When one or two ingredient prices go up, bakery operators can simply refigure retail prices to return a fair profit from their customers. But, when nearly every ingredient price increases at the same time, as they did this year, raising retails gets more complicated.

Two key questions arise. First, how will your customers react to these price increases? And second, have you increased prices enough for true profitability?

Last month's article, Adjust Your Bakery Business, offered insight to the first question. Most bakery operators are finding little resistance to price increases from their customers because rising food costs are not exclusive to bakery items. And, consumers are more aware of the commodities crisis thanks to media attention and bakery trade associations joining forces to call attention to the problem.

“Our guests [customers] have been very understanding of the higher prices. We have heard few complaints,” says Tammy Kampsula, bakery director for United Supermarkets, Lubbock, Texas.

Other bakers fear the low customer resistance to the price increases is actually a sign of fewer customers coming in the door. The price boundary between getting the sale and losing the customer can be fuzzy.

“Most bakers are reporting that customers aren't complaining because they aren't coming in to complain,” says Karl Schmitt, co-owner, Deerfields Bakery, Buffalo Grove, Ill.

How retail prices affect customer counts is difficult to track and variable depending on the bakery. But, bakers can use a few cost accounting methods to determine how much to raise prices to return a profit.

To help retail bakers get a better handle on their retails, Schmitt shares his methods and attempts to help you answer two important questions: What impact have the commodity prices had on your business and have you increased your prices enough?

Part I: Raising retail prices

Bakery operators use several common methods to reconfigure retail prices. Although tedious, one option is to recalculate the ingredient cost of every formula and every product in order to increase your prices on a product-by-product basis. Another common method is to simply look over your profit and loss (P&L) statements and examine the percentage of ingredient expense relative to the sales and increase your prices appropriately. The second method works well if you either: perform a complete physical inventory of your ingredients at the beginning and end of the month while holding your retail prices unchanged; or compute the ingredient cost percentage using three consecutive months with unchanged retail prices, i.e. three months of data either before or after you change prices.

Schmitt offers another fairly simple method to help you estimate the impact of soaring prices on your P&L statement with just one month of data and you can use that information to icrease your retail prices. The first step is to enter all of the invoices from your ingredient suppliers for a current month into a spreadsheet program, like Microsoft Excel. Most bakery accountants separate commodity costs from paper costs, so that should reduce the amount of work required. Initially, you need only four columns of data for each invoice:

Column A - units received

Column B - name of item purchased (with unit size)

Column C - most recent price of unit (price based on last invoice of the month)

Column D - extended price using a formula (A times C) [See table p. 33]

Now, go back and add two more columns of data for each row:

Column E - price paid for each product purchased this year using invoices for the same month last year

Column F - extended price using a formula (A times E). [See table on this page]

Here are a couple of helpful hints to follow while you perform this exercise:

• When an item is purchased more than once during the month, increase the number of units received in Column A rather than entering the same item again. Keeping the list sorted by Column B will make this easy to follow.
• When an item is purchased in different unit sizes, a separate row is needed for each product/unit size.
• Both Column C and Column E are the last price paid during the particular month in 2008 and 2007 respectively.
• If an item is purchased this year that wasn't purchased last year during the same month, then use an earlier month from 2007 to find a unit price. Don't leave Column E blank.

The increase in ingredient cost that you can expect from last year to this year can be computed by simply dividing the sum of Column D by the sum of Column F. Each bakery is likely to find the result to be slightly different because of its variety of products sold and prices paid for its raw materials. For Deerfields, the above calculation resulted in a value of 1.174.

It's extremely important to know exactly what that 1.174 represents. Deerfields' ingredient cost last year prior to increasing its retail prices was running about 28 percent. If retail prices remained the same as last year, then expect new ingredient cost to be 28 percent times 1.174, or 32.872 percent.