With no room for mediocrity in the retail bakery business, bakery operators are reshaping their businesses for growth. Learn where they are investing and how they are performing in Modern Baking’s exclusive survey report.

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Full-line retail bakers are becoming true specialists in what they do. They are not necessarily selling fewer products. Instead, they are finding their niches and designing their businesses for that specialty. For Andrew Swartz of Andrew’s Pastries in Ohio, it is wholesaling biscotti. For Edward Dimmer of Rheinlander bakery in Colorado, it is gluten-free products. For Mark Atwood in Louisiana, it is redesigning his bakery to create a more inviting shopping experience.

These examples, like all the bakeries surveyed for this report, still offer a full line of bakery products. In fact, many are even expanding their lines with sandwiches, beverages and upscale desserts. Whatever their specialty, independent retail bakeries are evolving with their neighborhoods. And, niche markets and online communication has expanded their neighborhoods far beyond traditional boundaries.

“You have to change your product line,” says Swartz. “So many bakeries plod along so reliant on retail sales that may not always be there. People like to see new stuff.”

Challenges build strength
While the state of the retail baking industry remains strong, 2007 brings specific challenges as well. Gas prices are at an all time high, effecting bakery operations costs and customers’ ability to spend money at the bakery. Commodities prices too are much more volatile than in years past. In fact, a third of bakers reported that their number one barrier to sales growth and profitability is the rising cost of essentials, such as ingredients. That concern is up 5 percent from two years ago.

These and other trends were revealed in Modern Baking’s 2007 Retail Bakery Survey, which has been conducted biennially since 1993. Modern Baking commissions an independent market research company to conduct a scientific survey of operators representing the entire full-line retail bakery market to learn how the industry is performing.

The latest news headlines do not always hold true for retail bakeries. While no-trans-fat bakery products debuted among the top new items bakers added to their product lines, only 24 percent reported that trans fatty acid bans were effecting their businesses. Unless they are located in areas where government legislation is keen on trans fat bans, such as New York City, most bakeries at the retail level are not finding it a major issue for bakery customers.

“Trans fats don’t seem to be a big deal for the vast majority of the people,” Dimmer says. “You let them know that you are trans fat free, and their reaction is ‘hmm, that’s interesting.’ And that’s about the end of it.”

Still, bakers are watching consumer health trends closely, and some are even capitalizing on them. Dimmer has developed several different branded product lines that cater to different “healthful ideas,” such as all natural, gluten free and low carb. Bakers surveyed this year reported allergens and special diets, such as gluten-free and sugar-free needs, as the health trend they are tracking more than trans fat concerns.

Not surprisingly, the greatest percentage of retail bakers reported that no health trends were affecting their business. Independent retail bakeries have become destinations where customers look to treat themselves or celebrate special occasions. “We’re known for big pastries,” says Mike Concannon, Concannon’s Pastries, Muncie, Ind. “Our customers want the biggest, sweetest item they can get.”

Bakers report that their customers are clamoring for cakes, particularly custom decorated cakes, upscale dessert cakes and cupcakes. “We’re seeing a growth in smaller-serving products for immediate consumption or that day’s consumption,” Dimmer says. “That goes for individual pastry items and smaller cakes, 3 ½ ins. on up.”

Cakes remain key business
The cake category, making up 38 percent of an average bakery’s sales, continues to drive profits and represents the largest percentage of sales for retail bakers. Upscale dessert cakes now account for 7 percent of bakery sales, up 2 percent from 2005. And, more than a third of bakery operators report adding new cakes or upscale desserts to their product lines this year. The trend towards smaller portions and creative decorating is likely driving cupcake sales as well. “Cupcakes are still doing well for us,” says Kirk Rossberg, Torrance Bakery, Torrance, Calif. “Cupcakes have had a renaissance with Sprinkles and other cupcake-only bakeries gaining popularity.”

Cookies, too, are benefiting from the popularity of smaller portions and bakery creativity. Cookies represent 12 percent of an average full-line bakery’s sales, and more bakers (41 percent) reported sales gains in cookies than any other product category. Decorated cookies add color to showcases and appeal to children. Traditional varieties, such as chocolate chip, sugar and peanut butter, tap customers’
nostalgic senses.

Most bakeries put their own spin on cookies, making them an extremely versatile and profitable product. “If I had to do it all over again, I would sell only cakes and cookies,” Rossberg says. “As bakers, we’ve become more creative with our cookies. They are baking fresh (cookies) every single day. That’s really changed over the years,” he says.

Whole wheat contributions
The bread category also has bumped up 3 percent to 16 percent of an average full-line retail bakery’s sales. Bakers report that much of the growth has been in the area of whole wheat/whole grain breads and European-style crusty breads, but most full-line retailers choose carefully whether or not to specialize in breads. 

“If they’re making 10 loaves of white bread and five loaves of whole wheat, it is not worth it. Most bakers don’t want to take the time to do it,” says Mike Kalupa, Kalupa’s Bakery, Tampa, Fla. While bread is a small category in Kalupa’s Bakery, it is an important one. He has chosen to focus more on whole wheat breads to appeal to the health conscious and for the bakery’s sandwich offerings.

Where breads gained, donuts dropped in their percentage contributions to an average bakery’s sales. While it has lost most of its initial luster, Krispy Kreme’s presence in some regions continues to affect donut sales, bakers report.

Some bakeries have simply opted out of the donut game altogether. “We dropped some donuts and bagels. We just don’t feel they are that profitable for us, and we don’t want to focus on them,” Rossberg says.

Versatile product lines
Choosing the right product mix is relative to each bakery. Concannon’s Pastry Shop does big business in donuts, and bakery sales are up 10 percent over last year. Kalupa also put new focus on his donut line in a quest to produce the best donuts and largest variety possible in his store. He refreshed bakery training in the donut production process from mixing through frying. “We went old school,” he says. “If we’re not going to make the best donuts along with the best cake, what reason do they [customers] have to come here? Sometimes you have to go back and reanalyze how you’re doing it.”

Full-line retail bakers remain scratch/mix operators for most products. They are, however, using frozen doughs and other convenience products where they can maintain quality. Swartz uses frozen dough for his Danish products, for example. “I’m a formally trained pastry chef. Some of the products available from suppliers are better than they’ve ever been,” he says.

Bakery operators also are investing in equipment to improve production efficiency and remodeling their bakeries to keep up with shifts in their product offerings and the way their customers shop. More than one in ten bakers plan to remodel their bakeries by the end of 2008.

Concannon says he purchases new equipment every year. He also remodeled recently, allowing more space for self-service merchandising. Cookie sales, in particular, benefited from the additional space; more than 65 percent of his cookies are now sold from self-service merchandisers.

Nearly a third of bakers reported plans to purchase freezers or refrigeration equipment by the end of the year. This too represents a change in the way bakeries operate. No longer baking only in the early morning hours, bakeries are adding freezers and refrigeration to bake-off products throughout the day and to add efficiencies during particularly busy seasons.

Any efficiencies bakeries can bring to their businesses are welcome contributions as operations costs continue to chip away at retail bakeries’ bottom lines. Bakers report greater sales in 2006 over 2004, and more than half are drawing more customers in 2007 compared to two years ago. But, customer counts on busiest days (averaging 319) are at the same level they were two years ago, and average sales per customer actually dipped a bit. The average sale per customer this year is $12.05, which is only 46 cents less than it was in 2005 and significantly higher than years before that. But, the dip is notable, considering the increasing cost pressures to operate an independent retail bakery business today.

Expenses rising
Health insurance costs have gone through the roof, up $10,000 from two years ago. Ingredient prices, everything from eggs, flour and pecans to non-fat dry milk powder, shortenings and blueberries, are jumping upward. “Ingredient prices used to stay within a dollar or two dollars year to year. Now you’re seeing these wild swings,” says Concannon. This year Concannon’s egg prices increased from $12.50 a case to $21, and non-fat dry milk powder increased from $61 a bag to $94. “I’ve been in this business since I was a kid, and these are the wildest price swings I’ve ever seen.”

Credit card fees too are becoming a much larger expense for small businesses. Although customers using credit cards generally spend more per transaction, bakery owners are seeing their fees to credit card companies stack up. Sixty percent of sales at Kalupa’s Bakery are generated by customers using credit or debit cards. His fees last year ramped up to $15,000, Kalupa says. He points out that the worst year he had for customers writing bad checks in his 28 years of business amounted to only an $1,800 loss.
“Any baker that’s not adding 3 percent to his prices to cover the cost of credit card fees is discounting product,” Kalupa says.

Where to go from here
Despite cost concerns, the state of retail baking is strong for those who take action. Many operators are dealing with rising costs by purchasing ingredients and supplies in bulk where they can, adding new products and merchandising techniques to increase the average sale per customer and even raising prices.

“Too many people [bakery owners] fall into the trap that they don’t raise their prices,” Swartz says. “High fuel prices get customers primed. When I raised my donut prices eight months ago, I only got one comment. As long as you keep the quality, you can raise prices.”

Swartz, like many retail bakeries, seeks out new avenues to generate revenue and grow his business. He has developed a significant business producing biscotti for coffee shops, bakery cafes and other food retailers. For bakeries with wholesale business, the wholesale side of the their business generated an average of 36.6 percent of sales last year.

The Internet is opening new sales opportunities for retail bakeries as well. Of the bakeries that have Web sites, nearly one-third offer online ordering. Total sales generated via on-line orders are not a high percentage yet. Rheinlander Bakery generates only about 3 percent of sales online with a goal to hit 5 percent this year. Still, these are sales Dimmer was not getting before.

More importantly, Web sites have become a central promotional and sales tool. “People that call me are online looking at my Web site while they’re talking to me,” Swartz says. Many new retail bakeries even begin their businesses by designing their Web sites first.

Along with creating new business on the Web, retail bakeries are adding sandwiches, on-site dining and gourmet coffee. Each new venture comes with its own set of challenges, such as higher food costs for deli products and the service space and staff required to add tables for dining or an espresso bar. But, retail bakery owners, as entreprenuers, get to pick their specialty and adapt their businesses for new opportunites. Deciding which direction to take their business is the challenge and the beauty of being a full-line retail baker.

“We’ve become a destination where people go and feel good doing business with us. It’s really a pretty good living,” Kalupa says. “Maybe we don’t make millions, but we have always provided for the family and have a good life.”