Fall 2020 bakery outlook – moving back to normal

Bakeries and tortilla manufacturing companies are an essential component of Canada’s food manufacturing industry. Employing over 49,000 Canadians and generating $5 billion in GDP annually, bakeries represent the second largest food manufacturing sector, only behind meat product manufacturing. Furthermore, bakeries are the fastest growing food sector, with an average annual GDP growth rate of 5.4% since 2015.

Most bakeries can be considered small businesses, and the average net margin was 4.2% in 2018. So small shifts in costs or demand can significantly impact financial health. COVID-19 has created significant opportunities and challenges for Canadian bakeries. Future growth in sales depends on Canadian foodservice rebound, export growth, and labour availability.

Canadian bakery industry trends

The industry has performed relatively well since the 08-09 Great Recession. 2020 started on the right foot. Nielsen data reveals bread sales jumped 21% over last year in March as customers flocked to grocery stores and purchased lower-priced at-home food.

Simultaneously, foodservice demand fell as much as 61% in April, dragging down bakery manufacturing after a strong Q1. Food service has begun a slow recovery and is still down over last year. Despite all the disruptions, bakery manufacturing sales are up 6.7% through July.

Population growth is a major factor behind the demand for bakery products. With low birth rates and an older population, immigration is the key driver of population growth in Canada. In the summer of 2020, we saw a steep decline in immigration due to COVID-19 border restrictions, which influence the strength in demand and labour availability.

The U.S. recorded similar trends in sales and immigration, which impact Canadian exports. 69% of the  Canadian bakery manufacturing sales growth over the last 10 years is attributed to export growth to the U.S. (Figure 1).

Figure 1: Exports are increasingly important to the industry

Sources: Statistics Canada and UN Comtrade.

What we expect for the remainder of 2020 and 2021

We’re projecting bakery manufacturing sales to fully recover in Q2 2021 (Figure 2) when the impacts of COVID-19 are expected to subside. Bakery manufacturing sales are projected to be slightly lower in Q3 and Q4 of 2020 relative to last year.

We forecast a YoY decline of 6.3% in Q1 of 2021, yet this comes behind a strong Q1 in 2020 when sales jumped 17.9%. The remainder of 2021 should see the industry return to pre-COVID growth based on an economic rebound in foodservice and robust domestic and export demand.

There exists significant uncertainty in these forecasts given the risks to the U.S. economy related to COVID-19 and government stimulus. Export opportunities might be more muted for the rest of the year.  

The outlook for the Canadian economy depends on its resilience towards the second wave of COVID-19. Lifting border restrictions would resume immigration trends. Foodservice sales increased slightly every month during the summer, but restaurant reservations have slipped in September, causing some alarm.

Figure 2: Bakery manufacturing sales to be strong in 2021 after a mediocre end to 2020

Sources: Statistics Canada and FCC computations.

Trends to monitor in 2020-21

Economic rebound on the horizon

Canadian economic growth will be dependent on our ability to control any future outbreaks and re-establish a healthy labour market. OECD projections call for Canadian GDP to decline by 5.8% in 2020. Significant government assistance has minimized potential long-term negative consequences of the economic slowdown as initial forecasts projected a decline of 8.0% in 2020. Canadian GDP growth is projected at around 4.0% in 2021 as a recovery in industries like food service, entertainment, and tourism slowly emerges.

Canadian dollar to increase slightly and trend mostly sideways in 2021

Interest rates are expected to remain near historical lows through 2021. The global economic recovery, demand for Canadian resources and commodities, and investors’ risk tolerance will determine the loonie's value. As economic growth begins to take hold, expect to see investors moving away from “safe havens” such as the U.S. dollar and the Japanese yen into more commodity-driven currencies such as the Canadian dollar or the Australian dollar. Currently, the Canadian dollar is trading around 75 cents. We expect the Canadian dollar to fluctuate significantly over the next few months and hover around 76 cents in 2021.

Cost pressures from wage growth, tight labour supply and commodity inflation

Wage inflation within manufacturing was up 6.1% YoY in August, much higher than the 0.9% inflation in the price manufacturers receive. High unemployment should usually prevent inflationary wage pressures but pay incentives have been necessary since the pandemic’s outset.

Lower immigration to Canada should also tighten the labour supply. Immigration accounted for more than 80% of the 1.1% population growth in Canada between July 2019 and July 2020. Border restrictions have already resulted in a weaker level of immigrants. Food manufacturing jobs are filled by immigrants more so than most industries (31.6% for food vs. 25.6% in all industries, according to the 2017 data). The cost of labour has outpaced the growth in the value of output since 2015. This trend is expected to continue as finding labour at a competitive price from a smaller labour pool might prove challenging. Passing on higher wages and costs to consumers may also be difficult in the current recessionary context.

Opportunities to sell directly to consumers are increasing

Grocery stores saw record revenues in 2020, partially offset by increased costs. As the stimulus is withdrawn, consumers might become more price-sensitive, which could lead to profitability challenges for retailers, and force suppliers (manufacturers) to review prices.

Profitability pressures and demand for less in-person shopping prompted some suppliers to sell directly to customers. Baked goods are perishable, yet customers are on the lookout for buying opportunities (Figure 3). According to SRG, 46% of households bought groceries online in 2020, and no grocery banner has over 26% of the Canadian online space.

Figure 3: Canadians are increasingly looking online to purchase baked goods

Source: Google trends.

Calls for eco-friendly packaging to continue post-pandemic

Many bakeries use plastic for packaging products. This usage increased with production shifting to consumer packaging from food service. Expect calls for more eco-friendly and less plastic usage to persist post-pandemic as governments implement new green policies. Middle to high-income households are willing to pay more for green packaging, but higher costs make it difficult to see widespread adoption at this stage.

Commodity input prices to stabilize

Our July grains outlook, mentioned that weakened demand and higher yields were behind lower prices in spring wheat and projected an increase for the remainder of the year. Since then, drought in the U.S. has lowered yield projections and stock expectations, increasing prices.  We expect prices to continue increasing slightly over the next 6 months.

The outlook for Canada’s bakery manufacturing sector is bright. The industry will face significant uncertainty from the pandemic, but the underlying consumer demand is very robust. Business resilience and agility are critical success factors for long-term growth as consumers settle into new purchasing habits post-COVID-19.

Kyle Burak

Senior Data Scientist

Kyle joined FCC in 2020 and is a Senior Data Scientist, specializing in monitoring and analyzing FCC’s agri-food and agribusiness portfolio, industry health, and providing industry risk analysis. Prior to FCC, he worked in the procurement and marketing department of a Canadian food retailer. He holds a master of economics from the University of Victoria.