Sector Insight: Cakes - Indulgence spurs cake growth

Premium brands are benefiting as cakes take on the mantle of treat, rather than teatime staple.

THE BACKGROUND: The cake sector may be expanding, but brands are having to fight hard to maintain value, as the nation's focus on healthy eating grows. In the year to 29 April 2006, market leader RHM, which owns Mr Kipling, suffered an 8.7% year-on-year drop in its cake business turnover from £264m to £241m. Brands in the market are being forced to innovate with a focus on indulgent products, individual servings or lower-calorie options to offset a fall-off in sales of more traditional whole cakes. The market is expected to continue to grow over the next five years, albeit at a slower rate.

UK consumers still enjoy a slice of cake with their cup of tea. From 2001 to 2005, sales of cakes and cake bars increased by 11% to reach a value of £1.47bn, according to Mintel.

With home baking on the decline, the ready-made ambient cake market has benefited. But in recent years, there has been a shift in preference of cake types, not least because of a focus on healthier eating and shifting patterns in terms of family size and household structure.

As in other food sectors, the rise of eating on the go and snacking has been to the benefit of individually wrapped cakes and cake bars, which now account for more than three-quarters of total value sales.

Another trend in the sector has been a blurring of the boundaries between confectionery and cakes, with brands that would traditionally have been found on the sweets shelves now taking up residence in the cakes section.

Brands that have achieved this type of crossover include Nestle's perennial kids' favourite, Smarties, through a cake range aimed at children, and chocolatier Thorntons, which has moved into the luxury cake market to appeal to adults.

The rise in sales of smaller, convenient snack-size offerings has been to the detriment of whole cakes, which have also been hit by the fact that families are now less likely to sit down to a meal together.

However, value in the category has been maintained by greater demand for upmarket, 'sharing' products. This is a reflection of the focus on healthy eating, which has resulted in 'unhealthy' foods, such as cakes, being viewed as a treat. This means that while consumption has fallen, premium items are more likely to be placed in the shopping trolley.

Lower-calorie offerings

Manufacturers have also introduced reduced-fat and reduced-calorie options, backed by better nutritional labelling. This area of the sector has been performing admirably, with individual cakes or slices, accounting for 100 calories or less, appealing particularly to female dieters looking for a sweet, low-calorie snack or pudding.

Brands such as Weight Watchers have done well in this area, but the supermarkets have also entered the market with ranges such as Asda's Good For You! and Be Good to Yourself from Sainsbury's.

The most frequent consumers of ambient cakes tend to fall into the 65-plus age bracket. To maintain sales as this demographic diminishes, the challenge is to attract new consumers, rather than try to get the same consumers buying more, according to Euromonitor, especially since cakes are now viewed as an indulgence, rather than an everyday teatime ritual.

To this end, one area being developed is 'the big night in', for which consumers will buy a product that can be shared easily, such as Gu's brownie pieces. It is a market in which premium products are growing, making it difficult for traditional mainstream brands to establish a hold.

Among the biggest long-term challenges facing the market is that there are more consumers trying to cut back on eating cakes than there are happy to increase their consumption.

This has boosted the importance of occasion cakes for events such as birthdays and Christmas, which have also benefited from the decline in home baking. Value sales in this category are expected to reach £135m this year. This represents a 44% increase since 2001, making it one of the sector's fastest-growing areas.

Value ranges and own-label products have helped to build volume growth in the category. In terms of new product development in the celebratory cakes market, character licensing has been at the forefront, especially for children's birthday cakes.

Leading brands

The multiples are taking a fair share of the cake market, with Tesco the leader, but branded items continue to show the way. RHM Foods is the market leader, with brands including Cadbury, Lyons and Manor Bakeries. The company floated last year, having posted cake sales of £264m in the year to April 2005.

Last year also saw the relaunch of the company's Mr Kipling brand, backed by an £8m spend. The overhaul was intended to give the brand a more modern and premium feel. The range was also expanded with the addition of whole-cake products such as Lemon Drizzle Cake and Victoria Sponge.

However, the relaunch was axed before the year's end when the company reported a 12% drop in sales. In January this year, it introduced its Mr Kipling Delightful range of reduced-fat and lower-calorie options, in recognition of the obesity debate.

Although better known for its biscuits, McVitie's brands in the cake sector include Jamaica Ginger Cake, as well as Galaxy and Snickers variants. In 2005 it dropped its McV umbrella brand to revert to McVitie's and extended its biscuit offerings into cakes with products such as Penguin Mini Rolls and Chocolate Digestive Slices.

Other players in the sector include Finsbury Food Group, which owns Memory Lane Cakes; Anthony Alan Foods, producer of Weight Watchers cakes; and The Fabulous Bakin' Boys, which has expanded its range beyond its traditional cup cakes into cake-fingers and flapjacks in grab-bags.

The sector is predicted to continue to grow over the next five years, although not as quickly in the previous five. By 2011 Mintel predicts that the market's value will have reached £1.7bn, an increase of 11% - or 4% in real terms - since 2006. This will be sustained by the wrapped and cake-bar categories, with the unwrapped market expected to experience decline.

PACKAGED CAKE BRANDS BY MARKET SHARE (%)

Brand Manufacturer 2004 2003 2002 2001

1 Tesco Tesco 14.5 14.2 13.9 13.0
2 Sainsbury's J Sainsbury 10.6 10.5 10.4 10.0
3 Asda Asda Group 7.6 7.3 6.7 6.3
4 Marks & Spencer Marks & Spencer 7.5 7.6 7.7 7.1
5 Lyons Cakes RHM 3.8 3.7 3.6 3.7
6 Cadbury's Mini Rolls RHM 3.8 3.6 4.0 4.3
7 Mr Kipling Pies RHM 3.7 3.4 3.2 3.2
8 Morrisons Morrisons 2.5 2.3 2.2 2.0
9 Lightbody Lightbody 2.0 1.8 1.6 1.6
Celebration Cakes
10 Weight Watchers Cakes Anthony Alan 1.6 1.4 1.0 0.8
11 Fabulous Fabulous 1.4 1.3 1.2 1.0
Bakin' Boys Bakin' Boys
12 Entenmann's George Weston 1.1 1.0 0.9 0.8
13 Viennese Whirls RHM 0.9 0.8 0.8 0.1
14 Cherry Bakewells RHM 0.8 0.9 0.9 1.1
15 Jaffa Cake Bars United Biscuits 0.8 0.7 0.8 0.7
Other own-label Various 5.9 5.6 5.5 5.5
Other brands Various 32.4 31.1 31.2 34.6

Source: Euromonitor


CONSUMER CONSUMPTION OF CAKES AND CAKE BARS, FEBRUARY 2006

%
Rarely buy cakes/cake bars 35
Eat fewer cakes than I used to 33
Usually bake my own cakes 21
Tend to buy cakes on impulse 21
Regularly buy cakes as part of the weekly shop 18
Never buy cakes/cake bars 12
Buy reduced-fat/reduced-calorie options 10
Eat more cakes than I used to 7
None of the above 1

Source: BMRB/Mintel

ANALYST COMMENT - JOHN BAND SENIOR ANALYST, DATAMONITOR

British consumers spent £1.18 bn on cakes and pastries in 2005 - the equivalent of £20 a head at a rate of 8.5kg a person. The vast majority of spending on cakes (64%) was accounted for by industrially produced cakes and pastries.

Although Brits have a reputation as one of Europe's biggest consumers of sweet products, this is not true when it comes to cakes. The populations of Belgium, Finland, Germany and Spain all spend more on cakes and pastries than the British. The Swiss are the biggest spenders, at about £42 a head.

As consumers become tired of mass-produced goods, they are more willing to spend more on home-produced traditional-style cakes and pastries. The artisanal market share, comprising cakes and pastries made on the premises (excluding supermarket bakeries), grew from 26% in 2000 to 27% this year. Absolute sales of artisanal cakes have risen by £49m since 2000.

Overall, the cake sector is not particularly successful for branded consumer goods producers. Own-label and artisanal products account for more than two-thirds of overall sales, and have done for many years. The only two firms with a significant market presence are RHM and United Biscuits, which account for more than half the remaining share.

The UK cake market highlights a general truth about consumer-brand relationships. People will pay extra for 'home-made' quality, but will trade down to own-label if there is no compelling value-add.

This trend toward 'high-low' consumption makes it essential for branded-goods manufacturers to build an emotional relationship with consumers. Despite their best efforts, this is something cake brands have not yet managed.

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