Retail bakers upbeat in down economy

What a difference two years makes

Since Modern Baking last conducted its retail bakery survey in 2007, bakers have endured sky-high commodities prices that now are settling; gas prices that went through the roof, dropped and now are on the rise again; and a recession that has seen the collapse of the housing market, the banking world and the automotive industry. Yet, through it all, bakers are persevering and looking forward to the future.

In fact, some bakers are choosing to look at the economic downturn almost as a blessing in disguise. “In a way it has been beneficial,” says Todd Wagner, general manager of Wagner's European Bakery & Cafe in Olympia, Wash. “It woke us up. We are no longer complacent; we are not immune from downturns. We have changed our operations to adapt.”

And, as many bakers point out, they've been here before. “We're cautiously optimistic,” says Jim Balmain, owner, Smith's Bakeries, Bakersfield, Calif. “We've been here since 1945, so this isn't the first recession we've been through. We feel we'll come out of it.”

This optimism comes in part from the fact that bakers know they offer the small indulgences that consumers can still afford. Customers may not be able to afford a new car or a new TV, but they can afford a $2 cookie or $20 torte. Modern Baking took a look at the state of the retail baking industry in its 2009 Retail Bakery Survey, which has been conducted biennially since 1993. Modern Baking commissioned a scientific survey of operators representing the entire full-line retail bakery market to learn how the industry is faring.

Almost one-third reported the economy as their top concern this year with maintaining sales/finding new customers a close second. “Our numbers aren't up that much from last year, but they are holding steady. That's good for us,” says Lynn Schurman, co-owner of Cold Spring Bakery, Cold Spring, Minn. “Some of our costs have gone down from a year ago, but we haven't lowered our prices, so we are getting a bit more margin to work with.”

Perfect storm of problems

Part of the “perfect storm” bakers faced in the past two years was a rapid rise in commodities prices, and while the situation has calmed, bakers are still recovering. Nearly half of bakers reported rising costs — both essential costs, like ingredients and packaging as well as non-essential costs, such as insurance and taxes — as the biggest hurdles in running their businesses.

Ninety-seven percent of bakers reported their ingredients costs increased in the last 18 months, and 80 percent of them responded by raising their own retail prices by an average of 9.5 percent.

“We did raise our retail prices, and we've just implemented another 5 percent increase to improve profitability. I didn't increase prices enough the first time around,” says Felix Sherman, co-owner of The Ambrosia Bakery, Baton Rouge, La. “I was just a little too cautious on my initial increase and have some catching up to do. I'm not like the gas companies that can triple prices overnight, and people are still going to buy gas.”

Nearly seven out of 10 bakers cited the increased costs of ingredients as the primary reason for raising their prices. On average, ingredients make up almost a third of a product's cost, according to the survey. Ingredients comprise the largest portion of a bakery's expenses, and represented the biggest percent increase compared to two years ago.

“We were really hit hard, mainly due to the increased costs of goods, about a 30 percent increase. That really hurt us,” Wagner says. “In about four months time we wiped out all of our business reserves. Now, we are starting to see more business.”

Besides simply raising retail prices, Wagner went to the source, his suppliers, and worked with them to shave about 10 percent off his ingredient and packaging costs. He also looked closely at his pricing structure. “One of the things I've been working on is having every product we sell have a cost attached to it, so we know how much it costs to produce that product to ensure we can sell it for a profit,” he adds. “In this industry, it's very easy to get complacent. We would just make stuff all the time and put it out without really knowing the cost behind it.”

The economic downturn also forced Cold Spring Bakery to take a look at its product line. “We've cut back on some varieties and are doing a better job of category management because of the economy,” Schurman says. “We used to make 12 to 15 different types of muffins, and they are only 1 percent of our sales. We cut back to five varieties.”

Changes facing wholesaling

Retailers' wholesale business also has been affected. Bakers reported only a quarter of their sales come from wholesale accounts, down about 10 percent from two years ago. Part of the decrease can be attributed to to less demand from restuarants. Consumers have cut back on dining out, which in turn causes restaurants to cut back on orders.

Wagner is seeing his accounts shift to producing bakery products themselves, while Biaggio Settepani, owner of Pasticceria Bruno, Staten Island, N.Y., is seeing demand simply disappear. “The corporate parties we did in the past, we didn't do this year. We had four or five big accounts that we always did Christmas baskets for, we didn't have them this year,” Settepani says. “But we're still active, and we have a salesman knocking on doors to gain additional customers to compensate for the lost business.”

While the wholesale side may be struggling, a majority of bakers reported an increase in retail customers compared to two years ago, even with the increased product prices. The 54 percent reporting more customers saw an average 32 percent increase in the number of customers shopping their bakeries. More than 50 percent also expect 2009 sales to increase over last year with 44 percent predicting a 6 percent to 10 percent increase in sales.

“With the economy being bad, more people are coming back to the comfort foods, and our products overall have benefitted from that,” Schurman says. “People are treating themselves more with bakery products.”

Good-bye to trans fat

Bakers also reported several changes in product trends. One trend, trans fat, generated a lot of buzz two years ago, but failed to register in the current survey. Two years ago, 6 percent of retailers were adding no-trans-fat products and 24 percent reported trans fat bans as one of the consumer health trends most affecting their bakery. This year, not enough retailers planned to add new trans fat-free products to even register a percentage point and only 7 percent reported trans fat bans as the health trend most affecting their bakery.

“Trans fat is pretty much off the radar,” Schurman says. “We're reformulating to do away with trans fats, but customers don't ask; it's not an issue to them.”

The exception is bakeries that are in municipalities or states that have or will enact a trans fat ban. “Trans fat is going to be important to us here in California because in 2010 we are going to be in the same situation as New York City,” Balmain says. “It's going to be mandated, but our customers don't care about it. I don't recall any of our salespeople saying that any of our customers were asking for no trans fat products.”

While customers may want to eat more healthfully overall, when they purchase a dessert, they are splurging and are not as concerned about trans fats, Wagner says. A larger factor are diseases directly impacted by diet, such as celiac disease and diabetes. “Gluten-free is the biggest concern I hear now, and then sugar-free after that,” he adds.

Sugar-free and gluten-free were the top two health trends bakers reported as the health concerns most affecting their business in 2009, at 15 percent and 12 percent, respectively.

The smaller the better

Mini desserts, such as individual size tortes, cupcakes and cookies also are driving sales in retail bakeries. “The trend I see now is the highly decorated cupcakes and cookies,” says Ambrosia's Sherman. “And, big cookies, like 3-in. or 4-in. cookies. Maybe it's to lift their [customers'] spirits.”

In the survey, bakers reported cookies made up 12 percent of dollar sales and 34 noted the category had posted the greatest sales gains of all bakery products since 2007. Six percent of respondents reported cupcakes as posting the greatest sales gains and 12 percent of retailers are planning to add cupcake varieties in 2009.

“We're doing more cupcakes, and we added some cupcake varieties. Our biggest seller is mini cupcakes,” Balmain says. “Our decorated cake sales have slowed down, but our decorated cookie business has more than overtaken what we lost in cakes.” Smith's Bakeries sells 3 ½-in. decorated cookies starting at $1.89, so it isn't a matter of them being inexpensive, Balmain adds.

While Balmain reports lower cake sales, he is an anomaly. The survey found that custom-decorated and all-occasion decorated cakes make up 29 percent of retail bakery's dollar sales, the largest category, and 43 percent reported custom decorated cakes posting the greatest sales gains.

“I was worried about our cake sales falling off because of the recession,” Schurman says. “I was thinking that cakes were an extravagance and people might forgo celebrating birthdays, but our cake business is up.” She attributes the increase to families focusing more on family time and celebrations at home with cakes becoming more the norm.

One of the biggest changes bakers reported was their use of the Internet. Nearly two-thirds of bakeries now have their own websites, compared to only 30 percent two years ago.

Many bakers realize this is a marketing tool they are under-utilizing. “We're not doing as good of a job as we need to,” Schurman says. “We have our website, but we are using it more for wedding cakes to give basic information. I really need to do more.”

Websites give bakeries a good visual tool to market to customers, and that is one element Schurman is using to her bakery's advantage. Cold Spring's website contains a link to Shutterfly.com, where an online photo gallery of all the bakery's wedding cakes is posted with all the pertinent design details along with photos. All the cakes are numbered, so when a bride places an order, she can reference the cake's number and then request any changes.

While more bakeries have websites, the number accepting online customer orders has remained steady at about 30 percent. This may be changing. “We are in the process of setting up an e-commerce site, and hopefully, that will take off in a couple of months,” Settepani says. He plans to offer some products, such as biscotti, for shipping year-round anywhere in the country, while other products like cakes will be ordered online for customers to pick up at the bakery or have delivered for a nominal fee. Wagner's Bakery also is planning to start an e-commerce website within the year.

The Ambrosia Bakery established an e-commerce site about 18 months ago that allows customers to order decorated cakes online. The orders must be placed 48 hours in advance and paid for by credit card at the time the order is placed, Sherman says. “Online sales have been pretty steady, but they do peak around the holidays,” he adds.

Increase in online networking

Nearly three-quarters of bakers also are using the Internet for networking purposes, both baker to customer and baker to baker. The baker-to-customer networking may be the next biggest marketing tool for bakers. Social sites, such as Facebook and Twitter, allow bakers to almost instantaneously communicate with their customers.

It requires a time commitment, but some bakers, such as Larry Merritt, owner of Merritt's Bakery in Oklahoma City, see it as the 21st century's version of face-to-face contact with customers. Generation Y, the next generation of bakery customers, is more technologically savvy than previous generations and more attached to their mobile devices. Gen Y is more likely to text the people standing next to them instead of talking to them.

As many changes are likely to occur in the next two years as have happened in the past two years. Bakers' optimism, however, is likely to remain unchanged.

“Things are better now than they were 18 months ago and definitely better than six months ago,” Settepani says. “People are starting to come out and are spending a little more. The next six months are going to be somewhat rough, but I think 2010 is going to be a better year.”