The meteoric rise in ingredients prices to record levels appears to have peaked. Bakery operators and their bakery supply distributors, still reeling from financial hits of $30-per-hundredweight flour and near-60-cents-a-pound soybean oil, are trying to recover their footing. Doing so has not been easy.
Worldwide Factors Cited for Volatile Commodities Prices |
| A shortfall in 2007/08 U.S. wheat production and a weaker U.S. dollar, which encourages agricultural exports, have contributed to a 60-year low in U.S. carryover stocks. |
| Reduced production among major grain exporting nations has yielded a 30-year low in world wheat stocks, causing some nations to curb exports. |
| Demand for wheat, soybeans and feed grains by developing countries, such as China and India, has mushroomed. |
| Increased European Union use of biodiesel has helped to fuel higher soybean oil prices. |
| Federal mandates and tax incentives to produce ethanol as an alternative fuel to gasoline have diverted U.S. corn use to fuel from food. |
| U.S. corn stocks, down sharply in 2007/08, likely will decline further in 2008/09. |
| Higher prices for corn and soybeans encourage their production at the expense of wheat output. |
| Federal agricultural price supports for producers have created artificially inflated U.S. prices for some products, notably sugar. |
| Farm production costs have climbed as a result of rising prices for petroleum and equipment, the latter boosted by strong demand by China and other developing countries for farm equipment, as well as rising costs for raw materials, such as steel. |
| Increased speculative commodities futures trading by index funds has generated the perception that they have inordinately raised prices and skewed the markets’ price discovery mechanism. |
Market volatility created the greatest disruption in ingredient supplies and prices since the mid-1970s when sugar prices shot from 8 cents a pound to 60 cents. Battered and bruised, bakers and distributors are confused, asking, “What’s next? What can we do?” Their confusion is profound, given that conditions 30 years ago involved only one commodity; during the last 12 months, world events have sparked price volatility for every major bakery ingredient and many minor ingredients.
The quick answer: Raise retail prices. That is what most operators did not do during the sugar price surge, forcing marginal bakeries to shutter. But present-day conditions are more complex and require measures beyond increasing prices.
For this article, the first in an exclusive series, Modern Baking spoke with millers, distributors, and retail, supermarket in-store, specialty wholesale and foodservice bakery operators for their observations. Their perspectives, offered here and in accompanying articles, offer ideas and suggestions to manage what may lie ahead.
All agree that prices began edging higher about a year ago and the steep incline began in earnest last fall. “I check my invoices religiously, and when I see prices rise by 3 percent, I take notice,” says Dan (Klecko) McGleno, owner, St. Agnes Bread Co., a St. Paul, Minn., specialty wholesaler. “Before last fall, it wasn’t unusual to see prices for one ingredient spiral out of control. But, late last summer, I saw prices of flour, honey, eggs, egg replacements, walnuts, and trans-fat-free and conventional shortening increasing by more than 3 percent within a week.”
By year-end, flour prices especially had struck bakery operators broadside. Schnuck Markets, St. Louis, which operates 101 in-store bakeries, supplied in part by its central bakery, regularly books flour purchases several months in advance. “We had booked flour through December, and come January we wondered whether we should book at $27 (per hundredweight); a year earlier we paid $12 to $14,” recalls Bill Mihu, vice president, bakery.
"But all indications showed we should lock in our price; it was the right move. By February, forecasts were at $40. After several weeks, prices dipped to about $28. But, anyone buying on the spot (cash) market would have been hit hard.”
By February, prices for hard spring wheat flour had reached stratospheric levels. Cold Spring Bakery, Cold Spring, Minn., purchases bulk flour for its wholesale and retail operation. “The highest I paid was $34,000 for a truck load in February, and that load lasted until April, when I paid $32,000,” says Lynn Shurman, Cold Spring co-owner and current president of the Retail Bakers of America. “Last year I wrote checks for about $6,000 per delivery; my last load was $17,500. To come up with the extra $11,500 was a challenge.”
In addition to higher flour prices, jumps in egg, shortening and soybean oil prices concurrently slapped bakers. Randy McArthur, owner of McArthur’s Party Cake Bakery, which operates three retail locations in suburban St. Louis, says egg prices in March had risen 148 percent from a year earlier, flour by 128 percent and shortening 78 percent.
McArthur says he was not affected as severely by the rise in raw ingredient prices because his bakery uses cake mixes and RTU wet goods for much of its product line. Decorated cakes comprise about 50 percent of his business.
Gary Gardner, president, B.H. Gardner Co., an Indianapolis bakery supply distributor, notes that several of his customers switched from scratch to mixes. “It’s because the mix companies hedged their ingredient purchases, contracting farther out for their ingredient purchases,” he says. “Some bakers are finding a side benefit in that their product consistency has improved.”
Flour prices dented first-quarter financial results of Panera Bread, St. Louis, which has about 1,000 company-owned and franchised bakery cafés. With wheat costs of about $13 a bushel during the first quarter, compared with $5.80 a year earlier, the company sustained about $2.5 million in increased expenses to operate company-owned stores and an estimated $2.2 million in additional costs to supply fresh dough to franchisees. Increased wheat costs accounted for more than one-half of a 1.9 percent drop in first-quarter bakery café margins and a 2.9 percent decline in corporate operation margin.
In addition to higher ingredients prices, packaging expenses have inched higher, particularly those for plastic bags and rigid containers, which are petroleum based. Cold Spring Bakery sells branded product through area supermarkets and is re-evaluating its bag sizes. “We had to cut back on the number of different bag sizes purchased and were putting some products in bags larger than necessary,” Shurman recounts. “But, every inch of bag makes the cost more expensive, especially with the increased prices. We probably will inventory more bag sizes, but it appears we could save money in the long run.”
The simplest, first step toward addressing increased costs has been to raise retail prices. Bakery operators, unlike those of the 1970s, responded quickly. Last September before the sharp cost increases began, McArthur’s lifted prices 8 percent to 10 percent across the board, less for higher-margin items and more for lower-margin products. “When flour prices shot up in November, we increased bread and roll retails another 10 percent just to recover the higher costs. That’s where we were taking an immediate hit,” McArthur says.
Mix prices’ impact on retails was less, he continues, adding about $1 to the cost of a sheet cake, and the bakery adjusted cake prices accordingly in March. “Cake retails now are about 10 percent more than a year ago,” McArthur says. “This is a lot less than if we were making cakes from scratch, paying $18 a bag for flour, compared with $9 a year ago.”
Panera Bread rolled out a 3 percent increase in retails in company-owned stores to help mitigate higher flour costs and increased the price of fresh dough sold to franchisees by 13 percent. At this writing, the company planned to increase the price of bagels to further defray higher wheat costs.
Schnuck Markets applied a series of price increases in January. “We thought they were sufficient, but another round of cost increases forced us to raise retails in March just to maintain margins,” Mihu says.
“Barring catastrophic market changes, most of our retails should hold for the remainder of the year.”
When determining retail increases, Shurman accounted for more than higher ingredient costs. “I checked my budgeted expenses for the year and applied each major increase–mostly flour and distribution–proportionately to each product category,” she explains. “I also accounted for increased wages because my employees have to fill up their tanks, too.” The bakery increased retails 8 percent to 10 percent to absorb the increased operating costs.
“In spite of the higher ingredient expenses, my cost of labor is more than ingredients,” Shurman says. “For example, though ingredient costs for cake aren’t as great as for lower-margin items, I still needed to account for an increase in labor.”
She and other operators also have identified opportunities to trim costs by improving production efficiency. Before costs began to climb, she was evaluating category sales and looking for ways to reduce labor. She chose to alter sweet roll production.
Sweet roll volume had declined to 1 percent of sales, yet the bakery still produced eight varieties. Bakers now prepare three flavors.
“We cut back muffin varieties from eight or 12 to five or six,” Shurman says. “And, we prepare more batter for the freezer and pull it as needed. Those changes haven’t affected either muffin or sweet roll sales.”
Recently she identified low-volume products, such as one cookie with macadamia nuts, for deletion to trim ingredient inventory. “Should we make that cookie if it’s the only product that contains macadamia nuts? We need more work in this area,” Shurman says.
Shurman also urges bakers to identify opportunities to improve efficiencies in non-baking areas. For example, each year she asks insurance carriers for bids for workers compensation and liability coverage. “We will save $5,000 this year because the insurance market is a bit soft and more competitive,” she explains. “So, it’s important to examine the entire list of budgeted expenses.”
Some operators express concern that increased retail pricing will have a deleterious impact on sweetgoods and pastries. “Higher bread prices don’t scare me as much as do sweetgoods increases,” Mihu observes. “Sweets are an indulgence. As customers question whether they should consume sweetgoods and as prices rise, they may ask themselves if they really need a dessert or treat.”
On the other hand, Klecko of St. Agnes Bread believes bakers can build sales of pastries and sweetgoods by down-sizing products such as quick breads, including banana or pumpkin bread. “Consumers would rather buy a smaller portion at the same price, rather than a larger loaf at an increased price,” he says. “Look at the changes in candy bars. Typically, consumers do not complain about down-sized products after two business quarters, but they will remember price increases for well more than a year.”
Klecko is applying the same approach with wholesale clients, notably chefs. More chefs are reducing plate coverage, and some of his products, reduced in size, fit their needs, he says. For example, three years ago, Twin Cities restaurants commonly served half-pound hamburgers. After beef and bread prices increased, some restaurants introduced tapas-size hamburgers; chefs portion a half-pound of meat across six small buns.
Some bakery operators in Texas, Oklahoma and northeast Arkansas are reducing the sizes of value-added items, according to Kevin Johnson, co-owner of Johnson Bros. Bakery Supply, San Antonio, whose company supplies those markets. Examples include 4-oz. turnovers trimmed to 2 ½ to 3 ozs. and muffins from 4 or 5 ozs. to 3 ozs. baked in cupcake pans.
He believes sweetgoods categories will not disappear from bakery display cases. “We saw this question come up in the wake of the anti-carb craze. Instead, a customer may turn from buying six Danish to buying three Danish and cutting them in half,” Johnson says.
He also notes that in-store bakers are returning to preparing some products on premise, as opposed to buying them ready to sell, to combat costs. A Texas supermarket chain changed from buying finished turnovers to making them from frozen dough squares, Johnson says.
Another in-store operator, which had purchased frozen parfait and tres leches cups, turned to assembling the cups. “The bakeries can use the labor they have on hand,” he explains. “Our staff is helping to train the store-level personnel to prepare these and other items.”
Though most bakery operators nationwide are willing to increase retail prices, they must be judicious, according to Ted Heim Jr., C.E.O., Inter-County Bakers Inc., Lindenhurst, N.Y., a bakery supply house serving metropolitan New York City, Long Island and northeastern New Jersey.
“Increasing retails requires some finesse,” he says. “If bakers raise prices and unit volume drops or even remains flat, they will have gained nothing. Ingredient costs still are a small component of the sales price relative to other costs, such as labor. Increasing the volume of each transaction will be critical.”
Success will require operators to ensure that they maintain high product quality and become more creative in their product offerings, Heim adds.
Schnuck’s Mihu concurs: “No matter what happened, we didn’t want to change product quality. Some operators suggested buying lower protein bread flour and using additives to compensate. But we rejected that.”
Creativity by retail bakers will become especially important. Because retail bakeries are destination locations, they always have had to offer consumers reasons to make extra stops for bakery foods.
Mihu notes that current conditions have put in-store bakeries at an advantage over retail bakeries. “Given rising gasoline prices, the one-stop shopping advantage in-stores have over retail bakeries will influence consumers,” he says. “Second, retail bakers have had to increase retails more rapidly, compared with in-store increases. In-stores can forward purchase and buy in larger quantities, which enable them to delay price increases.”
Retail and in-store operators agree that the pressure on retail bakeries to set themselves apart from competitors has multiplied and that developing creative products and publicizing them will be crucial to their success.
“The bottom line here for retail bakers,” Johnson says, “is they will have to continue to offer the best product quality and great service. In addition, they will have to be creative with their products above and beyond what the supermarkets offer.”