If supermarket in-store bakery operators wanted to get optimum performance from their bakeries, they would operate them more like "retail bakeries that happen to be in supermarkets," observes Rodger Slater, director of bakery operations for Bashas' supermarkets, Chandler, Ariz.
"In-store bakeries don't have much of a reputation anymore. They need to shed that image and create an identity for themselves," explains Slater, who offered his thoughts in reaction to the results of Modern Baking's exclusive 2004 Supermarket In-store Bakery Survey.
In March, an independent market research firm conducted a scientific mail and e-mail survey of operators, representing a cross section of the industry in terms of geography and numbers of bakeries operated. The survey asked operators to compare their bakeries' programs and performances with those two years ago. To gain perspective on the results, the editors conducted telephone interviews with operators.
What's behind sales growth?
At first blush, the results are encouraging. Industry-wide sales are growing, keeping pace with the nation's economy. The average in-store bakery's sales have increased, per-customer sales have risen, and distribution, or bakery sales as a percentage of store sales, has grown. The casual observer might attribute the increase simply to movement of more product. But, less obvious factors are contributing to the growth.
For example, operators say they increased retail prices. Also, sales per customer may have grown as customers make fewer shopping trips. "Alternate options, such as supercenters, are taking away some shopping trips," notes Carl Richardson, vice president, bakery operations, Price Chopper Supermarkets, Schenectady, N.Y. "As a result, when customers do make it to the supermarket, they buy more in fewer trips."
Bakery distribution, Slater says, likely has improved in part at the expense of the grocery and general merchandise departments, which have lost sales to the wholesale clubs and supercenters.
Still, the in-store industry's growth is reassuring, given that the market has matured. After more than 20 years of skyrocketing in-store unit growth, the number of new bakery installations began leveling off in 1988 as most supermarkets featured bakeries. Previously, large numbers of annual installations had generated exponentially greater sales.
Yet, while sales growth continues, it lags behind that of other bakery sectors, notably bakery cafès and retail bakeries. Introducing creative, innovative bakery programs and offering high quality product, these alternative venues for fresh bakery foods are pulling in customers who are turning their backs to in-stores.
Consider that consumers purchase the same amounts of bakery foods. The question becomes where do they choose to buy them? If in-stores intend to capture sales, operators will have to change some counterproductive procedures employed in operating their bakeries.
Sales growth masked problems
The meteoric unit growth and resulting sales gains masked these tactics, which began surfacing in recent years. One indication is bakery-remodeling programs.
For many years, operators remodeled in-stores to introduce innovative merchandising and production procedures to attract customers. In recent years, the overall goal when remodeling a bakery has been to reduce its size, which would be laudable if it meant installing more compact equipment and creating layouts to improve customer service.
Rather, operators are downsizing to reduce labor, notably by introducing more packaged, fully baked items. This includes branded and non-branded thaw-and-sell and fresh product from local sources.
Survey results show the use of thaw and sell is growing. It has a place: In-stores can use thaw-andsell products for low demand, laborintensive products. But, moves to establish thaw and sell as a primary production method are headed in the wrong direction. Such formats are nothing more than cold spot bakeries.
When unit growth of in-stores took off in the late 1970s, many supermarkets had cold spots. They disappeared as consumers were drawn by hot bakeries' fresh product and theater. A return to cold spots would mean nothing more than to create extensions of the commercial bakery aisles.
Ironically, in-store operators find themselves in a position similar to that of commercial wholesale bakers in the late 1970s. Manufacturers of sweetgoods saw their sales decline as in-stores' popularity grew. Believing the problem was price driven, the manufacturers began competing on price. Soon, quality suffered; sales spiraled down.
The category, with the exception of snack cakes, all but disappeared until the early 1980s when Entenmann's, then a regional bakery, chose to market high quality products nationwide. The company priced its products to return profits and reinvigorated the sweetgoods category.
Indeed, an invigorated in-store industry, supported by improved product quality and customer service, will stem the flow of in-store customers. Fortunately, instores have the product categories to do so, and performance of key groups points in the right direction.
Cakes top-selling category
Cakes continue as the top selling category. In recent years, sales of custom-decorated, all-occasion and wedding cakes have grown to hover at just less than 30 percent of in-store bakery sales. Operators acknowledge that this is the level at which in-store bakeries begin to turn a true profit.
This year's survey broke out upscale dessert cakes as a separate category. In-store operators report that nearly a third of all-occasion cake sales come from upscale cakes.
In-stores have helped to grow the cake category by selling cakes in smaller whole sizes and by the slice. Smaller portion sizes encourage customers to try pricier products because they know the cakes will not go to waste in a smaller household. Steve Bordonaro, director of bakery operations for Big Y Supermarkets, Springfield, Mass., says customers also buy a variety of smaller tortes or gourmet cake slices to offer party guests more options than a single full-size cake.
Low carb bakery sales waning
Breads, too, are holding firm with 26 percent of average in-store bakery sales despite the nation's fascination with low-carb diets. If consumers are not cutting out in-store bread, they are at least shifting to more healthoriented breads and are more closely analyzing bread ingredients, operators report. Sales show a trend from white bread to crusty and variety breads. "Customers are looking more for multi-grain breads and breads with cleaner ingredients," Bordonaro says.
Of operators who sell low-carb bakery products, sales results are mixed. Now that most commercial bakeries offer versions of low-carb
bread, some in-store operators are conceding the sales to them. " Lowcarb is dying," says Jeff Naaman, director of bakery operations, Strack & Van Til Food Markets, Schererville, Ind. "I've already started to discontinue it. We've lost money on the program."
While low-carb bakery sales seemingly are waning, sugar-free products continue to hold their niche. More than 80 percent of instore bakery operators offer sugarfree or no-sugar-added products. The key to positive sales in this category,
Bordonaro says, is to have a specific merchandising area dedicated to sugar-free items and to offer them consistently.
In-store bakery operators recognize that most supermarkets simply are not convenient venues for breakfast. So, primary breakfast categories, such as Danish and donuts, have remained relatively low, yet stable, as a portion of in-store bakery sales.
Muffins and puff pastry, however, have shown some increases. Both product categories are being consumed during day parts beyond breakfast, and in-store bakeries have dedicated more merchandising space to muffins, in particular.
Deposited frozen muffin batters, baked and merchandised in the same pan, can be baked off throughout the day as needed, giving customers fresher product. More in-stores, too, are merchandising a broader variety of muffins in "muffin carts", from which customers can select from a variety of muffins directly from their baking pans.
While some product categories have benefited from production and merchandising innovations, others have suffered from inferior quality and poor selling practices. After years of selling $1.99 pies, many in store operators have allowed consumers to expect cheap pies from their in-store bakeries
"The challenge now is to distinguish in-stores by offering better products. This will occur when operators muster the courage to price for profit."
Selling them so cheaply could not support providing quality ingredients, resulting in poor quality pies and ultimately diminished customer demand. Some in-store operators have responded by shifting production methods. Frozen raw pies, as a production method, dropped 20 percent from 2002, while mix production increased. Some in-store operators are bringing pie production back in house.
Shifts in production methods are occurring in other product categories as well. Bagels have nearly doubled in thaw-and-sell production, as have decorated cakes. More operators are using cake sheets and rounds, and frozen base-iced cakes, to speed cake decorating. Moving to thaw-and-sell makes sense if quality products are available, and operators use them to round out their product lines. For example, nearly half of operators sell thaw-and-sell gourmet cakes, a labor-intensive product.
Though operators are reducing their bakeries' sizes, largely to trim labor costs, they report relatively stable expenses, except those for primarily thaw and sell operations. Interestingly, the production method that should require the least amount of labor shows increased labor costs. Operators attribute this to not effectively adjusting labor hours and to the need to package bulk-supplied products, maintain bakery displays, rotate product and provide even a modicum of customer service.
Petroleum prices' impact coming
Other operations costs have held at near 2002 levels. Despite rising petroleum costs and volatile commodity markets, in-store operators report relatively stable ingredient and packaging costs.
Strack & Van Til's Naaman says he expects an 8 percent increase in packaging costs by fall. As well, operators note that increased diesel fuel prices will boost the costs of other supplies and ingredients. Most likely, operators may not feel the full brunt of higher oil prices until later this year.
Regardless, operators cannot squeeze vendors' pricing further. Instore customers are shopping at alternative venues because operators have driven down suppliers' ingredients prices, affecting product quality, and have curtailed the labor necessary to build and maintain customer relations.
Given retail bakeries offer basicallythe same types of products as those by in-stores, why is the average per-customer sale at a retail bakery ($11.19) three times that of the average in-store sale ($3.53)? Retail bakers achieve this despite lacking major advantages enjoyed by in-store operators. Retail bakeries generally are inconveniently located, lack sufficient parking, lack supermarkets' total shopping experience, lack pricing flexibility because they must turn a profit, and do not have promotion and coupon deals used by in-stores.
The answer: Retail bakers bake up to consumers' expectations, while instore bakers increasingly bake down to meet budgeted labor hours and dictated fixed margins.
This directly affects the quality of in-store employees. Some starting wages paid to in-store personnel hover at what the federal government defines as the poverty level. Five years later, they will have barely improved.
What type of quality candidate will join a company at those wages? And, who would remain, having little hope for growth and knowing that the position might be eliminated to accommodate more self-service? If operators priced for profit, they could afford to hire qualified help to run better bakeries.
Consider that retail bakers must cope with the same labor and cost issues as those encountered by instore operators. Yet, retail bakers pay their bills and turn a profit. Why? Because they remain close to their customers and understand their needs. Retail bakers offer the products and services demanded by their customers, not the products and services the retailers might want to sell. This has not changed during the instore industry's nearly 30-year history.
When unit growth began back then, the challenge for supermarkets was to install bakeries to differentiate their stores from competitors' stores. Supermarket operators initially achieved that goal, delivering on their promise to provide fresh, high quality bakery foods with helpful customer service at fair prices.
But, during the intervening years, operators lost sight of their promise as they turned to cutting costs in futile attempts to gain profitability, rather than focus on building sales. The resulting loss in product quality and customer service drove once loyal customers to alternative venues for fresh bakery foods.
Indeed, market dynamics affecting in-store bakeries have changed dramatically. Yet, certain indisputable objectives to operate successful—profitable—bakeries remain. Most important, in-store bakeries need to earn loyal customers' business to achieve profitability.
This will occur when operators muster the courage to price for profit, which will encourage higher product quality. In-store operators will see sales increase, labor improve, profits grow, and in-store baking's importance to supermarkets enhanced.