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Today’s consumers are eager to indulge themselves with fresh and convenient baked goods. To tap into this growing desire, grocery stores are looking to offer higher-quality bakery products that emphasize authentic and premium ingredients.

However, managing an in-store bakery with freshly stocked shelves can be challenging, especially in a tight labor market. With a goal of becoming more efficient and cost-effective while capturing rising consumer demand for quality and authenticity, grocery stores are turning to companies that deliver easy-to-execute bakery items with attractive visual appeal.

In this article, senior professionals from our Consumer Group share why the premium baked goods space is experiencing steady growth and how investors can best capitalize on its value-creation opportunities. Recently, our team saw the sector’s key trends on display at the 2023 International Dairy Deli Bakery Association (IDDBA) conference.

Turning Up the Heat

IDDBA 2023 highlighted several trends that continue to drive growth and investor appeal in companies specializing in fresh, high-quality baked goods.

For instance, home-cooking burnout spurred by the pandemic is driving consumers back to more convenient food products that are ready for pickup but taste homemade. Bakeries are a perfect place to capture this higher demand for grab-and-go prepared foods while satisfying an appetite for sweet indulgences.

“Consumers want to focus their daily diet on the best-tasting products, leading to a shift from center-store packaged goods to in-store bakery items that are fresher and more indulgent,” notes Cash. “The confluence of these consumer themes bodes well for the premium baked goods sector."

As consumers continue to seek quality, freshness, and convenience, grocery stores want to save time on preparation. Baked goods that match consumer desires while requiring less labor and being simpler to make are highly attractive, particularly in a climate of wage growth and margin pressure.

“Food retailers have a growing need to keep their shelves filled with near-finished and fully finished bakery products that don’t skimp on quality,” says Poth. “That’s why thaw-and-serve items or those requiring minimal in-store processing continue to gain traction in the market.”

Retailers are also seeing rising consumer interest in personal health and sustainability. Shoppers are striving for healthier lifestyles and greater environmental consciousness, causing a shift toward better-for-you baked goods. “Consumers want to indulge themselves, but they are also more demanding in terms of product quality and their own health and wellness, driving greater emphasis on clean-label bakery products,” explains Cash.

Poth adds that consumers are looking for their bakery items to deliver more than ever before. “They want products that offer freshness, flavor, function, and mission,” he says. “This is especially true as consumers reward themselves more often with tasty treats.”

Rising to the Top

To take full advantage of the growing premium baked goods sector, investors should prioritize several characteristics of top-performing companies. For example, the importance of scale, innovation, and brand positioning has escalated for both baked goods companies and their investors.

Across the bakery space, there’s often a lack of capacity to meet demand in high growth categories. Therefore, scaled companies with advanced manufacturing capabilities that can achieve greater capacity—while maintaining quality—will be positioned for growth.

“An added benefit of scale is the ability to invest in automation that enables increased throughput, offsetting the impacts of rising ingredient and labor costs,” points out Cash.

At the same time, companies offering innovative product lines covering a wide range of baked goods categories and flavors are highly sought after. “Businesses that can manufacture differentiated products at scale can establish partnerships with marquee retailers and foodservice operators,” he continues. “Bakery customers are on the lookout for suppliers that can reliably fill their shelves and help them introduce new items or seasonal products that attract consumer attention and drive higher purchasing frequency.”

Brand positioning has become another critical consideration for best-in-class baked goods manufacturers. Retailers are beginning to merchandise more branded items at the in-store bakery, and suppliers with premium positioning that stand out on the shelf are poised to take market share going forward.

“Consumers are often drawn to premium products with the most eye-catching packaging, especially when shopping for convenient grab-and-go food products,” shares Poth. “Affluent purchasers of premium food products also tend to be less price sensitive, allowing those brands to push price, maintain margins, and weather economic volatility.”

Prepared for Growth

Fueled by long-term trends, the baked goods sector is expected to continue its growth trajectory. The companies best prepared to benefit will offer the fresh, high-quality bakery items consumers crave, while delivering the time and labor savings grocery stores need. Meanwhile, professionalized, scaled businesses that can meet growing national demand for premium baked goods will be well positioned to create value.

Cash notes that M&A-driven growth is increasingly important in the sector, with several large PE-backed platforms now in the space. "The sector's M&A thesis has proven to be true,” he says. "Bakery is a fragmented category, and when two companies combine forces, they have the potential to generate meaningful revenue and cost-saving synergies. Leveraging greater scale to deliver broader solutions for the customer can create a virtuous cycle of growth."

To learn more about opportunities throughout the baked goods space, please contact Brant Cash.