=== Finsbury at a glance ===

Finsbury’s businesses: Memory Lane Cakes; Campbells Cakes; Nicholas & Harris; United Central Bakeries; Lightbody Group

Recent buys: Anthony Alan Foods and California Cakes were acquired in 2007; gluten-free specialists Yorkshire Farm Bakery and A&P Foods were picked up in April 2008 on the back of a predicted doubling of the £90m gluten-free category within the next five years. Brooks says any acquisitions over the next 12-18 months would be fairly small and in the health end of the market, which is seen as more recession-proof

MLC’s 2007 turnover: £57.4m, with sales up 16% year-on-year

Cake licences: these account for 25% of Finsbury’s cake business and include Nestlé confectionery; the newly relaunched Thorntons cakes and Weight Watchers range; Disney spin-offs such as High School Musical; and smaller licences such as Dr Who. MLC has now created a separate management team for brands, working independently of own-label

Production: Memory Lane makes 72 million packets of cakes a year

Premium cakes: now account for 45% of MLC’s turnover (not including seasonal lines, celebration cakes or brands)


=== Learning from the big guys: tips to take away from Finsbury ===

l Mike Woods holds consumer tasting panels every three weeks. "It is a powerful tool to sit in front of consumers and ask, ’What would you do differently?’ You’ll rarely get something completely wrong, but you’ll often learn how to make things better. You need to get into the minds of the consumers, probably six months before a launch."

l MLC has developed around 230 products in the last year, but the vast amount of that figure is "value challenging", or tweaks, says Dave Brooks. "This means you’re sure that the consumer wants everything you’re putting in that product, and you’re not giving away expensive ingredients that aren’t actually generating any value at the point of purchase."

l For example, it adapted a successful 5.5-inch premium carrot cake into four-pack mini carrot cupcakes. A rosette was added to each cake for decoration, and launched into stores. "But customers said they literally wanted it to be a mini version of the carrot cake, which they liked, and they expected it to look the same too," recalls Woods. So the flourish was removed.

l Delivery of cupcakes into the market needs to improve: consumers are saying there is too much buttercream on top, so neater, more finessed products will feature in MLC’s premium category relaunches later this year. Richly-topped chocolate cupcakes, which Woods was "convinced would fly", are about to be de-listed and revamped.

l MLC employs 1,100 people in Cardiff and a real challenge was keeping absenteeism down. One simple scheme that has helped cut absenteeism to under 4% is offering £50 for going six months without an absence: "It’s more of a ’thank you for attending every day’ than a reward, which is a nice bonus in the week you get it," says Woods