Part II: Adjust your bakery business

Bakery operators only raise prices when they have to. Most bakers, from the smallest retailer to the largest wholesaler, have had to more often and by a greater percentage during the last 12 months than any other time in recent history. While the cost of most ingredients has seemingly peaked, all bakery ingredient prices are up, and those prices likely will not go down to the level they once were.

In this article, the second in a special series on the topic, Modern Baking explores how bakery operators are adjusting business to manage relations with their customers and suppliers in the new era of volatile ingredient prices.

Bakers explain increases

Consumer reaction to increase bakery foods prices has been muted, compared with complaints voiced during other price run-ups. The sudden price surges of the 1970s were especially jarring because they came after at least two decades of relatively stable prices. Consumers who had become accustomed to paying about 29 cents a gallon for gasoline suddenly saw prices increase by that amount in a matter of months.

By contrast, modern consumers are all too familiar with gyrating prices. They may grumble when prices soar. But, they do not regard each spike as an assault on the general sense of order.

“The run-up of commodities prices this time is different because it has generated so much media coverage,” observes bakery distributor Gary Gardner of B.H. Gardner & Son, Indianapolis. “Before, if soybean oil or eggs went up, no one noticed. This time, everything went up. Consumers see increases merely when shopping for groceries. So, they are not surprised.”

The nation's bakery operators also have communicated to customers the reasons for increasing retails. Randy McArthur, owner of McArthur's Party Cake Bakery, St. Louis, set up a display in his stores' sales areas, each with two bags of flour and a placard that explained that a wheat shortage was occurring and stated, “These bags of flour last March each cost $9.82. Today each costs $20.12.”

The display also encouraged customers to sign a petition calling on their congressional representatives and senators to pass farm legislation to release acreage without penalties to farmers to increase wheat production and to refocus grain production geared to food needs from biofuel uses. An accompanying map displayed congressional districts and contact information for customers.

“Customers thanked us for informing them,” McArthur says. “They may be angry with the higher prices, but at least they're not angry with us. And, they see that we as bakers are trying to do something about them.”

In company-owned Panera Bread stores, managers posted counter cards, which explained that “because of escalating wheat, dairy and transportation costs, we have adjusted prices on some select items in order to maintain the quality standards our customers expect from us.”

Panera's CEO Ron Shaich notes that his company in some ways has benefitted from the media exposure of wheat prices. “Customers have heard so much about inflation in these products on the nightly news and have seen it in the grocery stores,” he says. “They are giving folks like us permission because they fully understand the necessity. They don't like it, but at least they understand.”

Dan (Klecko) McGleno, who operates a specialty wholesale bakery, St. Agnes Bread Co., in St. Paul, Minn. pursued another tack. Unable to personally meet with each of his 200 wholesale accounts, he contacted the business news department of the Minneapolis Star-Tribune. He provided information about the impact of higher ingredients costs on bakers and included market statistics and background from suppliers. He also offered bakers' names as sources to interview.

“The resulting article thoroughly covered the situation,” Klecko says. “The report helped to validate the price increases we've had to pass on to clients. Instead of personally contacting each account, I sent the article with the price increases to them. We didn't receive one complaint.”

Lynn Shurman of Cold Spring Bakery, Cold Spring, Minn., has sought to educate employees as well as customers. As a matter of practice, each employee pay envelope once a month contains a note regarding the bakery's operations. “The latest notes have explained the higher operational costs and increased retail prices to all employees because we want to ensure they understand what's happening,” Shurman explains.

Higher prices way of life

U.S. Department of Agriculture and other crop forecasts suggest that prices for major bakery ingredients have topped but that they will remain volatile and at high levels as the United States and other producing nations seek to rebuild stocks. Further, the U.N. Food and Agriculture Organization and the Organization for Economic Cooperation and Development in a joint report said they do not expect the current price levels to last.

But, the average of most agricultural commodity prices during the next 10 years will still exceed the average of the previous decade by 10 to 50 percent, depending on the commodity, the report states. Compared with the previous decade, wheat and feed grains prices will rise 40 to 60 percent, vegetable oils more than 80 percent.

“The days of cheap commodities are over,” Gardner notes. “Long term, we'll never see commodities prices as inexpensive as they have been during the last decade just because of the world situation. The mid $20 per hundredweight could become the new benchmark for flour; and that assumes good crop years.”

He adds that commodity prices likely will fluctuate at the same time, rather than move individually. “The price of oil didn't affect grain prices; now it does,” he says.

Shurman and McArthur say they see little relief in higher ingredient costs until Congress establishes an energy policy that focuses more on food and less on fuel.

Bakery operators and distributors say higher operating costs and ingredient price volatility are setting up a scenario for a shake out of sorts in the industry.

Compared with their fathers and grandfathers, “bakers and distributors today are more in tune with what it takes to run their businesses. They are more educated,” observes an East Coast bakery distributor who asked not to be identified.

“Still, some distributors will go out of business,” he continues. “This won't happen quickly but over the next couple of years. The same thing will happen to marginal bakeries that lack staying power.

“They're paying their bills and running down inventories, but they're tapping their credit lines or using credit cards to get by. The closures will begin when their accountants say they lost money in 2008 or when a distributor refuses to ship ingredients.”

Bakery operators must understand that the business climate is completely different, and that they cannot continue to do business the same way as in the past, McArthur says.

“They must accurately determine how much money they're making and establish a profit level necessary to support a decent living,” he counsels, “and then decide what to do to achieve it. Move the store? Change from retail to wholesale? Wholesale to retail? Open another store?”

Adjust to new business climate

Distributors and their bakery operator customers are an adaptable lot, able to adjust quickly to changing conditions. The last nine months have tested them, and they have survived. Yet, challenges remain.

The successful operators will be those who continue to do what they have always done: offer customers the products and services they want, produce the best possible product quality and price the products to return a fair profit.