Hot to Value: Bakeries

Industry Description

The Commercial & Retail Bakeries industry contains establishments manufacturing fresh and frozen bread and other baked goods, including cakes, muffins and croissants (NAICS 31181x). These products are sold either directly to consumers or to downstream supermarkets, convenience stores and food-service providers. 

The following are some basic characteristics of the industry:

  • The Commercial & Retail Bakeries industry have a combined revenue of $48.7 billion, with a growth rate of 0.5% in 2022-2027
  • There are approximately 33 thousand companies as of 2022
  • Bakeries employ approximately 247 thousand people

Not included in the scope of this analysis are Baked Good Stores, Snack and Non-alcoholic Beverage Bars, or Cookie and Cracker Manufacturing.  These are potentially the subject of other guides in the How to Value series.

Industry Trends

The Bread Production industry is its mature phase in its lifecycle and is fully saturated in the U.S. market. The two largest U.S. baking companies account for 61% of branded bread sales in the U.S.  While new products are introduced frequently, they typically are modest improvements on already existing products but reformulated to have higher quality ingredients, nutritional value, or texture. New products, such as pita, naan and other ethnic breads, are recently new to mainstream America but are adapted from other parts of the world. As a result, competition among the top manufacturers has grown largely through acquisition of smaller specialty or artesian style operators to expand market reach, portfolio offerings and distribution network. 

The key factors influencing the industry are (i) shift in consumer preferences and tastes, (ii) robotic and automation technology advancements, and (iii) production techniques to prolong product shelf life. Each of these is described in further detail below.

There have been several shifts in consumer tastes which changed the product offerings. Between healthy eating and environmental concerns, consumers seemingly want it all: (i) an increase in “health-boosting ingredients”, (ii) while being low in sugar, fat, and carbs, (iii) plant-based flexible diets free of animal cream, butter and eggs (iv) without compromising on taste.  Furthermore, the pandemic changed the way Americans ate. As a result of stay-at-home mandates, breakfast became a more central meal according to the Harris Poll and General Mills Foodservice. Rather than a grab-and-go option before school or work, people could enjoy a more elaborate breakfast. Findings include 24% Americans report eating more breakfast foods and 79% say they have eaten breakfast foods outside of traditional hours. As a result, this behavioral shift increased demand for premium fresh and frozen bread offerings such as brioche bread and bagels.

To get consistent product texture, taste, and aesthetic, many operators have partial automated manufacturing production lines. Robots first earned their place in bakeries 20 years ago, but due to advances in size, mobility, adaptability, vision, controls and end-of-arm tooling, these are significant opportunities to improve processes. Collaborative robots, or “cobots”, have also addressed labor availability fluctuations and production schedule shifts. These robots work alongside humans and enhance processes by alleviating requirements placed on humans and make production more efficient. According to Association for Advancing Automation (A3), robot unit sales in North America for the Food and Consumers Goods sector increased 29% in 2021.

The increased demand for packaged baked goods has been catalyzed by shift from physical bakery counters to online and pre-packed bakery treats. According to McKinsey and Co., US online grocery shopping penetrated 9-12% the end of 2020, a threefold increase from pre-pandemic levels, and it projected to get to 14-18% in the next three to five years. Because of this shift in shopping behavior, producers are evaluating how to overcome the challenges of delivering the best quality products. Many have turned to functional ingredients, such an enzymes and additives, to prolong the shelf life. In addition, conventional and innovative processing and preservation techniques, such as acidification or ultra high-pressure treatment, can cause microbial degradation (mold inhibition) and prevent quality degradation (staling process retardation).

Key Performance Metrics

In evaluating the Bread Production industry, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions.  Since bread production is heavily automated quality-controlled process, many of the metrics are related to quality/ production:

  • Profit Margin by product segment
  • Portfolio Diversity
  • Branded vs Non-Branded Products Ratio
  • Operating Equipment Effectiveness (OEE)
  • Order Fill Rate
  • Reject Ratio
  • Production Cycle Time
  • Forecast Accuracy
  • Quality Product Specification

Industry Organizations & Publications

The following organizations publish useful information:

  • BBM Magazine
  • North America Foodservice
  • Snack Food & Wholesale Bakery
  • World Bakers

Guideline Information: Private Purchase Transactions

Most bakeries are privately owned and there is considerable M&A activity in this industry. Data regarding the sale of 100% of closely held bakeries is generally the best source of information to appraise a subject company. The following are typical appraisal multiples from sale of bakeries:

  • Revenue multiples between 0.28 and 0.61 times
  • Gross Profit multiples between 0.45 and 1.1 times
  • EBITDA multiples between 2.1 and 6.1 times

In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered.   

Guideline Information: Publicly Traded Companies

Most Commercial & Retail Bakeries are privately owned; however, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. For example, there are companies that contain baked goods in their brand portfolio, such as General Mills, Kellogg Co, that are not included below and should probably not be used to value commercial & retail bakeries.  Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company.  

The largest publicly traded Bread Production stores, which include manufacturing bread and baked goods products, ranked by market capitalization are:

  • Grupo Bimbo (BMV: BIMBOA) – $15.9 billion market capitalization
  • Campbell Soup Company (NYSE: CPB) – $14.8 billion market capitalization
  • Flower Foods (NYSE: FLO) – $6.0 billion market capitalization
  • ARYZTA (SIX: ARYN) – $1.1 billion market capitalization

 The Price-to-Earnings (P/E) ratios of these five companies range between 15.8 times to 17.3 times.

Appraisal Rules of Thumb

Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

Commercial & retail bakeries are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.