This year should see record returns for plant bakers. As good news stories go, that is not a bad one to kick off the New Year. And it is all down to confident pricing on branded sliced loaves, says a leading city analyst. A better understanding of consumer trends is driving competition where price was once king. Meanwhile, the gains from premiumisation of the market have yet to be fully mined. In fact, a “fundamental change in plant baking economics” is underway, no less.These are the views of industry expert David Lang of city analysts Investec, who believes a completely new plant baking business model is being created. “Ten years ago, most plant bakers had to run flat out to eke a profit. A few sacks a week were often the difference between a profit and a loss,” he says.But the upturn in baking and retail has seen UK bread value nearly treble profitability from a decade ago. Mr Lang says a distinct shift from a commodity mindset towards a marketing one has brought a fundamental shift in the economies of plant baking. Looking ahead, he predicts that over the next 10 years plant baking should see a continuation of price rises, improvements in quality, with production becoming more flexible, and deep-rooted shortcomings in the distribution chain overcome.Changing demographicsAnd the demographic tectonic plates will continue to move, shaking up how plant bakers approach their product portfolio. Increasingly, consumers are trading up – a forecast that is set to continue for at least the next five years, according to futurologists. An increase in the number of affluent shoppers will be mirrored by a corresponding decline at the middle and bottom end of the scale.While this may be good news for premium brands and speciality lines, private label is likely to fall further behind. UK prices remain among the cheapest in Europe, notes Mr Lang, but premium-branded innovations will continue to drive up prices. “The move is away from the old manic, capacity driven, price-obsessed, flour-dominated, commodity game, towards something much more closely aligned to the rest of consumer goods civilisation,” comments Mr Lang. “For private label, Sainsbury’s Taste the Difference could point to a possible premium way forward. But big questions are begged about the down-at-heel standard product. Improved quality and ‘reassuringly expensive’ looks the only way forward, particularly as below-cost supply has been nuked.”He cites the wrapped ‘bakery occasions’ snacking market as providing opportunities for incremental sales for plant bakers. This category includes traditional and continental breakfast items, cakes and fruited snacks, and is valued at £677m, with growth of 7.3% (AC Nielsen Scantrack, 52w/e July 2005). Unlike the closely related £209m rolls and baps category (up 5.5% in value year-on-year), where the big brands have a representative presence, bakery occasions supply is splintered, he comments. “Some areas like fruited snacks, and crumpets are getting increased attention. In others, like speciality breads, the brands struggle to stretch with consumers demanding authenticity. Look at Poilåne French Country Bread, shipped from Paris. It’s flying off Waitrose’s shelves at £4.99 a kilo.”Developing ‘parallel’ brands could provide one solution for plant bakers to break into niche markets, best illustrated by Cadbury’s acquisition of organic chocolate brand Green & Black’s in early 2005. But greater activity from the major bakery players is inevitable, says Mr Lang. “The bakery occasions opportunity is too big for the majors to miss, particularly as it’s in line with premium, luxury and lifestyle trends.“When people get richer they don’t eat more, they eat better – market growth becomes all about premiumisation,” explains Mr Lang. “Consumer branding and customer management are becoming paramount, with efficient, high-quality production and service.” Interestingly, he speculates that the trade up could ultimately be at the expense of the multiples, with people more inclined to seek out specialists and small independents. As consumers get richer, the supermarket share of growth declines, he says – a shift that would benefit local shops, petrol stations and railway station concourses. Because of this possible fragmentation of the retail trade, a 40-year bakery consolidation trend could be halted as bread is baked closer to market.But the retail trade has played a key role in squeezing out value bread and backing the brands, he adds. “My rough calculations suggest supermarket bread operating margins of approaching 20%, and that’s despite a break-even situation in private label. So the bread department’s been restored to rude health.”Although promotion still plays too big a part in the industry’s marketing mix, long-term brand-building investment and media spend is on the up. “Moreover, managements – particularly British Bakeries’ – have felt confident enough to take pricing on to an entirely new plane. An already yawning price gap between branded and private label has been stretched beyond breaking point, and still sales are shifting to the brands. Consumers seem to want the reassurance that premium pricing brings.”However, improvements still need to be made with the supply chain, he observes. “Quality doesn’t just mean good ingredients and bread baked by proper bakers; it means freshness too,” says Mr Lang. “Shorter delivery lead times, with fresher bread and improved service levels, requires a less extended and more flexible supply chain”. “Distribution can run at more than 10p a loaf and it’s often massively inefficient. Ultimately, we could see more smaller, strategically placed units, making a broader range of fresher products delivered through the day.” Over £300m of cost could be at stake – a figure that is rising with increasing energy costs and regulation, he says. Flour costsPlant baking is also seeing a change from being production driven to marketing led. But the future cost of flour could emerge as an issue, says Mr Lang. “The last decade has been a doddle for flour buyers. Prices have fallen sharply, with partial recovery relatively gentle. “Looking ahead, life could become a lot more dangerous. Up for grabs are the last vestiges of European agricultural export subsidies. If they don’t go in 2007/8 then they’ll come under even greater attack afterwards. Their demise seems inevitable.”Consequently, the long-term future for UK millers is uncertain. “The huge increase in UK wheat production since Common Market entry is already showing signs of faltering,” says Mr Lang. “By 2008/9 flour millers could struggle to find adequate domestic supply. Millers could start to see much more volatile grist costs. For some, the experience could be terminal.”So, how will the plant baking landscape look in 2015, and will the ‘Big Three’ – British Bakeries, Allied Bakeries and Warburtons – still dominate? “There is no question that three overlapping brands plus own-brand is too complicated for the chains,” says Mr Lang. “Waitrose could be pointing the way with its British Bakeries/Warburtons duopoly experiment.”British Bakeries has been “fearless” in its price leadership, although it has been investing a lot less than its peers, Mr Lang comments. Meanwhile, Allied’s new CEO Brian Robinson, could be the fillip that Allied needs, he adds.Warburtons’ advantageFor the eventual winner, however, some pundits find it hard to look further than Warburtons. “Having ownership and management in the same hands is a priceless advantage,” he says. It could also be strengthened by expansion into new regions. “With Warburtons opening up in Wales next year and establishing a bridgehead to attack British Bakeries’ west country citadel, the battle for the south of England is going to hot up.”But the fight will not just involve the Big Three, he says. “Harry Kear plans to re-establish the Rathbones brand. His lock-in with Morrisons could provide a strong expansion base and history says you under-estimate him at your peril.” The same goes for Brace’s, he observes. “It’s got brilliant Welsh credentials and is already eating into the south west.” Moreover, with Rathbone Kear back on an even keel, and with a miniaturised Harvestime likely to follow, higher returns are expected across the trade, and in particular Allied, he comments.Mr Lang’s working title for the talk he gave at British Baker’s Baking Industry Summit was ‘Pimp My Loaf’ – a reference to the TV programme Pimp My Ride, in which clapped out cars are transformed with a radical makeover. It is a sage analogy for an industry already on the right road.