The rapid, steep increase in ingredient and fuel costs has forever changed the accounting landscape for bakeries. To keep up with the increased costs of doing business, bakeries have raised their retail prices significantly during the past year. This practice, while necessary, has created new challenges to keeping tabs on profitability. Tracking labor is one of them.

Bakery owners and managers need to be aware of how their labor reports and profit and loss statements have been altered by abnormal increases in retail prices. “If you continue to measure the performance of your bakery based upon reports of labor and ingredient cost percentages, then you may be completely misled by your past experience of what represents a good labor percentage or a bad ingredient cost,” says Karl Schmitt, co-owner, Deerfields Bakery, Buffalo Grove, Ill.

To help retail bakeries keep their labor costs in check, in this article, Schmitt explores why the past metrics have changed and how to create a new labor report that is independent of retail prices and changes in pay rates.

During past more stable times, typical bakery business metrics were about 30 percent ingredients, 30 percent labor and 40 percent overhead and profit. So, a bakery with $1 million in sales had $300,000 in ingredient costs, $300,000 in labor and $400,000 for rent, insurance, etc. and profit.

Bakery customers are paying higher prices, but fewer customers may be coming through the door in today’s down economy.

Let's assume this hypothetical bakery's ingredient costs jumped 33 percent from $300,000 to $400,000, and the bakery responded with a 15 percent retail price increase. This brings sales to $1.15 million with ingredient costs at $400,000; labor should not change at $300,000, leaving 450,000 for overhead and profit, which is $50,000 more than before.

Consider customer counts

If the bakery didn't lose any customers with the price increase, it should have that extra $50,000 to cover additional fuel costs, etc. and profit. But, look at what happened to the labor cost percentage in this scenario. It is now $300,000 divided by $1,150,000, which is 26 percent. In the past, if you had a 4 percent drop in your labor percentage, you would be ecstatic. But now you have a 4 percent drop just because of the math. Here's the rub: if a bakery starts running the old 30 percent labor cost benchmark with the new prices, then it likely has become inefficient without realizing it. Also, examine the new benchmark for ingredient costs: $400,000 divided by $1,150,000 is roughly 35 percent.

This demonstrates that it is unnecessary to raise retail prices sufficiently to maintain the original ingredient cost benchmark of 30 percent. The 15 percent increase in retail prices has not only covered the increase in ingredients, but has left $50,000 extra in the coffers. Of course, you can expect upward pressure on wages, because the employees must be suffering from the increase in ingredient and fuel costs as well.

It is even more likely that bakery customer counts have fallen as families feel the pinch on their pocketbooks. With falling production volume, the natural tendency is for employees to slow down in order to stretch their day to a full 8 hours. Unfortunately, when production levels drop significantly, bakery owners are forced to reduce their staff in order to remain solvent. The new metrics are difficult for most of us to accept, and if you share your labor reports with your managers, it will be even more difficult for them to accept.

By measuring labor costs in terms of productivity rather than costs, owners can create an entirely new report that managers can use to improve labor efficiency and provide workable goals for staff. Owners should still look at the traditional labor percentage because it reflects the “true” labor cost. Since the new approach is designed to measure productivity rather than labor costs, a higher number is better than a lower number. Owners need to keep in mind that the new metric should be lower than it has been in the past. This new report is ideal to share with lower level management, who may not understand that the new labor metric should be lower than ever before.

The new productivity report will work best by using a different technique for each department within the bakery, but for this demonstration, we'll use the sales department. A reasonable way to measure the productivity of sales employees is by measuring the average number of customers they handle per hour. This can be accomplished by dividing the number of customers that you have for the week by the number of hours worked by the sales employees for the week. We are looking at productivity rather than cost, so overtime hours are simply added to the regular hours without the time-and-a-half factor.

Typical POS software and payroll software provide all the information you will need. If you've retained the reports from previous years, you can do historical comparisons. Here is how it is done. Divide the number of customers you have for the week by the number of hours worked by the sales employees for the week. Let's try an example using the numbers for my bakery for the week ending 9/28/08. Customer count was 2,854 and hours worked by the sales department was 344 regular time and 19 overtime, so 2,854 divided by 363 (the sum of 344 plus 19) yields 7.9.