by Katherine Martin, managing editor
Paper or plastic is no longer a decision that concerns only bagging groceries. Consumers are now making the plastic or paper decision when it comes to paying for purchases, and more are choosing to use plastic (debit or credit cards) instead of paper (cash or checks), even for food.
“We have seen a major shift in the last three years,” says Todd Wagner, owner of Wagner’s Bakery, Olympia, Wash. “We are seeing more and more credit purchases. Cash still exceeds credit purchases, but it is almost 50/50 now.”
Mazur’s Bakery, Lyndhurst, N.J., is seeing a similar rise in credit card purchases. Since the Spiekermann family purchased the bakery three years ago, purchases made with a credit card have risen from 30 percent of purchases to 50 percent, says Jaclyn Spiekermann.
“I would call it more than an up tick, it is a surge or tidal wave of credit card use,” says Michael Kalupa, owner of Kalupa’s Bakery, Tampa, Fla. His bakery now sees 60 percent of its purchases from credit cards.
While any sale is good, consumers purchasing products with credit cards brings certain headaches. Retailers must work with credit card processing companies, which charge their own fees as well as handle the interchange fees retailers pay to the banks that issue the major credit cards, such as MasterCard and Visa.
Each credit card company charges a different interchange fee, and in the last two years, the fees have been increased four times, according to Food Marketing Institute (FMI) research. The average interchange fee was 1.75 percent in 2004 and is expected to reach 1.86 percent by 2010, according to a Morgan Stanley report. The rising fees are hurting retailers nationwide, and none more than food retailers, with thin profit margins.
Build fees into pricing
“You have to build in the processing cost just like any other,” says Michael Volz, owner of Rilling’s Bucks County Bakery, Warminster, Pa. His bakery has accepted credit cards for 10 years and 30 percent of purchases are now made by credit card.
Kalupa agrees. When costing products, his bakery now automatically tacks on 3 percent for credit card fees. “There is no way to absorb it. It is the cost of doing business and it needs to be addressed in the same way as electricity or sugar,” Kalupa says.
To help offset the fees, Volz has a suggested minimum purchase of $10. He acknowledges that you can not enforce a minimum purchase because it is against credit agreements. But many customers understand the need for a minimum purchase, Volz says.
Other bakers offset the cost of fees by relying on the trend that customers who pay with a credit card often buy more. For Mazur’s Bakery, the average cash ring is about $15, while the credit ring is almost double, around $24. “We do weigh fees against the price of a product,” Spiekermann says, but the bakery hasn’t upped prices to offset fees. On the smaller purchases, such as coffee, she knows the bakery does lose money, but that comes with the territory of offering customers the convenience of accepting credit cards. She counts another customer’s purchase to make up for the loss.
Wagner’s Bakery also banks on the larger purchases. “The credit card sales are a fair margin higher than check or cash,” Wagner says. In fact, the bakery recently quit accepting checks all together. The only exception being corporate accounts.
In Tampa, Kalupa also sees average credit card purchases of about $20 or more. He attributes the higher sales to the fact that people simply don’t carry much cash anymore. However, this past Halloween, he began noticing that many of his credit card rings were much lower, in the $5 or $6 range. “I think it might be a sign of the times,” he says.
Processing companies
Switching processing companies may be one way to save on fees. If you think that fees are not that important, take a look at how much your bakery actually spends every month on processing and interchange fees. Depending on the season, Kalupa pays anywhere from $1,200 to $2,000 a month. He has not switched processing companies, and for those that do, he cautions about the traps of “voodoo economics.” The charges companies assess are endless, and there is no cut and dry method on how fees should be assessed, he says.
However, many of the bakers Modern Baking spoke with recently had switched processing companies in an effort to offset the amount paid in fees.
Volz switched processors in the last two months for lower fees as well as a quicker response time. The new company now turns around the processing in 48 hours compared to the 72 hours of his previous company. The response time was as great a factor as the lower rates when he was looking at processing companies, Volz says. He found the new company through a discussion on the Baker to Baker discussion board sponsored by the Retail Bakers of America. “We haven’t saved any money yet, however,” Volz adds.
Six months ago, Todd Wagner also switched processing companies to one his local Chamber of Commerce endorsed. He has seen better results. “We are saving about $400 to $500 a month on fees, which over the course of year, really adds up,” Wagner says. If the fees start climbing back up again, Wagner says he will take another look at other processing companies.
In the three years the Spiekermann family has owned Mazur’s Bakery, the bakery has changed processors four or five times. It is difficult to find the right company with all the hidden fees and charges, but a company always exists that is a fit for your bakery, Spiekermann says. Switching companies is not painless, especially the first few times, she acknowledges, but she has found that processing companies are becoming more helpful in making sure that everything is up and running correctly.
The convenience and awards offered by many credit card companies will continue to push consumers to “plastic.” Unfortunately, the processing and interchange fees are the cost of doing business today and must be factored into your business strategy.