A Christmas Story: Sugar Soars, Profits Drop

Peter Dollé, Berlin Correspondent |

One German confectioner is saying “Bah, humbug!” to the Christmas cookie business, weary of high sugar prices, low profit margins, and tough sales competition.

A mouth-watering stroll through the aisles of an ordinary German grocery store at Christmas time outlines the marketing challenge for dessert producers here:  Shelves are stuffed full with items in flashy packaging - German cookies, gingerbreads, stollen and candies, as well as Italian panettone, UK fruitcakes and other scrumptious sweets from every country, some laced with alcohol and packaged in boxes one metre high.  (German “Baumkuchen”, or pyramid cake, won’t fit on your desk).  It’s the time of year when retailers make most of their money.

So it may come as a surprise to learn that German cookie and confection maker Bahlsen is discontinuing most of its Christmas brands, choosing to focus instead on its everyday dessert business.  “Sales at Christmas time and seasonal business is very low – it’s less than 5 percent of our total business,” Dr. Christoph Hollemann, Bahlsen Manager of Operations, told INSEAD Knowledge at the Industrial Excellence Awards near Munich in October 2012.  “So we’re focusing more on the whole new product, which has maybe a seasonal taste, and seasonal packaging, but we need to produce the whole year rather than using capacity for three months or even less.”

Hollemann is convinced the Christmas market is saturated and that launching new cookies and cakes is not worth it.  “Christmas is very traditional,” says Hollemann.  “You cannot gain in the market even with new stuff and the price competition is very, very high.”

At the Mercy of Commodity Markets

BahlsenAnother reason Bahlsen is avoiding the Christmas market is the rising cost of raw materials, which account for up to 70 percent of all production expenditures and are squeezing margins.  Over the past year, the price of sugar, milk, cocoa, hazelnuts and wheat have surged.  “Even by cutting costs as we have done in some areas by automation and rationalisation, for example, cutting by one third on labour costs, you will not compete and cannot compensate for the increase in raw material ingredients costs,” says Hollemann.

Despite the upward trend in commodity prices, Bahlsen has succeeded in passing along the higher costs to consumers, at least for now.  Its chocolate-covered cookies are targeted toward upscale consumers, or those who “indulge” themselves, and are willing to spend more on quality desserts, Hollemann says.  Maintaining brand consistency over the years has built trust and loyalty with upscale consumers.   “One of our traditions at Bahlsen is our cookies, our indulgence cookies,” Hollemann explains.  “And even the market trends and the taste trends show that people want to indulge themselves by eating a cookie from Bahlsen.  So we stay with quality, we stay with good chocolate, and we give you a feel-good moment with a high quality product.” 

It’s not what Grandmother put on the table

Adhering to tradition has also kept Bahlsen from getting caught up in a marketing fight over consumer trends, like the current preference for low fat, low sugar and low salt foods, or worse yet – the craze for designer cookies with calcium and vitamin D.  Bahlsen offers healthier cookies and cakes but does not position itself in the market as a “light food” producer.  “We have introduced a lot of products in our range over the last years which are already low in sugar and low in fat.  However, this is more of a trend.  Sometimes it’s good to stay with your traditions.”

Bahlsen does not use preservatives or artificial colours, and only uses non-hydrogenated shortening in baking.  “The ingredients list hasn't changed over the last 100 years even for the butter cakes, so we are still producing the same quality as 100 years ago,” Hollemann declares.  And despite the increase in raw material costs, Hollemann insists they are not cutting corners by using cheap additives. 

Maintaining taste quality is a real challenge for Bahlsen, which has five production centres throughout Europe and distributes cookies to over 80 countries.  It conducts sensory tests (taste analysis) with consumer groups in major countries to gauge the acceptance of various desserts before new products are released.  Hollemann says Bahlsen often changes the flavour and character of cookies to match national tastes.  “It’s different from region to region, and it’s totally different in Germany compared to Arabic countries which like much sweeter cookies, or Russia where we have much drier cookies, or in China, or in America.  So the tastes are totally different and regional in some cases.”  Think of McDonalds and Coca Cola, he says:  “Business is local, it needs to be managed locally, tastes are local, so you have to fulfill the requirements of the tastes in the local market.”

Competing for Taste in Emerging Markets

Bahlsen earned millions earlier this year with a new cookie snack bar targeted toward youths, entitled “PICK UP!”.  The successful launch of the bar helped Bahlsen overcome a period of weakness domestically, brought on in no small part by Kraft Foods and its Milka chocolate bar.  Kraft said in September that it saw organic sales growth of five to seven percent worldwide – especially in emerging markets - for on-the-go snacks, and indeed this autumn spun off its snack business to take advantage of increased demand in emerging markets.  Bahlsen is also upbeat about sales in these markets but won’t be lured by Kraft.  “We’re following our own strategy in this region,” says Hollemann.

Bahlsen sold 327 million euros worth of cookies and cakes in Germany last year, up a nominal two percent over 2010.  Global sales rose three percent to 517 million euros.  Bahlsen is privately owned and is not under any requirement to reveal publicly its financial statements.

Hollemann joined Bahlsen in 2007 at a time when energy costs were outpacing productivity at its original baking facility in Barsinghausen near Hanover.  The plant was reportedly so inefficient that owner Michael Bahlsen discussed closing it altogether.  In desperation, he began to “think outside the bubble” and hired Hollemann (who holds a PhD in mechanical engineering yet had no experience in food production) to turn the factory around or close it.  After studying various options, Hollemann determined they could incorporate 80 percent of the existing plant along with 550 workers into a new energy-efficient factory on the same site.  Hollemann says the two-year retooling process cost Bahlsen 40 million euros, but was worth it in terms of productivity gained and jobs saved.  “Efficiency has increased by more than 30 percent in this time frame - based on people, based on the technology installed,” he adds. 

Bahlsen’s decision to axe most Christmas desserts in its cost-cutting plans and make up for it by introducing tasty new products throughout the year reflects the realities of indulgence snacking and the warnings of many dieticians.  It’s not so much what you eat between Christmas and New Year that makes you put on weight...  it’s more what you eat from New Year to Christmas. 

Comment
Anonymous,

Whatever the logic behind this decision Bahlsen has been forced by massive consumer pressure to backtrack. A highly embarrassing reversal for management.

I suspect the impact to the brand would have been disastrous if they had carried through the plan to drop Christmas specialties.

- ceebee

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