March 01, 2007
by World Grain Staff
Rabobank report examines the factors that are forcing the E.U. flour milling industry to consolidate
by Arvin Donley
The wheat flour milling industry in the E.U. has been consolidating in recent years, and analysts at Rabobank International expect that trend to continue — and most likely accelerate — in the foreseeable future.
In a recently released report, Rabobank said the number of milling companies in the E.U., which includes 27 European countries, is expected to decrease over the next few years and will be accompanied by an increase in the average size of E.U. milling companies.
Rabobank listed four primary reasons why the industry is consolidating:
• The consumption pattern of grain-based foods has been shifting, as cultural habits and increasing health awareness have changed bread formats and recipes; • Bread distribution is increasingly dominated by industrial bakeries at the expense of craft bakeries;
• There has been a shift in trade flows, as the amount of wheat flour exported from the E.U. has decreased quite markedly since the end of the 1990s;
• The increased demand for wheat-based ethanol is expected to drive wheat prices higher in the foreseeable future.
BREAD CONSUMPTION TRENDS Rabobank said E.U. per capita consumption of bread is stable, but there are large differences in the types of bread that are consumed in different countries. While fresh bread sales are growing at a nominal pace, bake-off breads (those that must be baked in the oven before serving) are exhibiting significant growth. There is also increasing demand for rolls and Mediterranean types of bread such as ciabatta and focaccia.
Consumers in many E.U. countries are also becoming more health conscious, which is causing a shift in the types of bread people are eating. In the U.K., for instance, the demand for whole wheat bread is rising at the expense of white bread. In the Netherlands, whole wheat bread now accounts for approximately 25% of fresh bread consumption.
The E.U. is also experiencing a change in the distribution of bread, as industrial bakeries that deliver to both supermarkets and bakery chains are gaining market share at the expense of smaller craft bakeries.
In its report, Rabobank said the best way for flour millers to respond to the shift in consumption is to conduct extensive market research in order to gain a better understanding of consumer behavior. The report noted that demand has increased for premixes (flour that is blended and transformed into a higher-value product by adding ingredients to gain efficiency in the bakery) and pre-baked products.
CHANGING TRADE PATTERNS The E.U. has traditionally been the world’s largest exporter of flour, but that changed in 2006 as Turkey vaulted to the No. 1 spot in flour exports. During the 10-year period from 1993-94 to 2003-04, E.U. flour exports fell by 56%, from 5 million tonnes to 2.2 million. As a result, the E.U.’s market share in global flour trade fell from 60% to 26%.
Rabobank notes that this trend is partly due to the significant expansion of milling among major flour importers such as Yemen and Syria. Also having a negative impact on the E.U.’s flour export picture has been the expansion of the North Af- rican flour milling industry. Trade liberalization, privatization of the milling sector and gaining access to quality, imported wheat that is also affordable have been the main catalysts for the growth in North Africa’s milling industry.
But the fact that flour milling is expanding in several regions that used to depend on the E.U. for their flour supply is only part of the equation, according to Rabobank. In contrast to the steep decline in E.U. flour trade, global flour trade has suffered only a small overall decrease during the last decade, which means the E.U. is losing some of the export market to other countries such as Turkey and Kazakhstan.
The decreased flour trade in the E.U. has resulted in significant overcapacity in southern Europe, which can be attributed in part to that region’s proximity to North Africa. The Netherlands and Belgium, both significantly dependent on exports, have also had to contend with significant decreases in demand and falling capacity utilization rates.
The report said that in response to the reduction in exports to countries outside of the E.U. the flour trade is increasingly becoming a regional business, with total intra-E.U. trade amounting to more than 1 million tonnes per year.
Belgium, the largest intra-E.U. trader, exports flour mainly to neighboring France and the Netherlands. Germany is the second-largest intra-E.U. flour exporter and trades primarily with the Netherlands, France and Denmark.
RAW MATERIAL USAGE The E.U. flour milling industry is a significant consumer of wheat, processing approximately 40 million tonnes into flour annually.
Grains — with the majority being wheat — are also the main feedstock in the E.U. ethanol industry. About 1.6 million tonnes of ethanol is currently being produced in the E.U., requiring approximately 3.8 million tonnes of grains, or about 1.5% of total E.U. grain production (250 million tonnes). However, Rabobank expects E.U. ethanol production to reach 3.5 million tonnes in 2010, requiring 8.4 million tonnes of grains, or about 3.4% of current E.U. grains production, assuming the share of grains used for the ethanol industry remains at 80%.
Because of the expected increase in demand for wheat, the E.U. would most likely become a net importer, resulting in higher wheat prices in the medium term.
Considering that the cost of wheat makes up about 75% of total flour production costs, Rabobank said the increase in wheat prices will likely have a significant impact on the profitability of flour milling companies.
MARKET STRUCTURE The E.U. flour industry has a rela- tively high level of fragmentation, with more than 3,000 milling companies located in Europe, according to the GAM European Flour Milling Association.
The level of fragmentation varies between regions. The southern part of Europe, including France, Italy and Spain, are more fragmented than those in northern Europe. The market structure in central and Eastern Europe (the newmember states) has traditionally been different than the rest of Europe.
For instance, the flour milling industry in Poland was dominated by state enterprises until 1989, but by the late 1990s more than 200 mills were privately owned. Although Poland’s milling industry has begun to consolidate, it is still relatively fragmented.
The Rabobank report said that in contrast to the fragmentation at the E.U. level, the largest milling companies on the national level are relatively consolidated and enjoy a significant market share in their domestic markets (see chart, page 65).
The E.U. flour milling industry is also fragmented because the individual companies have limited cross-border activities. Most E.U. milling companies — even the largest ones — are present in only a limited number of European countries (see chart, page 66).
While the individual companies have differing structures, Rabobank said they distinguish themselves through their economies of scale, physical location and capacity utilization. The size of milling companies in the E.U. varies from region to region, with southern Europe having a larger number of smaller, family-owned companies than northern Europe.
In France, more than 40% of the mills produce less than 1,000 tonnes of flour per year. This contrasts sharply with the situation in Germany, where less than 5% of the flour mills produce between 500 and 5,000 tonnes per year. About 35% of the flour mills in Germany are classified as mid-size companies and produce between 10,000 and 200,000 tonnes annually.
Rabobank said in today’s business climate, E.U. flour mills need to increase their economy of scale and focus on efficiency to compensate for labor and administration costs.
Several other recent trends among E.U. milling companies noted in the Rabobank report were building facilities near ports and heavily populated areas, and trying to improve capacity utilization rates.
For many years, European milling companies built mills close to wheatgrowing areas and then transported the flour to the region where it would be consumed. But the cost of transporting flour is now relatively high compared to the cost of transporting wheat. Another reason E.U. companies are locating more of their mills near ports is that it gives them greater flexibility in terms of wheat sourcing, Rabobank said.
CROSS-BORDER CONSOLIDATION The consolidation process of the E.U. flour milling industry began in individual countries and is now extending across borders, with a particular focus on central and eastern European countries such as Poland, the Czech Republic and Hungary.
Rabobank said the German flour industry has increased the pace of the cross-border consolidation process. Germany’s largest milling company, VK Mühlen, has been acquiring milling companies within Germany and is expanding into Hungary and Poland, where it already holds a 10% market share. Swedish Cerealia Mills has bought an 18% stake in VK Mühlen in order to develop a joint Eastern Europe strategy.
In the U.K., ADM Milling has gained a major foothold by purchasing four flour mills from Tomkins in 1999 and six flour mills from Allied Mills in 2003.
Rabobank said it expects the Italian milling industry, which still has many small-scale, family-owned mills, to undergo a major wave of consolidation in the upcoming years.
"As soon as the current generation leaves milling, a significant number of mills will be closed or taken over by larger companies," the report said of the situation in Italy.