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.”