Sub-sector Profiles: Index
[ Introduction | Significance | Structure | Performance | Employment | Investment ]
[ Trade Performance | Challenges/Opportunities | Association | Statistics | Contact ]

The Canadian Bread and Bakery Industry

The bread and bakery industry in Canada consists of establishments primarily engaged in the production of bakery mixes and frozen dough/pre-formed products and those involved in dough mixing, kneading and baking to manufacture "perishable" bakery products (such as bread, rolls and pastries) and their distribution. These products are sold to retail grocery and foodservice establishments. This industry, however, specifically excludes "retail bakeries" who bake and sell their products directly to the consumer on the premises.

Introduction

The evolution and concentration of the retail grocery sector, coupled with growth in modern transportation and distribution systems, have greatly influenced the structure of this sub-sector. The ability to achieve economies of scale in the manufacture of baked goods is largely a result of the ability to sell high-volume, homogenous products to large retail or foodservice customers with central purchasing, and to distribute these products efficiently. The wholesale bakery industry has slowly evolved to a structure that favors more centralized, scale production which has resulted in the reduction in the number of plants (establishments) from 555 in 1982 to 471 in 1997, despite the growth in domestic population.

The major metropolitan markets exhibit a high degree of inter-firm rivalry for market share. Bread, sometimes considered to be a "commodity" product, is often used as a "loss leader" in grocery stores which further contributes to a highly-competitive pricing environment. Manufacturing cost reductions are continually being sought through the implementation of higher levels of plant mechanization.

The advent of frozen baked products (in the early 1980s) to supply the foodservice industry and a growing number of "in-store bakeries" has provided growth in the domestic market and contributed to increased activity in exports because such products are less perishable.

Exports rose from 5% of shipments in 1988 to more than 14% of shipments in 1997 (see table), largely attributable to trade in frozen products. Trade with the United States in many bread and baked goods' categories was tariff-free prior to the Canada/U.S. Free Trade Agreement (FTA), and some trade took place, especially in locations close to border crossings. However, the elimination of all duties (by 1998) has raised awareness of the potential in the U.S. market. Only a few baked goods (mainly pastries) are subject to U.S. restrictions that limit access through Tariff Rate Quotas (TRQs).

In the 1990's North American consumption of processed grain products grew more quickly than consumption of many other food categories, influenced by consumer awareness of their health and nutritional value. As consumers increased their intake of grain-based products, the Canadian bakery industry was in a position to benefit from growth in both the domestic and export markets.

Although health and nutritional issues still motivate consumer pruchasing, recent data suggests that growth in shipments has slowed in the late 1990's suggesting that domestic demand for baked products has tapered off.

Significance

The production of bread and baked goods, considered staples of the human diet, has evolved from a cottage industry to a large-scale, modern manufacturing industry. Canadian production is primarily oriented to serving the domestic market, chiefly because, until recently, most products were considered highly perishable. For this reason, growth in shipments historically corresponded closely to growth in the domestic population.

In 1997, the bread and bakery sub-sector had shipments of $2.3 billion, up 36.5% from 1988 levels, and accounted for 4.2% of total food and beverage processing sector shipments.

Structure

The bakery industry in Canada includes two distinct segments classed as "wholesale bakers" and "retail bakers". The primary focus of this profile is the wholesale bakery industry.

Retail bakers produce and sell on the premises and cater to the demand for fresh baked goods such as bread, rolls and pastries, made from "scratch" or from frozen dough supplied by wholesale bakers. For statistical purposes, they are considered "retailers" rather than manufacturers. Retail bakeries comprise more than 3,000 firms, with estimated annual sales of more than $600 million. Other than these figures, none of the statistical data referenced in this profile relate to retail activity.

Wholesale bakers are part of the manufacturing sector of the economy and, for statistical purposes, are referred to under Standard Industrial Classification (SIC) 1072 as Bread and Bakery Products Manufacturers. Firms in this industry produce goods in volume, in manufacturing operations and are normally also responsible for the distribution of their products. Products include all types of bread, rolls (sweet and unsweetened), pizza dough, pizza crusts cakes, pies, fruit pies, frozen dessert pies doughnuts, muffins, pastries (uncooked refrigerated and frozen), ice cream cones wafers, and matzo baking..The wholesale bakery industry includes a growing sub-set of firms that specialize in the production of frozen pre-mixed dough, frozen par-baked (partially-baked) goods and frozen pre-formed products that are primarily sold to small retail outlets or in-store bakeries. These outlets perform the final baking operations which generally involve little skill before selling fresh finished products to consumers. Products that are typical of this trade include croissants, specialty breads (e.g.,sourdoughs, baguettes), buns, puff pastry dough, turnovers, Danish dough products, cinnamon buns and frozen muffin mixes. Some frozen baked products only require thawing prior to serving.

The size of Canadian production facilities ranges from small establishments with fewer than 20 employees to several full-range, wholesale operations employing more than 1,000 people. According to Statistics Canada's Survey of Manufacturers, in 1997 there were 471 wholesale bakery establishments in Canada, which employed 21,077 workers and shipped products valued at more than $2.3 billion.

The share of total industry sales held by small, medium and large establishments (plants) has remained relatively stable during the last decade. Small establishments (less than 20 employees) account for less than 10% of total shipment, medium (20-200 employees) - about 50%; and large (200+ employees) about 40%. These shares have remained virtually unchanged from 1988 levels. The proportion of total industry value-added held by this same grouping of establishments corresponds closely to their respective share of shipments. This is an indication that the composition of products in terms of value-added is, on balance, similar among small, medium and large firms. In addition to mainstream products (bread, rolls), smaller firms tend to specialize in niche products (pastries, pies and specialty breads). Larger firms that produce high-volume breads also engage in the production of innovative frozen dough, par-baked goods and wet-dough mixes that are higher valued-added products....There is a high degree of concentration of ownership within the industry. The leading four enterprises account for about 50% of total industry shipments. This measure also somewhat under-estimates the level of concentration because several of the large firms own minority shares in other large, regional, wholesale bakery firms.

A key characteristic of this industry is the perishable nature of many of its mainstream products. For this reason, distribution costs and the management of product on the retail shelf is an integral part of the bakery business. It also imparts a relatively higher cost structure to bakers than other food processors. When firms consider the advantages of increasing scale in manufacturing, they must weigh the costs of higher distribution and viable shipping distances against the advantages of centralized economies of scale in manufacturing. This characteristic is evidenced in the fact that small- and medium-sized establishments represent about 60% of market share, which is atypical of the food processing sector. Wholesale bakery establishments are located in all regions of the country, their relative size and number being roughly proportional to the population.

For the reasons noted above, most of the major corporations that produce fresh goods in Canada operate through branch plants, subsidiaries or affiliates that vary in size according to the density of population in the region.

Performance

Although the rate of increase in shipments and new capital investment slowed in the mid-1990s, overall shipments of bread and other baked products have demonstrated steady growth since 1988 (Figure 1). Between 1988 and 1997, the value of shipments by all processors increased 36.5%.

Rationalization of production has proceeded slowly when compared to other food industries for reasons that relate to perishability of product.

However, a number of larger operations have undertaken capacity increases and plant modernizations during the last seven years. While the total number of establishments declined by 4.6% from 1992 to 1997, weighted by a relatively larger drop in small establishments, the average sales per establishment, adjusted for inflation, increased by 7.5%, from $4.1 million to $4.4 million.

Figure 1. Imports, exports and domestic shipments: 1997

Gross margins (as measured by value-added less the cost of wages) improved between 1988 and 1997. In 1988, gross margins represented about 36% of sales, but rose to 40% by 1997, partly because of improvements in production efficiency. Although margins improved for all size categories, small establishments experienced the largest percentage improvement. Further, value-added as a percentage of shipments increased from 55.1% to 58.4% during the same period, perhaps due to a move toward greater emphasis on satisfying consumer demand for higher-priced, specialty breads and to the increased trade in frozen products. Labor productivity, as measured by real value-added per worker, rose 29.4% during the 1988-1997 period, increasing from a level of $64,100 to $82,900 comparing favorably with the food and beverage processing sector average of 27%.

Consistent with a global trend in the value-added food processing sector, international trade in baked goods now plays a much more significant role than it did a decade ago (Figure 2). The industry is increasingly more vulnerable to import penetration. However, export potential has also increased because of product and packaging innovations. For example, exports as a percentage of shipments increased almost three-fold, from 5% in 1988 to more than 14% by 1997. Similarly, imports demonstrated the same sort of growth, increasing from 2.6% of the Canadian market in 1988 to 8.4% in 1997.

The overall growth rate of exports between 1988 and 1999 was 386.5%. The U.S. is, by far, Canada's leading export market, chiefly because of geographic proximity and similarity of tastes. In 1999, exports of Canadian baked goods to the U.S. totaled $393.9 million, representing over 96% of all Canadian baked goods exports.

The bulk of exports are in frozen dough, par-baked products and frozen, finished-baked products. Imports of bakery products increased from $43.3 million in 1988 to $198.0 million in 1999, representing a 357.3% increase. This translates into a positive balance of trade on baked goods of $211.6 million in 1999, compared to $40.9 million in 1988.

Figure 2. Imports, Exports and Domestic Shipments, 1996

Trade Performance

Despite the trade surplus, substantial increases of imported fresh bakery products have occurred in product categories such as bread, pies, cakes and pastries. The U.S. continues to supply more than 90% of Canadian imports. This trade is normally confined to sales in Canadian markets close to the U.S. border.

In summary, the performance of the bread and bakery sub-sector has been:

• a 36% growth in shipments between 1988 and 1997 accounting for 4.2% of the Food and Beverage total;
• in the 1990s growth in exports has out performed growth in the domestic market. Between 1992-1997 annual domestic market growth averaged 2.9% while exports increased 11% annually during the same period;
• in real terms, productivity, as measured by real value-added per worker increased by 29% between 1988 and 1997;
• between 1988 and 1997 gross margins in the sub-sector increased by 11.1%, rising to a level of 40% of sales; and
• most rationalization occurred in small establishments, resulting in this segment posting the strongest percentage gains in productivity and margins.

Issues/Challenges/Opportunities

As the bakery sub-sector adjusts to market drivers such as life-style and demographic changes, retailer influence and globalization, it must address a number of related issues to remain viable and enhance its competitiveness in both domestic and international markets.

Functioning within a globalized environment

Globalization is an economic phenomenon driven by a range of influences. These include: the development of more efficient means of transporting goods; the internationalization of food-product demand; the establishment of information networks that facilitate trade in goods, services and capital; and a more international perspective in marketing and investment activities by the sub-sector. Globalization has not been a major influence on the Canadian bakery sub-sector. However, to some extent, it has already re-shaped the industry's structure and attitude as noted earlier, and a wide range of issues must be addressed to keep pace with the change.

Investment

We do not actually have a subject for "Investments", our apologies.

Employment

We do not actually have a subject for "Employment", our apologies.

Production Costs

Volatility in the cost of raw ingredients is a concern to bakers. Major ingredients such as flour, sugar, vegetable oil and dairy products are sold on global commodity markets and large buyers (in particular) need to closely monitor prices to make the most advantageous purchasing decisions.

Flour is the single most important input in baked goods and, on average, accounts for about 40% of the cost of raw materials and 20% of overall production costs (excluding labor and capital). Fluctuating wheat prices have a profound effect on margins. For example, between 1992 and 1995, the price of wheat increased 132% which translated into flour increases in the order of 36%. During that period, production costs of bread increased 7%, chiefly because of the rise in flour prices. Recently, however, wheat prices have returned to levels enjoyed during the early 1990s.

The price of butter as an ingredient has been an issue with segments of this industry. Under the supply managed dairy system, bakers must purchase their butter requirements in Canada. The prices were, at one time, high compared to the U.S. This forced many manufacturers to switch from butter to the use of lower-priced vegetable oils in the late 1980's. However, with the special class permit system, introduced by the Canadian Dairy Commission (CDC) in the mid-1990's, milk can be accessed for use as ingredients in eligible products at competitive prices. The Class V Milk Permits System now allows baked goods that are high in butter (croissants, etc.) to be more competitive with imports.

Technology and Innovation

Significant advances have been made in oven and ingredient technology to create high-quality frozen and par-baked products with longer shelf life. For example, research and development has led to the prevention of moisture loss and to the retardation of crust formation during the first bake, while providing good development in the oven. These advances make frozen and par-baked products extremely viable options for many foodservice and retail operators. Other advances include improvements in yeasts and gluten levels in flours that lead to superior products and packaging technologies that minimize oxygen levels.

Much of the processing technology used in the manufacture of bakery products is purchased off-the-shelf from equipment manufacturers in the U.S. or Europe.

Opportunities in the Domestic Market

Consumption of processed grain products, such as bakery mixes, frozen dough and baked goods, is growing. The North American market for these baked goods is currently estimated to be about $90 billion (retail) annually. The market has been fueled by increasing consumer awareness of the nutritional value of grain-based products and the important role they play in maintaining health. Canadian firms have been leaders in the development of innovative frozen goods, an area that offers attractive growth prospects at home and abroad.

Opportunities in International Markets

Frozen products have been the driving force in the advances made in exports of bakery goods. Twenty years ago, bread production required skilled labor, a large production area, several hours production time and many different ingredients to provide quality and variety in finished products. Developments in mixes and frozen dough led to reductions in the skills needed to produce high-quality products, which in turn has lowered labor and production costs. Frozen dough products enable retail bakeries, supermarkets and foodservice operations to offer a broad line of specialty breads throughout the day with less-highly-skilled baker labor to satisfy the growing demand of informed consumers.

Per-capita consumption of white bread declined from a high of 42 kg in 1961 to 23 kg in 1992 (most recent data). However, the rise in sales of fresh-baked, specialty breads, multi-grain breads, bagels and flat breads appears to have more than countered the downturn in white bread sales. The net effect of these shifts, driven by consumer trends, is the creation of a dynamic market that allows innovative firms of all sizes an opportunity to capture increased market share. These trends also favor growth in in-store bakeries, not only those associated with grocery chains, but also for corner stores or retail outlets attached to service stations, for example. The domestic wholesale bakery industry, in turn, is the major supplier of frozen dough to this retail segment.

The U.S. continues to be the primary export market for Canadian bakery products. Canadian firms were among the first in North America to develop quality frozen dough and many of these firms have established a strong presence in the U.S. market for their frozen products. Frozen goods are highly regarded by the foodservice sector (restaurants, institutions and in-store bakeries) where, as noted above, they greatly reduce labor costs while delivering a fresh, high-quality product. Many of the regional markets in the U.S. are large, geographically close to Canada and continue to exhibit potential, particularly in the categories that relate to serving the growing in-store bakery segment of U.S. retail grocery chains.

Challenges

Canada's bakery industry must continue to address the more significant challenges that began to emerge in 1990, namely:

• The slower growing domestic market relative to exports means the industry must continue to look to foreign markets to maintain future growth;
• There is increasing import competition for market share;
• Consumer tastes are constantly changing. The last decade saw the growth of low fat and fat-free products which peaked in the mid 1990's. Today's consumer is more educated and has moresophisticated tastes, particularly where quality and nutrition are concerned. The industry is also experiencing unprecedented growth in "non-traditional" bread products such as bagels, flat breads and organic products. These changes mean that firms must adjust their technology as well as their marketing strategies;
• There is increased concentration of retailer grocers. Manufacturers of all sizes face more powerful "buying power". The introduction of "every day low pricing" (EDLP) merchandising strategies and "club" stores by retailers has placed considerable pressure on wholesale bakers to deliver quality products at lower prices. Smaller and regional manufacturers will have to differentiate their products from national brands to gain access to the grocers' bakery isles.
• Like all food processors, bakers are assessing how to deal with the emergence of E-commerce. The baking industry will have to determine if it can effectively use this medium to increase efficiencies through business-to-business solutions and the development of web-based marketing strategies.
• Food safety is a concern to the baking industry. As a result of the increasing number of people affected by food allergies, the Baking Association of Canada is working with the Canadian Food Inspection Agency to educate its industry on such issues as allergen awareness and labelling accuracy.
• Bakers are aware of the public's perception of biotechnology and genetically modified organisms (GMO's). There is concern that the industry could be affected if their products are negatively associated with these issues>the slower growing domestic market relative to exports means the industry must continue to look to foreign markets to maintain future growth;

Association

Agriculture and Agri-Food Canada Contact

The Canadian Bread and Bakery Industry

The Following Analysis Reports are Available From the Food Bureau:

Food & Beverage Processing Sector Analysis

• The Canadian Food and Beverage processing Sector - An Overview of Opportunities and Challenges at the Turn of the Century
• Historical Perspective of the Canadian Food and Beverage Processing Sector
• Analysis of the structure of the Canadian Agri-food Industry

Sub-Sector Profiles

• The Canadian Bread and Bakery Industry
• The Canadian Confectionery Industry
• The Canadian Wine Industry
• The Canadian Distillery Industry
• The Canadian Dairy Processing Industry
• The Canadian Red Meat Processing Industry
• The Canadian Feed Industry
• The Canadian Poultry Processing Industry
• The Canadian Snack Food Industry
• The Canadian Fruit and Vegetable Processing Industry
• The Canadian Cane and Beet Sugar Industry
• The Canadian Flour and Related Products Industry
• The Canadian Soft Drink Industry
• The Canadian Bottled Water Industry
• The Canadian Tea and Coffee Industry *
• The Canadian Pasta Industry *
• The Canadian Brewing Industry *
• The Canadian Miscellaneous Foods Industry *

* Titles marked with an asterisk are not complete at time of publication. Published profiles are available on the internet at http://www.agr.gc.ca

Regional Profiles

• Atlantic Provinces 
• Ontario 
• Saskatchewan 
• British Columbia
• Quebec 
• Manitoba 
• Alberta

Readers can obtain data updates by accessing the electronic version of these reports on ACEIS at http://www.agr.gc.ca

We would be pleased to receive your views, and any comments or suggestions that would improve the substance of these reports. For additional information and/or to provide your comments, please contact:

Food Bureau, Room 501, Sir John Carling Building, Ottawa, Ontario, K1A 0C5, (613) 759-7556.

Les documents sont disponibles en français.

Date Modified: 2004-06-02		Important Notices
[ Français | Contact Us | Help | Search | Canada Site ] [ AAFC Online | Links | Newsroom | What's New | Site Index ]