What a difference a year makes. At the beginning of 2009, optimism ruled the day. All the talk about the economy seemed to have the same refrain: wait until 2010. Things were going to start looking rosy again around the third quarter of 2009, but no later than fourth quarter 2009, and by 2010, we'd be well on our way to recovery.

But at the onset of 2010, realism rules, and much of the previous optimism has dissipated. While it is true that the recession, as defined by negative growth of the gross domestic product (GDP), did indeed end in the third quarter of last year with a 2.8 percent increase of the GDP, the rebound has been much smaller than anticipated. Economic growth is expected to remain at a modest 3 percent for much of the year. This is an improvement over the previous two years but is not enough to return the economy to its pre-recession level.

The reality is that recovery is going to be slow. “2010 will look a lot like 2009. Consumers are going to remain cautious,” says Ron Cardey, president, Bridor USA, Vineland, N.J.

The unemployment rate seems to have stalled at 10 percent, and a lot of talking heads are tossing around the term “jobless recovery.” Many eliminated jobs simply will not be replaced. According to the Labor Department, the U.S. economy has lost 7.2 million jobs since the recession started in December 2007. The labor market is expected to be slow to recover, a trend that actually began with the smaller downturns of the past two decades.

Part of the slow recovery is due to consumers knee-jerk reaction to the recession. They stopped spending instantly, and businesses followed suit. According to a CNBC report, personal consumption is expected to grow 2.3 percent, lower than the overall economy's 2.7 percent. With a new frugal mindset, consumers are expected to use their money to pay down debt rather than making new purchases, meaning purse strings will remain tight.

Consumers watch spending

The Nielsen Co. reports that almost one-third of consumers say they will use credit less, even when conditions improve, and 19 percent intend to save more money. “I think sales are going to be tough to come by,” says Bill Mihu, vice president of bakery operations, Schnuck Markets, St. Louis. “Bakery is an affordable luxury, but people will be watching their spending.”

To succeed in a tough econcomy, bakers need to find the right balance between product quality and reasonable prices.

One indication that consumers are still closely watching their spending is coupon use. Last year marked the first year that coupon use had increased since 1992. Manufacturer coupon redemption was up 26 percent in the first three quarters of 2009, according to the Nielsen Co. Another sign of consumers' new frugality is the rise of private label sales over national brands. “Consumer buying habits will likely continue to favor private label and more traditional bakery products,” says Robb MacKie, president and C.E.O., American Bakers Association, Washington, D.C.

Bakeries have traditionally weathered recessions well, but the drawn-out recovery will continue to be a drag on the baking industry. “While I believe the worst of the recession is over, the country is not back on the path to sustainable growth. Economic growth this year will be modest at best, and there are warnings of a potential second dip,” MacKie says. “The worrying signs include predictions of substantial increases in commodity prices, expiring tax cuts, uncertain federal policy, an aggressive regulatory policy in Washington and the exploding federal debt. Not until there are several months of respectable jobs growth will the economy trend upward.”

With the economic future uncertain, bakers should not maintain the status quo. “Bakeries will have to be prudent,” says Dan “Klecko” McGleno, C.E.O., St. Agnes Baking, St. Paul, Minn. “I expect those who expand or reduce will do better than those who try to maintain right where they are.”

In view of what bakers can't control—customer spending and ingredient costs—they need to take charge of what they can control—their own operations. “Bakeries should continue to refine their daily operations by evaluating products and eliminating those that are unprofitable,” says William Seppi, general manager, Costeaux French Bakery, Healdsburg, Calif.