The European flour market is fragmented both in terms of participants and regions, resulting in increasing internal competition and a struggle for survival.
Despite the difficulties it faces, the EU milling industry continues to endure under conditions that would drive rapid consolidation in other sectors. The three keys pressures driving the evolution of the market are counterparty risk, volatility and margin profitability. Furthermore, EU players must counter increased competition from Turkey and Kazakstan, which have emerged as the leading global wheat flour exporters.
EU wheat and rye flour production has fallen in the last six years from an estimated 40 million tones, to roughly 34 million tonnes today.
The household use of flour has fallen from 18 %- 12%, displaced by the growth of industrial bakery. Consumer tastes continue to evolve towards more consumption of value-added processed bakery, but with a population that is both ageing and teetering on the edge of decline; opportunities for future domestic growth are limited.
Volatility in commodity prices and periods of increased scarcity in row-crop commodities also threatens the operations of many millers in the region, with margin profitability falling in the last six years. Increased volatility is a structural issue to which companies need to find both operational and strategic responses in order to secure margins and long-term competitiveness.
The operational response entails making use of risk management and hedging programmes. Strategically, companies need to have a more defined approach to volatility and reconsider how best to position itself in the value chain in order to better manage volatility.
The EU milling industry is suffering from reduced profitability and increasingly tough competition from Turkey and Kazakhstan, which have emerged as the leading global wheat flour exporters. In addition to proximity to export markets, Turkey and Kazakhstan both benefit from lower-than-average labour and energy costs compared to their European counterparts.
The governments of each country are also willing to employ varying levels of incentives to help sustain agriculture and agribusiness.
In general, we expect market dynamics and variability in the wheat value chain to lead to consolidation.
Possible strategic options for milling companies to adapt include integration with end producers such as a bakery or pasta producer; brand differentiation; stronger sourcing relationships through co-operative alliances or building a pan-European presence through M&A.