About 18 months ago, Mike Kalupa relocated his retail bakery in Tampa, Fla., only 11.2 miles from its former location, but, "you would think it was 20 miles," he says. "Fifty percent of our regular customers stopped coming to our bakery; yet, 60 percent of our customers now are new."
Increased sales have confirmed Kalupa's decision to relocate Kalupa's Bakery, a full-line business. Sales in 2004 grew by 20 percent from 2003, despite the loss of a major wholesale account. In the first quarter of 2005, revenues climbed 14 percent from the like period a year earlier.
The move took Kalupa's from a commercial area across a major commuter thoroughfare to a predominately residential community. Formerly, commuter breakfast sales had comprised much of the bakery's business, but drivers increasingly stopped at convenience stores for donuts and Danish, while fueling their cars. Kalupa's now sells more upscale dessert and decorated cakes and a high-end line of Danish coffeecakes to families. Kalupa also added a deli, which currently accounts for 25 percent of total revenue and "puts a lot of profit dollars to the bottom line," he notes.
Customer counts have climbed 35 percent since the relocation, and best of all, per-customer sales rose, Kalupa explains. "We've become a neighborhood bakery, offering the products that our residents want."
Kalupa's operation reflects several trends borne out in Modern Baking's biennial national survey of full-line retail bakeries. An independent market research company conducted the survey earlier this year to learn how retail bakeries have performed since early 2003. Some of those trends include:
•Retail bakers are becoming better business operators. Marginal bakeries continue to fade from the scene, while progressive bakers' sales rise.
•Attuned to their customers' needs, operators are posting strong sales gains, particularly in cakes, cookies and other pastries.
•More bakers are diversifying into non-bakery products, such as high-end hot and cold beverages and deli items.
•Traffic counts have risen, and per-customer sales have climbed.
•While remaining committed to scratch as their primary production method, bakers are applying convenience, value-added ingredients to improve efficiency and consistency.
•Concurrently, they plan to invest in more equipment, including automated gear and computers, to improve productivity.
•Operators are coping well with increased costs, especially for utilities, insurance and taxes, as shown by their capacity to maintain fairly steady profit levels.
Median annual sales rose by nearly 35 percent to $330,000 during the last two years. "The people who are more business oriented have survived, even grown," observes Kalupa, who was one of several operators queried about the survey's results. He and others agree that more progressive bakeries are picking up sales from marginal operations, whose quality is not up to par, or from bakeries no longer in business.
Some 16 percent of responding bakers report that they opened their doors during the last two years, an indication more venture capital is entering the market. "A person buying a bakery today is different. Until several years ago, the buyer was another baker working for the owner or for an in-store bakery, or bought out his boss," Kalupa recalls. "The bakeries that have survived have much greater value and are more difficult to get financed. The buyers often have other careers and may have tapped the equity in their homes."
Bakers generally continue to build their businesses capitalizing on the products that have supported their success, notably cakes and cookies. Each cake category– custom decorated, non-decorated iced, wedding and upscale dessert–increased as a percentage of an average bakery's total bakery sales and they collectively represent 38 percent. With the exception of non-decorated iced cakes, the other three were among the top categories scoring the greatest sales gains.
Todd Wagner, Wagner's Bakery, Olympia, Wash., reports that customers are spending more for higher-end cakes. Customers are asking for all varieties, including photo image and sculpted cakes, says Wagner, whose operations include a bakery/store and two farmers market cold spots.
Sales of upscale dessert cakes are growing and account for 35 percent of cake sales, he adds. To appeal to the needs of smaller families and couples, Wagner plans to produce more varieties in flexible bar formats.
Sales of individual cake slices have increased at Kalupa's Bakery. "We like this. Instead of selling a whole cake for $15, we're selling 12 slices of a cake at $3 a slice. Of course, we have some stales, but with this margin, who cares?"
New varieties are helping to boost cake sales. White's Pastry Shop, Brockton, Mass., introduced several upscale pastry items, including flourless chocolate tortes and scratch-made German chocolate cake. Most products are offered in whole and individual servings with 7-in tortes retailing for $18.95 each and individual slices for $2 each.
In northeast suburban Philadelphia, Rilling's Bucks County Bakery, Warminster, Pa., added new cake varieties, among them a chocolate kiss, featuring dark chocolate cake, dark chocolate pudding, chocolate buttercream and drizzled poured chocolate. Another is a banana split cake with fresh bananas, vanilla and chocolate custard fillings, whipped cream icing and toppings of sprinkles and maraschino cherries. Both 9-in. cakes are priced at $18 each.
Packaging helped cookie sales
All operators interviewed report sharply higher cookie sales, which as a category increased to 12 percent of total bakery sales from 9 percent in 2003. Further, the cookie category posted the greatest sales gain.
Bakers attribute the growth to creative packaging and displays, as well as to innovative varieties.
Jay Sinkiewicz, White's Pastry Shop's head baker, notes that cookie sales increased about 10 percent during the last year, largely because of new packaging. The bakery's main bakery/store and three hot bakery outlets feature six gourmet cookies packaged in clear cellophane, tied with a colorful ribbon and a label with the bakery's logo. Wicker baskets display the bags. Also offered are 11.2 lbs. of assorted cookies in black plastic trays, wrapped with cellophane. The cookies retail for $10 to $12 a pound.
Generating add-on sales from self-service displays has been critical to growing cookie and other impulse sales, says Michael Concannon, Concannon's Pastry Shop, Muncie, Ind. A remodel of the bakery three years ago included added space for self-service merchandising.
"People like to browse while they shop, instead of walking directly to the counter," he notes. "Thousands of dollars in impulse sales are on the other side of the counter." For example, the bakery sells about 100 domed containers of two dozen iced tea cookies on busy days, 40 on slower days. Each container sells for $2.79.
Higher-end cookies are drawing much of the sales growth. Mark Atwood, Atwood's Bakery, Alexandria, La., says his cookie sales have risen, particularly for gourmet varieties, such as triple chocolate nut, made with chocolate cookie dough, dark and white chocolate chips, and roasted almonds and pecans. One dozen, weighing 12 ozs., retail for $5.89.
Mike Kalupa concurs with Atwood, noting that sales of fancy, decorated cut-out varieties have grown. Kalupa's Bakery maintains customer interest by changing decorating themes regularly. Stock cookies sell for $1.69 each; custom-decorated versions begin at $2.50.
One notable product category, crusty or specialty breads, declined as a percentage of bakery sales. Bakers attribute the shift in part to the increased strength of cakes and growing number of venues for quality crusty breads, such as Panera Bread and Whole Foods Market.
"The low-carb craze had little impact," says Michael Gassen, owner, Noe Valley Bakery, San Francisco, a city well known for quality specialty breads. "Consumers did not shop retail bakeries for low-carb products. Competition for good bread has really grown." He noted that his bread sales have declined from 25 percent of bakery sales to 10 percent.
Retail bakers have good opportunities to add sales with non-bakery products, especially beverages, Todd Wagner offers. One-third of bakers surveyed expressed interest in diversifying the product lines; among them, nearly one quarter are eyeing espresso and other gourmet coffees.
Wagner's Bakery beverage sales have risen 10 percent to 15 percent during the last two years. Featured are espresso-based coffees, three types of drip coffee, chai and other teas, blended frozen fruit drinks, organic and conventional juices and bottled water.
Wagner's introduced gourmet coffees in the 1970s, the first bakery in its area to do so. In recent years, coffee houses have proliferated, resulting in a slip in coffee sales. Wagner has responded with iced and blended–so-called "foo foo"–drinks. "Having a latte no longer is the big treat. Now, it's a blended, iced mocha or an organic juice," he says. A 14-oz. drink retails for about $3.50 "Despite the initial capital outlay, added labor and inventory control (pilferage), your return is at least 50 percent profit." He adds that Wagner's effectively competes with coffee houses because customers come for the hundreds of available bakery foods. "It's not like Starbucks with only 10 items. And, they can buy good coffee, too."
Mark Atwood says that national retail chains, such as Starbucks and Panera Bread, have shown that an attractive, inviting store environment can increase business and have reinforced the need to remodel bakeries to be current.
"These operators are our competitors, more so than grocery stores," says Atwood, who recently completed the first 12 months of business in a new facility, located two blocks from his former bakery. "Some bakery owners have remodeled just to keep up, then discovered later that the remodeling increased sales. They're pleasantly surprised to find that spending a few hundred thousand dollars, or even applying a new coat of paint, resulted in more sales."
His new facility covers 5,400 sq. ft., with 3,400 sq. ft. for sales. During his first year in the new facility, sales increased 70 percent, partially supported by 52 parking spaces, Atwood explains. Per-customer sales dropped from $23.80 to $21.50. "We expected this because we added a broader line of impulse items, such as gelato, cookies and donuts. The higher sales came from cakes, which represent 53 percent of sales. And, we more than doubled our customer count," he says.
Nationally, bakery operators recorded larger customer counts (see table, page 34). Michael Concannon believes improved merchandising has contributed to incremental increases in his traffic each year. Afternoon sales have picked up smartly mostly because Concannon's Pastry Shop sales personnel keep displays cases full, he says. "My displays need to be as full in the afternoon as they are in the morning. I would rather have some product left over than to have customers see empty cases."
Bakers coping with costs
While grinding out more sales, operators also are taking practical steps to hold the line on ever-increasing operating expenses, especially "non-essential" costs for insurance premiums, utility bills and taxes. For example, Wagner, hit with skyrocketing electricity bills, instructs employees to keep refrigerator and freezer doors closed and not merely to depend on the plastic curtains. He also switched to energy-efficient lighting, including high-pressure sodium vapor lights in place of mercury vapor units, and fluorescent bulbs from incandescent fixtures.
Michael Volz of Rilling's Bakery stepped further, replacing the plastic curtains with swinging doors. In addition to conserving energy, "we don't have to replace torn strips," he explains. Volz also converted the bakery's solid ballast fluorescent lighting to electronic ballast lighting, which enabled using four, 4-ft. bulbs on a single ballast, instead of two, 8-ft. bulbs. "We had the cost to install the new lighting but have realized savings in energy costs, and we change bulbs less frequently," he explains.
During the last two years, retail bakers generally added or expanded employee benefits, particularly health insurance, paid vacations, profit sharing and company- contributed retirement plans. One of the biggest challenges has been coping with health insurance premiums, which for the average bakery increased to $25,128 annually from $18,190 in 2003.
Volz says he pays the full premiums for his employees. He advises operators to shop around for coverage. "We're able to handle the premiums because we raised the deductible levels and co-payment schedules." Wagner, who recently offered fully paid health insurance to more employees, notes that doing so is essential to hiring and retaining high quality employees.
Looking deeper into compensation issue, Mike Kalupa sought to get his arms around the total labor cost. "We established a burdened labor cost by bundling our compensation to include social security taxes, unemployment taxes, workers' compensation, health insurance and any other benefits, including vacations," he says. "We can now view our total labor cost more realistically. Using this approach, retail bakers have a 45 percent to 48 percent burdened labor cost."
The survey showed that employee wage levels changed little, and the average bakery employed nearly the same number of full- and part-time personnel. Along with these developments, operators adapted production methods and automated equipment to improve productivity.
A review of production methods by product categories shows that retail bakers remain committed to scratch as their primary method. However, they continue to introduce bases and mixes slowly and steadily, a trend that began some 20 years ago with the shrinking pool of skilled bakers.
"We switched to mixes for some products in the last few years because we could not obtain consistent flour," Atwood says. "I could adjust a scratch formula for different flour, but less-skilled employees couldn't do it. These products provide convenience and consistency."
In this year's survey, refrigeration equipment tops the list of planned big-ticket purchases through 2006, followed closely by computers, then mixers, packaging gear, computer image decorating systems, sheeters and proofers. Atwood, who installed 1,000 sq. ft. of refrigeration in his new facility, says bakers are becoming more efficient. "Set-up and clean-up are the same whether you run a hundred dozen cookies or a thousand dozen. With the right equipment, running a thousand dozen and freezing them eliminates multiple set-ups and clean-ups, and frees employees to handle other tasks," he explains.
Taking another step to improve efficiency, Michael Volz says he has expanded use of dual-ovenable trays and pans for products such as Danish rings, quick breads and pound cakes. "This increased our packaging costs some, but it has reduced production and clean-up labor costs," he notes.
During the last 25 years, food prices have increased much less than those of other goods and services, Atwood adds. "Back then, a standard cake retailed for $6.50; now, we get $23, four times more. But, other goods cost ten times more. The only way we can handle this is to be more productive," he says.
Retail bakers increasingly are embracing computers to improve efficiency with a wide array of applications. Since 2003, more operators especially are using computers to track sales from cash registers and to determine batch costs.
Topping the list of computer applications is accessing the Internet, which rose to include 80 percent of computer users from 60 percent two years ago. Interestingly, though about one-third of retail bakeries have established Web sites, less than one-third of the sites enable customers to place orders. Bakers say most operators have not put into place the needed infrastructure, including software, to support Internet sales. They add that manufacturers are continually improving software to meet retail bakers' needs and that on-line bakery purchases will grow steadily.
This year's survey revealed much good news, especially the community of progressive, business-savvy retail bakery operators is growing. Their neighborhood bakeries are providing the products and services that their customers want. And, by investing in their businesses, these bakers will be the beneficiaries of their customers' demands for high quality products and friendly, helpful service, and their willingness to pay for them.