Like the weather, economic forecasts are tough to pinpoint, but the general consensus seems to be that the baking industry will continue to see small sales gains. After a dismal 2009, 2010 held steady–no great gains, no great losses.
Experts anticipate more of the same for 2011, with some segments of the marketplace looking up, but trouble for the baking industry could be on the horizon. Fears of a double-dip recession eased after a tax deal was brokered at the end of December. Kiplinger expects the GDP (gross domestic product) to grow by about 3.5 percent, better than the 2.8 percent growth in 2010, but still low for a period of recovery. Goldman Sachs concurs, estimating a 3.4 percent rise in GDP in 2011, followed by 3.8 percent growth in 2012.
On the consumer side, retailers are coming off the best holiday spending season since the recession began, which may indicate consumers feel a little more comfortable with their personal economic situations.
This sounds good news for the baking industry, but some caution it is not. “I think you see that more in durable goods than you do on the food side,” says Kevin McFadden, bakery director, Schnuck Markets, St. Louis. “I don’t think you’re seeing it bust loose on food just yet. People are taking a little bit of a risk and buying the durable goods, but on the food side, we’re not seeing the sales bounce back yet.”
Some of this hesitation can be attributed to the still-high unemployment rate, currently hovering at 9.4 percent. Kiplinger expects about 2.5 million new jobs in 2011 with unemployment declining to less than 9 percent; however, about 8.5 million jobs were lost in 2008 and 2009 with only about 1 million having been restored so far. In order for unemployment numbers to recover, GDP growth will have to continue at 3.5 percent in 2012. With the jobs market still so uncertain, consumers may be willing to splurge occasionally but unwilling to increase their weekly expenditures on food.
Depending on your bakery’s location, your state’s fiscal situation also could affect your bottom line as well as your customers’. Several states find themselves on the verge of bankruptcy or insolvency, and in the case of Illinois, residents’ state income tax will rise 66 percent in 2011. This translates to a larger tax hit to customers’ paychecks, more expenditures for bakeries and less money available for spending.
For bakers, commodities are the looming storm. “Sugar is going to remain volatile, soy is going to remain volatile and so are wheat prices and cocoa,” McFadden says. “All of them are going to be major contributors to instability. It’s going to be an interesting year. It could be a roller coaster ride for awhile.”
The next six months are likely to be very erratic for wheat, according to Scott Custard, vice president of Moving Parts, Omaha, Neb., a commodities consultancy firm. “For both corn and soybeans, supplies are so tight that we don’t have a lot of room for error. The wheat balance sheet looks a lot healthier than either beans or corn, but having said that, wheat doesn’t trade in a vacuum. It takes a lot of its cues from corn. And corn is king.”
Custard adds that the current price of wheat is hard to justify, even with the Russian drought this summer and this winter’s flooding in Australia. The upside is that the supply in the United States is adequate, unlike the situation in the summer of 2008 when wheat prices spiked sky high. In 2008, the world had three years of low wheat crop yields, which increased U.S. wheat exports, and then the United States’ 2007 harvest was subpar. When low supply was coupled with a rise in crude oil prices, the stage was set for the perfect storm of low supply and high demand.
“I think what’s different today is that we’re not in such a tight spot for global supplies. We’re still trying to get our hands around how much is out there and how much is going to be needed from the United States to help feed the world market. It’s kind of tough to do that with the prices we’re at today,” Custard says. “I don’t anticipate those types of horrific moves we saw in ’08, but I will say I think we’ll be quite volatile. Wheat has plenty of its own things to worry about, but at the end of the day, it’s still going to be driven much of the time by the corn and soy markets. We don’t have any room for error. There is a way out of the forest, we just can’t take any wrong turns.”
Sugar has already seen high prices during the past several months. The floods in Australia along with droughts in Brazil, the world’s largest sugar producer, have led to shortages in the international sugar supply. In addition, freezing weather in Florida damaged the U.S. cane crop. Sugar hit $752.70 on the New York Stock Exchange in January, compared to $383.70 at the end of June 2008, and prices are at a 30-year high.
Recent political strife in the Ivory Coast, which produces more than 40 percent of the world’s cocoa, has caused the price of cocoa to spike. Prices had remained steady during much of the upheaval at the end of last year. The situation had raised concerns that the cocoa yield would be low; however, U.S. cocoa suppliers expect some of their largest deliveries from the region.
Gas prices also are worth keeping an eye on. Kiplinger expects crude oil prices to remain in the $85 to $95 range, but a great deal of speculative trading is keeping the price higher than market supply and demand. Prices at the pump will edge upwards during the next several months.
Sunny side to sales?
With indications that ingredient costs and gas prices are on the rise, what do bakers expect in 2011? Many predict sales to remain flat.
“However, I do see people’s spending habits increasing as they become more accustomed to our country’s economic situation. The scare factor has worn off, and people are beginning to loosen up,” says Michael Manni Jr., director of finance and sales, LaSalle Bakery, Providence, R.I.
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In Northern California, Costeaux French Bakery is beginning to see a slow rebound, according to William Seppi, general manager. “People will still seek out comfort foods as well as quality and price. People are still willing to pay for quality so long as there is value. I have seen companies [wholesale customers] take shortcuts, decrease their quality and in turn lose business or go out of business.”
While customers may be loosening their purse strings, full recovery is still a long way off.
“Consumers may be spending more freely, but what they are spending is still less than before this economic turmoil,” Manni says. LaSalle Bakery customers are buying slices of cheesecake instead of the whole cheesecake, which has required production adjustments.
The current economic situation also requires bakers to begin to think creatively. “We also do a 99-cent special every week, which we have never done before,” Manni adds. “The excitement has been much more than we could have expected. Not only are people trying new products, but they’re saving money doing it.”
Seppi agrees that now is the time to experiment and try new things. “Opportunities can be found in many ways,” he says. “If you’re looking to expand or grow, it’s a great time to do it. Money is cheap–that is, if you can get access to capital.”
Importance of being green
Sustainability remains a concern for American consumers, but how do their concerns stand up in the face of economic burdens?
Consumer focus will remain on sustainability, but it will take a backseat to the concern about jobs recovery and overall economic stability, Seppi says.
“It’s not clear how sustainability resonates in the marketplace,” says Nick Pyle, president, Independent Bakers Association, Washington, D.C. “As long as major big-box stores are concerned, sustainability efforts will grow along with their supply chain. Good business sense and practical implementation of many of these strategies can save money, and this is reflected on the bottom line.”
Sourcing ingredients locally, if you can make it work, is always a good idea, McFadden adds. “It’s always good to support the community you’re in. But it boils down to price and supply. Hopefully buying locally helps you control your costs. It’s the quality of your ingredients and the outcome they have in your products. All of that plays into the sustainability picture. If you pull it all together with savings on price and quality ingredients, then you have the best of both worlds.”
With the fluctuating cost of ingredients, bakers are going to have to shop around to get the best price, he says. And when it boils down to the cost of the final product, customers are going to want a cheaper product over a product made with locally sourced ingredients. “We’ll see people start making decisions in the coin purses that they may not make in a normal economic environment. They may not pull the trigger on something that is 50 cents higher than it was two or three months ago. Those trigger points change as the pressure on their wallet becomes greater. If they have to pay more at the pump or pay higher utility bills, the discretionary funds they have to spend on food begin to change.”
However, especially for retail bakers, many consumers are interested in supporting their local businesses. Manni has seen a trend in New York City of consumers frequenting local bakeries, and he hopes it spreads across the country. “With an increase in our farmers’ market sales in 2010, people seem to be trending towards local foods and local business. People are starting to recognize the value in eating fresh baked foods with no preservatives. We hope this continues,” he says.
No matter if consumers shop locally or want locally sourced ingredients, they still need to perceive value for the products they purchase. “From a consumer perspective, they’re going to ask if the money they expended for the product is going to meet their needs and is going to keep them in budget?” McFadden says. Consumers are looking to get the most for their money, and the bakery’s impulse and indulgent products are going to be challenged this year, he adds.
To help offset this, Schnucks is focusing on smaller packaging sizes, products for two and scaled-down versions of popular items, such as half cakes and half pies. “People still want to feel good about what they purchase, but they have to take care of their basics before they can spend on the indulgent categories. If it’s smaller and at a lower price point, they may be more willing to treat themselves,” McFadden says. The drawback for retailers is that often the smaller packaging costs the same as the larger packaging. Bakers are going to have to get creative to make up for the increased packaging costs for the smaller products that sell at a lower price point.
For the last several years, advances in technology have provided new avenues of communication between bakers and their customers with the use of social networking websites, such as Facebook and Twitter, becoming increasingly common. Couponing also has gone virtual. Consumer coupon use remains at an all-time high, and bakers are beginning to use coupon sites, such as Groupon, to their advantage. “We ended the year using a virtual coupon and had a decent response,” Seppi says.
As consumers become more attached to their mobile devices, either smartphones or tablet computers like the iPad, they have constant access to any information bakers care to provide. Schnucks recently introduced a mobile app that provides customers with a map of their local store, so while they are shopping they can plug in whatever products they are looking for and the app directs them to the products’ locations in the store. “We’re continuing to explore where technology is going to help us with our consumers or help us drive down the cost of our business,” McFadden says.
This philosophy remains important not matter the year–provide the best experience for your customer at the least expense to you.