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CASE STUDY 2: Big firms and little firms: the case of bakeries 5 Despite barriers to entry of other large-scale firms, many oligopolies face competition at the margin from many small firms. The reason for this is that the small firms often produce a specialist product or serve a local market. These small firms are in a position somewhat like monopolistic competition: they produce a differentiated product and face few if any entry barriers themselves. A good example of this is the UK bakery market. Worth 3.6 billion, it is one of the largest markets in the food industry. There are three giant bakers, the plant bakers', which produce bread for a nationwide market: Allied Bakeries (a division of Associated British Foods) with brands Kingsmill, Sunblest, Allinson and Burgen; Hovis Ltd. (jointly owned by the Gores Group (51%) and Premier Foods (49%)) with brands Hovis and Mothers Pride; and Warburtons. These plant bakers' are of a similar size and between them account for about 75 per cent of the market by value and 85 per cent by volume. In-store bakeries in supermarkets supply about 20 per cent of the market, although much of their dough comes half cooked from the plant bakers, with the rest being baked from raw ingredients. But then there are thousands of small bakeries, known as 'craft bakers', often where the bread is baked in the shop. However, they account for only around 5 per cent of the market by value and 3 per cent by volume. Their bread is usually more expensive than the mass-produced bread of the three giants, but they often sell a greater variety of loaves, cakes, etc., and many people prefer to buy their bread freshly baked. In the 1950s and 1960s, the giant bakers gradually captured a larger and larger share of the market. This was due to technical developments that allowed economies of scale: developments such as mechanical handling of bread, processes that allowed rapid large-scale proving of dough and bulk road tankers for flour. Also, with the development of supermarkets where people tended to shop for the week, there was a growth in large-volume retail outlets where there was a demand for wrapped bread with a long sell-by date. These presented real barriers to the small baker. But then in the 1970s, the rise in oil prices and hence the rise in transport costs gave a substantial cost advantage to locally produced bread. What is more, some of the technical developments of the 1960s were adapted to small-scale baking. Finally, there was a shift in consumer tastes away from mass-produced bread and towards the more individual styles of bread produced by the small baker. The effect was a growth in the number of small bakers, who now found that entry barriers were very small. In more recent times, however, the small baker has faced a new form of competition. This is from the in-store bakeries in supermarkets. These produce not only the standard loaves but also the more specialist breads which were previously produced only by the small bakers. Not to be outdone, the plant bakers are now also producing a wider range of breads, many produced for the supermarkets to be sold under their own brands. In recent years, people have started to demand more variety in the types of bread on offer and the demand for artisan bread is on the rise. Television programmes, such as The Great British Bake Off, are encouraging people to turn their kitchens into mini bakeries. Record numbers are enrolling on baking courses, some hoping to start their own business. Indeed, some have opened their own high street bakeries, providing real competition for the supermarkets. Yet the baking revival is no mere micro revolution: big retailers such as Tesco, Lidl and Marks & Spencer are overhauling in-store bakeries to drive sales of speciality loaves. And industrial beasts from Hovis to Warburtons, after years of sliding sales in the wake of the fad for Atkins-style low-carb diets, are giving their bread a makeover. Chris Brockman, who analyses the sector for the research group Mintel ... tipped 'stealth health', which spans gluten-free and high-protein loaves to bread made with grains such as spelt, millet and quinoa, as the next big trend. 'In-store bakeries are getting a lot more sophisticated,' he added. Mintel figures show that in-store bakery purchases, which account for 15 per cent of total bread sales, rose by 6.5 per cent in the past 12 months. Challenging times for the plant bakers Despite having such a large share of the market, the three plant bakers are facing a 'pincer movement' of falling demand and rising costs - so much so that in 2016/17, two of the three, Associated British Foods (Kingsmill) and Hovis, made a loss. As far as costs are concerned, in the two years to 2017, the price of the type of wheat used for bread had risen by 24 per cent. Wheat prices then rose again in 2018. These rises were partly the result of a rise in dollar and euro terms, with the higher price being caused largely by higher demand for wheat used in animal feeds and for making biofuels. In the UK, the rise in price was also the result of the large depreciation of sterling following the Brexit vote, with much of the wheat being imported from Canada and Germany and British wheat being sold into the more lucrative overseas market. As far as the fall in demand is concerned, this has been caused by a general switch away from bread, particularly in the lunch market as many people have replaced the traditional sandwich with alternatives, such as salads, pasta, wraps and rice-based dishes. But also, many people at breakfast are switching away from toast to cereals and/or fruit and there has been a rise in take-away breakfasts, many of which are not bread-based. Finally, there has been a decline in the number of people taking traditional "tea-based largely round bread. About 42% of Britons eat bread on a daily basis, down from 52% two years ago, according to the Harris Interactive poll carried out for the Grocer trade journal. The change is being led by young people, with only a quarter of 16- to 24-year-olds eating bread every day compared with about half of those over 45. "Sales of sliced bread have been coming off for maybe four years. People see it as highly calorific. It's gone from being a real staple to being perceived as a negative food," said one supermarket executive. "Women in particular are trying to limit their carb intake and bread is in the firing line when they are making those cutbacks," says Emma Clifford, a food and drink analyst at Mintel. Small bakers are in a slightly better position in this changing market environment. Many people, eating bread less as a staple, are more likely to see bread as something a little more special and thus may be more inclined to buy the high-quality specialised breads produced by the craft baker. Required: Read carefully the case study and answer to the following question: 7 Are the large oligopolistic bakers and small craft bakers catering for the same market? [55 marks]