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Rabobank: Consolidation Needed to Create Value in European Biscuits Sector

30 January 2014


Although the €12 billion Western European biscuits market has maintained steady growth in recent years, the sector presents great challenges for biscuit companies, according to Rabobank’s latest report, Fewer Crumbs More Dough.

While average growth has been close to 3%, the market remains fragmented and manufacturers are being forced into a tight spot by two pressing issues: volatility in value creation, and the high level of competition in the sector.

“Value creation volatility is mainly due to major swings in prices for commodities such as wheat and sugar, combined with inflexible price agreements with retailers,” explained Rabobank analyst Marc Kennis. “This creates substantial uncertainty in the variable cost base for manufacturers, who have limited room to pass on any price increase to customers due to intense competition and the sheer size of food retailers. Biscuit companies are caught between a rock and a hard place.”

The report argues that a two-pronged approach is required to help alleviate these problems. European biscuit companies will need to manage commodity prices more effectively, both in purchasing commodities and in passing on higher prices to customers. At the same time, they will need to strengthen their proposition with trade and retail players.

Rabobank believes that the European biscuits sector will seek to consolidate in order to accomplish these goals. There are clear advantages of scale to be attained in regard to buying and selling power, strength in research and innovation, and achieving cost synergies.

“With funding becoming cheaper and ample potential target companies available, the fortune of Western European biscuits industry in the next few years will be determined through a major round of consolidation”, predicts Kennis.

Rabobank identifies four likely consolidation scenarios:

1) Global brands buying large European branded players
2) Tier 2 Branded European players buying each other
3) Private label seeking scale to optimise
4) A private equity roll-up

Of these, a private equity roll-up is likely to generate the greatest opportunity for value creation in the industry. Private equity-owned biscuit companies generally appear to be more efficiently run than their competitors, and there are clear synergies to be realised through business combinations, both in branded and private label biscuits. In addition, there is a good availability of potential companies for acquisition and the funding environment is improving.

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