The global economic recession has not been good for most businesses, but small businesses have been hit hardest. For the resilient retail baker, though, a small silver lining can be found in renewed interest in meticulous efficiency. A recession quickly whips into shape a business that has grown fat, lazy or both. Survival depends on attention to the small stuff, particularly how much you sweat it. And, survival means sustaining profitability.

For a function that really boils down to simple revenues and expenses, retail bakers know the complex multitude of variables determining profitability. Retail bakers also know their respective markets, understand that their customers are going through a recession as well, and want to ensure they still have a loyal customer base waiting for them at the end of the economic tunnel. This means the two variables requiring the utmost care are prices and product quality.

“I prefer to keep quality high so that my demographic remains those expecting a higher quality, higher priced product,” says Karl Schmitt, owner of Deerfields Bakery, Deerfield, Ill. “That's my niche. I don't want to drop down in price and quality and get into a price war with Wal-Mart. That's a war that you just can't win unless you are doing wholesale. Also, if you keep discounting your product, you'll diminish the image of your business.”

During the volatile ingredient price swings of 2008, Schmitt, like many other bakers, was forced to raise his prices to accommodate for high quality. Customers understood at the time and accepted the increases as ubiquitous.

“Ingredient prices are finally starting to settle,” says Gary Polletta, owner of Edgewood Bakery, Jacksonville, Fla. “One thing you don't want to do is start buying cheap ingredients and making cheaper products. Once the economy turns around, you'll look around and find that people no longer like your product.”

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Customers who were forgiving during the commodities pricing volleyball match now are facing a very different reality. Bakers agree it is important to remain consistent with the two profitability variables that most concern customers and most affect revenue: price and quality. Bakery's greatest strength in a bleak economy is consumer perception that it is an affordable luxury. It would be a gamble to diminish either the affordability or the luxury elements of that winning equation.

Return on investment

Not every product is a winner, though, and consumer popularity shouldn't be the primary indicator of whether or not a product is working. A baker has to be careful not to “sell him or herself out of business” with products that don't offer a sufficient return on investment.

“For each item you sell, you first have to ask ‘is there a market for it?’ Then you look at the ingredient costs, and see if anyone else is doing it,” Polletta says. “If nobody is doing it around you and there is a market for it, then you have control of the price. As long as you can maintain 30 percent food cost, it's a no-brainer.”

Polletta's Edgewood Bakery once offered more than 300 bakery items; it has scaled back to fewer than 250 and that number will continue to drop. He identified his most profitable products to use as daily items. Less profitable items will be rotated in and out, giving them a seasonal or “limited time” quality, and the worst performing products will be eliminated.

One way to make the numbers work on popular, but less cost-effective products is to introduce similar, but slightly less sophisticated versions of them. Schmitt cautions bakers to be sure the new product bears a different name than the original, maybe even a different shape. He doesn't want to give his customers the impression that a favorite product has been downgraded in quality.

But since ingredients tend to represent upwards of 30 percent of an average retail bakery's expenses, bakeries are forced to put them under a microscope to see where they can save without sacrificing quality.

Ingredient savvy

Hank Kretchmar, owner of Kretchmar's Bakery, Beaver, Pa., carefully watches ingredient prices from several different suppliers, regarding any singular spikes as harbingers of higher prices to come.

“If one vendor's price jumps for a specific ingredient, say, raspberry filling, then I know it's only a matter of time before the rest of the vendors' prices will go up. When I see that spike, I know to stock up on the ingredient with a vendor that has yet to raise the prices,” he says. “A decade ago, a price spike might be a negligible 2 or 3 cents; now the potential for fluctuation is much larger. It has really become worth your while to pay close attention.”

Kretchmar also worries about wasted inventory and has developed a system designed to stave it off at every turn. The system kicks in the moment ingredients are loaded into the storage room. Kretchmar makes sure to check every order to ensure he's getting exactly what he ordered. An overall belief in keeping low working capital translates into keeping inventory low, so deliveries at his bakery are common, and people make mistakes.

“We once ordered egg yolks, but couldn't find them in our stock room. We found egg whites, and figured we had been sent the wrong product before opening the package and discovering that we had egg yolks after all; they were just mislabeled,” Kretchmar says. “That's not just a matter of getting the wrong product; that's getting the wrong price for the wrong product. Check your orders every day; the sooner you find a mistake, the easier it is to correct and credit.”