It’s beginning to feel a bit like the Bill Murray movie Groundhog Day. Another year, the same situation: the economy is in slow recovery, but things might be looking up. Since 2010, Modern Baking has been looking at how the bakery market will shape up in the coming year and talking to bakers on what their expectations are. And much like reports from economic analysts, it’s a bit of a mixed bag–some are resigned to little or no growth while others have experienced and are expecting more growth.
In a poll taken on www.modern-baking.com last month, 55 percent of respondents had a very positive outlook for their bakery in 2012, 30 percent were somewhat positive while 15 percent were neutral. It may be encouraging that none of the respondents indicated their outlook was somewhat negative or very negative. However, many factors out of bakers’ control could affect the final outcome of 2012.
“I think it’s a crapshoot,” says Ben Davis, co-owner, Grand Central Baking Co. with locations in Portland, Ore., and Seattle, Wash. “It could grow a little, or it could be an economic meltdown. There are just too many major things that could happen which would affect growth in the United States.”
The final weeks of 2011 seemed to indicate the recovery might be on an upswing with consumers spending and traveling more, factories creating more goods and an improved auto industry. Employers added 200,000 net jobs in December and unemployment fell to 8.5 percent, the lowest percentage in nearly three years. Most economists are predicting that the economy will have grown at an annual rate of 3 percent in the last quarter of 2011, an improvement from the 1.8 percent posted during the summer and just 0.9 percent in the first half of the year. According a Wall Street Journal report, most private economists forecast a modest 2 percent growth in 2012. However, some sectors of the economy, especially housing, remain weak.
Factors affecting economy
With the globalization of the marketplace, factors outside of the United States can have a big impact on the U.S. economy. The Wall Street Journal indicates four factors that will influence the 2012 outlook: global economic weakness, foreclosures keeping the housing market flat, a lackluster job market and government belt tightening.
Global growth will decline from 3 percent in 2011 to about 2.7 percent this year, according to forecasting firm IHS Global Insight. Europe will experience a recession while China and other developing economies will see less growth as they try to manage inflation. Moody’s Analytics chief economist Mark Zandi lowered his expectations for growth in 2012.
“We expect the U.S. economy to perform a bit better in 2012, but this will depend on policy decisions coming out of Europe and Washington,” he said in a published report. “The Europeans are fighting to keep the euro together, while U.S. policy makers are struggling to find an appropriate degree of fiscal austerity. While we believe these issues will be resolved in a reasonable way, there is a significant degree of uncertainty associated with this assumption.”
The U.S. housing market, another factor weighing on the economy, is not likely to improve due to foreclosures holding down prices, sales and new construction. According to Kiplinger, housing prices will continue to fall, with a 2 percent drop by the middle of 2012 followed by a 2 percent increase in the second half of the year.
While U.S. companies will add jobs in the coming year, it will be at a rate too slow to improve unemployment. Wells Fargo predicts an average of 123,000 jobs will be added per month, about the number needed to keep up with population growth. State and local governments, with their layoffs and budget cuts, as well as federal government cutbacks, will subtract about 0.5 percent from 2012 growth, IHS Global Insight says.
While consumers did step up spending in 2011, the trend can’t continue if weak job gains result in only marginal improvement in personal income. Consumer spending is predicted to grow only 2 percent in 2012, down from the expected 2.6 percent in the fourth quarter of 2011–important because consumer spending constitutes 70 percent of economic activity.
The price of fuel and other energy also can affect consumer spending. According to Kiplinger, crude oil will trade in the $90 to $95 per barrel range. The recent volatility that sent prices over $100 per barrel (and raised domestic gas prices around the holidays) is not an indication of an imbalance of supply and demand. Rather it is the result of the increasing role of hedge funds and speculators.
Traders have recently bid up the price of oil due to Iran’s threat to close the Strait of Hormuz, which sees 20 percent of the world’s oil supply pass through it. Any shutdown will result in considerable price hikes. However, Kiplinger predicts that domestic gas prices will fall to $3.25 per gallon in the next few months, much better than the $4 prices from the summer of 2011.
One worry that most likely will not be hanging over bakers’ heads, however, is the price of commodities. After several years of volatility and wide price swings, the weak economic growth in developed markets and plentiful supplies will prevent price hikes, according to FoodNavigator.com.
Benefits of selling food
The good news for bakers is that they peddle food, and people always need food. And for many, the outlook is bright. In www.modern-baking.com’s survey, 70 percent expect their 2012 sales to increase over 2011, none were expecting a decrease and 30 percent thought sales would remain the same.
“I believe we will see spending increase gradually in 2012,” says Marc Serrao, owner, Oakmont Bakery, Oakmont, Pa. “Over the past several years, customers have been planning smaller weddings and parties due to the decline of the economy. I expect to see an increase in corporate and family events.”
Randy McArthur is seeing something very similar in his full-line retail bakery, McArthur’s Bakery in St. Louis. “Our high-end items have been suffering. We’ve had to retool to go to less expensive, smaller portion sizes. Customers are looking for value items and they don’t want to waste.”
While many bakeries may have been having flat years, Oakmont’s sales haven’t slowed. “We have been extremely fortunate to have experienced an 11 percent spike in sales in 2011 and expect with innovative additions to technology and products to see continued growth in 2012. We had a 14 percent increase just in December. We are really fortunate. At a time when a lot of bakeries are experiencing flat years, we are continuing to see growth.” Serrao has continued to improve his bakery and his customers’ experience. Last year, he added an outside seating area and expanded the café menu to include soups and salads. The moves increased sandwich sales by 35 percent.
With consumer spending expected to remain fairly low, and after several years of consumer belt tightening, many bakeries have implemented strategic and innovative measures to help cut costs and streamline their production processes. McArthur’s Bakery is reevaluating its product line and checking price points to ensure the bakery is positioned for value. “It’s a tough game–cost cutting is hard,” McArthur says. “The area we will look at most is the fact that our line is too broad. We will have to get SKUs down to a smaller amount or rotate specials better. It’s the only area we have left to recognize efficiencies.”
Value plays an important role in most bakeries’ efforts to provide the best customer experience. “We expect consumer spending to be tight in 2012, however, we plan on continuing to deliver ‘everyday value’–something customers have come to expect from us,” says David Clanachan, COO, Tim Hortons, Dublin, Ohio. Tim Hortons is the second largest foodservice bakery chain with more than 650 U.S. locations and 3,750 units overall. “We will continue to bundle product and continue with our ‘fresh at restaurant’ approach and innovative product introductions in multiple daypart categories.”
Ensuring products are sold at the correct price is vital to a bakery’s bottom line. “We had a good year in 2011,” Grand Central’s Davis says. “Part of that success was due to increasing prices and part was gaining new accounts and just getting better at what we do. Efficiency is something we’re always working on.” Davis knows cost-cutting measures can only go so far. “We like to solve our financial problems with more sales. Good sales solve most problems and that comes with good products, consistency and service.”
Providing ‘value’
While consumers spent a bit more this past holiday season, value is still key in getting them to open their wallets. Defining value in bakery can be an elusive thing as it often doesn’t correspond with the least expensive product.
“The value question is interesting,” McArthur says. “People are willing to accept a lesser standard for certain things, so there is a temptation to go after a low-end market. But we need to redefine the high-end market and what the sizes and portions are.”
The struggle, he adds, is getting customers to recognize the value in flavor and quality and be willing to pay for it. He knows that customers are willing to pay for quality for special occasions, but maybe not when they are bringing treats to the office. “Celebrations and occasions are what the bakery is built on. But we have to find a way to increase our daily traffic. That’s where the bakery café side becomes more important.”
McArthur also has begun couponing to provide value for customers and drive traffic. “Our sales really rise and fall with the coupons,” he says. “I’d love to get away from them, but I don’t think it will be possible for the next year or two. The people clipping coupons now aren’t the people who have always clipped coupons–people all up and down the economic strata will use them.” The bakery offers buy-one, get-one coupons on several products, including cookies and sandwiches.
He attributes much of the coupon culture to the rise of Groupon, which he struggles with. “If you condition customers to wait until they get 60 percent off, given the margins of our industry, it’s detrimental to the food industry as a whole. For mid-priced to value-priced food retailers, there’s no upside to it,” McArthur says.
For Oakmont Bakery, value goes hand-in-hand with trust, Serrao says. “Trust is the key ingredient that drives our success. Fresh product, full cases, quality ingredients, a clean and uncluttered store, short wait times including holidays and weekends, and great customer service. When a customer is able to expect these traits consistently, I believe it causes a refreshing sense of trust that Oakmont Bakery will be a positive addition to their day.”
The definition of value can also be a bit more traditional–tied directly to pricing, especially for foodservice operations. “Value will continue to be defined through freshness, quality, innovation and of course affordable pricing”, Clanachan says.
Finding the right balance between quality and price will draw customers in the door, and raise bakeries’ 2012 forecasts.