Last month, Associated British Foods CEO George Weston admitted pricing alone wouldn’t fix the serial underperformance of its bakery arm. And the subsequent ditching of its Bürgen bread brand after 25 years in the UK points to the tough decisions the food and retail giant faces to turn around years of losses at its Allied Bakeries division.

Allied and its key Kingsmill brand are far from alone in facing pressures in the category.

More generally, UK wrapped bread has been in structural decline for many years as consumer habits and lunching tastes change.

Additionally, bakery and wrapped bread is one of the key areas own label has been gaining market share from brands, amid the march of the discounters and the more commoditised nature of the product.

While the top line of traditional bakery players has been challenged, the bottom line pressures hugely escalated this year as Russia’s invasion of Ukraine sent cost input prices soaring.

“It’s difficult to imagine a product that is more directly and widely impacted by inflation than bread,” Weston noted earlier this year, given soaring wheat prices, the natural gas involved in the baking process coupled with the impact of fuel prices on distribution.

It was under these pressures the decision to axe Bürgen was taken – as Allied sought to focus on its core volume lines and reduce complexity in its manufacturing process.

The Grocer’s Top Products data published this week shows why Allied is taking drastic action.

Bürgen was down 60% to around £771k in the 52 weeks to 10 September 2022 [NielsenIQ] before the plug was pulled, while Allied’s key Kingsmill brand lost more than £19m of sales, with sales down 13.9% to £119.6m on volumes down by almost 19%.

Perhaps more worrying for Allied is its branded rivals Warburtons and (previously troubled) Hovis are holding value sales just above flat (despite volume declines), with Warburtons in particular benefiting from diversification away from wrapped bread.

That’s shown in NielsenIQ’s market share data for October, with Kingsmill losing around a fifth of its market share over the past year, dropping 1.8 percentage points to 7%, while Warburtons (0.5 percentage points down to 25.1%) and Hovis (0.2 percentage points down to 20%) are faring better.

That situation is only worsening, with share down to 6.4% over the past four weeks as private label (up 4.3% in the past four weeks and 2.8% in the past year) in particular takes more market share.

“Own label is going to accelerate,” warns one market source.

In terms of financial performance, ABF does specifically split out Allied and bakery numbers, but there’s little doubt the division is under pressure.

At its most recent financial results, ABF said sales were ahead of last year – with previous falls in sales driven by its April 2021 exit from its Co-op supply contract – but losses also increased as a result of those cost rises in wheat, energy and distribution.

“In our view these [bakery] losses need to be addressed more aggressively,” broker Barclays cautioned in September.

Companies House data shows headline operating losses at ABF Grain Products – which along with bakery includes ABF’s UK cereals brands, sports nutrition business and more – were £115m in the two years to August 2021.

Given the bottom line, bakery performance has declined further since then (Barclays predicted Allied’s loss alone would by £60m for 2021/22), so it’s no wonder Weston says “pricing alone won’t get us to an acceptable level of profit”.

“We were making decent progress,” he said. “We [closed] two bakeries, we pushed price very hard and we were getting somewhere, and then the Ukraine war started and wheat went up by another 45% and energy went up multiple-fold.”

He said significant price discussion is underway – but a market observer points out that a loaf of bread, up from around 85p to £1.25 since inflation kicked in, remains below prices in 2009 and is only just returning to the level it was at a decade ago.

ABF has not been explicit about the nature of the actions it will take to drive this turnaround – aside from continuing to reduce capacity and prioritise production efficiencies.

A spokesman commented: “The focus of the business has been on maximising operation efficiency, alongside cost recovery – both management approaches are required in the face of such rapid and significant increase in costs.”

So Allied has taken action to simplify its product portfolio to maximise production run-times on core bakery lines (hence ditching Bürgen) and reduce the number of recipe changeovers.

Additionally, it has consolidated logistics operations in south east England and stopped production on two bakery plans in Glasgow to increase efficiencies (Glasgow remains open as a distribution hub).

But one industry source suggests the brand positioning of Kingsmill is as much of a problem as structural cost pressures. The source argued Allied overestimated the brand cache of its commoditised Kingsmill product, and its brand refresh and focus on premiumisation – which has seen the launch of two upmarket bloomers: Great White with Sourdough and Malted – had not taken off with consumers.

“You could delist Kingsmill and no one would bat an eyelid, but there was a lot of brand loyalty to Bürgen,” they said. Another commented: “Bürgen was a well-positioned product with distinctiveness and could have done a lot better – it’s a reflection of their inability to manage brands.”

While its 50/50 range remains a strong performer with consumers, Allied risks becoming squeezed between the financial imperative to simply production and target efficiencies and the longer-term necessity to innovate away from commoditised wrapped bread.

Despite the seemingly vicious circle, ABF insists it will not walk away from the category.

“ABF has operated in the bakery sector since 1935 and remains fully committed to it,” the spokesman said, noting that its bakery assets spread beyond Allied, including Speedibake in the UK, Tip Top Bakery in Australia and the supply of bakery yeast and ingredients through AB Mauri.

ABF has declined to elaborate on specific turnaround strategies – but the likelihood seems to be more capacity taken out and more production consolidation.

With ABF itself dominated by its Primark retail behemoth, critics suggest its bakery business has been left on the shelf by its conglomerate owner. But even for a business of ABF’s size, divisional losses of £50m-plus a year are not easily brushed off, or indeed sustainable.

Having shed sales through the loss of its Co-op contract and margin through cost inflation, ABF will be hoping a leaner, more focused bakery business – with more cutbacks likely – and an easing of soaring cost inputs will finally be the recipe to reverse Allied’s woes in 2023.

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