While the baking industry is being squeezed from all sides by unprecedented ingredient costs and weak consumer spending, the in-store bakery segment is well positioned to cope with the pressure. Learn why and other trends from Modern Baking’s exclusive supermarket bakery research.
While the baking industry is being squeezed from all sides by unprecedented ingredient costs and weak consumer spending, the in-store bakery segment is well positioned to cope with the pressure. Learn why and other trends from Modern Baking's exclusive supermarket bakery research.
Some bakery operators are being pinched. Others are caught in a strangle hold. But, all bakery businesses are feeling the affects of skyrocketing costs of doing business and the economic downturn that has put less cash in their customers' pockets.
All segments of the baking industry feel the crunch, but in-store bakeries are in a better position than most to deal with, and even benefit from, the current economy. The in-store bakery segment has several advantages: shopping convenience (with gas prices surpassing $4 a gallon, consumers are looking to make fewer shopping trips), flexible production methods (chains can purchase ingredients in bulk and adjust production methods to account for shifts in ingredient costs) and comparative pricing with center-store grocery (customers are not surprised with price increases in the in-store bakery when they compare them to price increases in the rest of the store.)
“At the start of this year, I was pretty nervous we would take a hit on sales because bakery really is an impulse department. It appears customers are a little more thoughtful about what they're purchasing, but they still want a treat,” says Elise Shmoorkoff, bakery buyer, Yoke's Fresh Market, Spokane, Wash.
In fact, in-store bakery's average sale per customer is up significantly this year, reaching $3.96 per visit. And, the percentage of store customers who regularly shop the bakery also is up, according to Modern Baking's 2008 Supermarket Bakery Research. “What we're seeing overall in the store is that customers are making fewer trips, but they're buying more on each trip,” says Roland Krueger, bakery director, Buehler Food Markets, Wooster, Ohio. “We thought this would be a concern considering how perishable bakery is, but bakery and deli are doing really well. Other perishable departments are not seeing the increase bakery is.”
Bakery directors agree and are cautiously optimistic about the rest of the year. “Over the summer, more families will be staying home, which might work to our benefit with more shopping locally going on,” Shmoorkoff adds.
In-store bakeries have increased their retail prices by an average of nearly 12 percent this year to keep up with rising costs of ingredients, packaging, fuel, etc. But, according to the survey, operators say they are not losing customers.
Beginning in January this year, Modern Baking commissioned the Perishables Group, a West Dundee, Ill.-based market research and consulting firm, to conduct an independent national survey of supermarket in-store bakery operators. Modern Baking's 2008 Supermarket Bakery Survey of its readers represent more than 10,000 in-store bakeries with anonymous results compiled to determine national averages. In addition to the exclusive survey, some sales figures in this report also include scanner data from the Perishable's Group's national database representing more than 60 percent of supermarkets in the United States.
Nationally, supermarket bakeries are not feeling the sting quite as much as other segments of the baking industry, but in-store operators are greatly concerned about out-of-control costs. Seventy-seven percent of operators cited rising costs as their biggest concern this year. Of that, 51 percent are worried about ingredient costs, specifically.
Multiple costs up at once
“This is the first time I've seen the cost of everything jump at the same time,” Shmoorkoff notes. Suppliers of raw ingredients, mixes and bases, frozen and par-baked doughs as well as thaw-and-sell items increased prices multiple times since Modern Baking's last survey in 2006. In-store bakeries absorbed as much as they could before inevitably raising their retails to the end consumer. With food costs going up everywhere in the supermarket, including the commercial bakery aisle and the rest of grocery, customers are not surprised by price increases in the in-store bakery.
“We've had very little customer resistance because they're comparing prices that are up in the whole store,” says Kevin McFadden, bakery director, Schnuck Markets, St. Louis. “The media also has helped get the story out there about the commodities prices. The public is more informed than ever about wheat and flour costs.”
While customers seem to be taking the blow of higher prices, in-store operators are bracing for continued volatility in ingredient costs by adjusting product size, variety and package counts to avoid further price increases. Yoke's Market, for example, increased the price of a 16-count package of cookies from $3.99 to $4.49, and recently reduced the number of cookies in the package to 14 for the same higher price.
With all the worry over increasing retail prices, in-stores are finding “upscale” items are selling well even in this economy. “Don't be afraid to go with a higher quality product at a higher price. People will pay more for a better product. I didn't believe it myself at first, but it's absolutely true,” says Ken Downey, bakery sales manager, Kings Super Markets, Parsippany, N.J.
Among the bakery product categories, upscale dessert cakes and crusty/hearth breads, which includes artisan breads, showed the biggest increases in percentage of in-store bakery sales. Dessert cakes now represent 5 percent, and artisan breads make up more than 11 percent of average in-store bakery sales, the largest percentages to date for each category compared to previous Modern Baking surveys.
The cake category as a whole, including custom-decorated, all-occasion, wedding and upscale dessert cakes, continues to generate more than a quarter of in-store bakery sales.
Along with upscale dessert cakes, cupcakes are proving to be a growth product for in-store bakeries. Taking a cue from the wave of specialty cupcake bakeries, in-stores are dressing up the single-serve treats with more than a simple dollop of icing. Schnuck's, for example, promotes a cupcake of the month with creative flavors, such as chocolate mint and Key lime. “We're taking the trend and making it work for us by getting crazy with some of the icing colors and flavors,” Schnuck's McFadden says.
More cupcake options
Buehler Food Market has expanded its cupcake offerings with a range of products, such as cupcake cakes (cupcakes positioned together and iced as a single, larger cake), mini cakes (cupcakes removed from their wrappers, iced and decorated as single-serve cakes), piped character-topped cupcakes (bumble bees, mice, etc.), and gourmet cupcakes (with ornate icing decorations and value-added toppings, such as sprinkles, nuts and candies.)
“The retail price on these is higher. It doesn't seem to matter what the economic situation is, customers like the specialty cupcakes, and no one bats an eye at the retail on them,” Krueger says.
Donuts, white bread and bagels are among the sales decliners this year. Nineteen percent of operators reported sales declines in donuts and white bread, and sixteen percent reported sales declines in bagels.
The donut category's less than stellar performance this year can be attributed at least in part to the Krispy Kreme bandwagon that crashed and burned many in-store bakeries. As Krispy Kreme set up branded merchandisers in convenience stores, gas stations, supermarkets and other retail chains, it strayed away from its core concept of “hot” glazed donuts. The company became challenged to stock and maintain the merchandisers, and the donuts lost their glamour when they became available in so many outlets.
Some in-store bakeries even dropped their on-premise donut programs for the Krispy Kreme concept. Ironically, many in-store bakery directors were wary of the inherent problems in the branded concept, but were mandated by corporate management to jump on the bandwagon. Those in-stores that continue on-premise donut production, including frying and/or finishing, have maintained or even grown the category.
Successful in-store bakery chains have become adept at adjusting their bakery production methods to balance costs and create product lines that differentiate their bakeries. On premise baking is essential, but operators are using DSD products from area bakeries with a strong local brand and sourcing specialty items with longer shelf lives (ie.: biscotti and cookies) to keep shelves looking full on slower days.
“The key is you can't be afraid to make a change. You can't just keep doing the same thing day after day, year after year,” Downey says. “Go out to all the food shows and see what's new out there. You can't expect people to keep calling you and bringing you products.”
Healthful niche grows
Niche categories, such as products for customers with special dietary needs, are finding growth among in-store bakeries, and most operators are choosing to outsource these products rather than produce them at store level. More in-stores than ever are offering organic/natural and gluten-free products.
The percentage of operators that sell organic/natural products is up by 20 percentage points compared to two years ago; gluten-free is up 27 points to more than a third of in-stores selling the products. More importantly, more operators are reporting sales gains in the two categories. While sales gains can be attributed in part to a greater number of in-stores offering the products, organic/natural and gluten-free showed the most growth among healthful bakery products posting sales gains this year.
More than half of operators offer reduced-trans or zero grams trans fat products, although the pressure in the media from consumer health advocates seems to have lessened in recent months. In-store bakeries are taking out the trans fats where they can as part of a broader, more healthful approach to their products. “People are looking for cleaner labels, ones they can read and understand,” Krueger says.
Whole wheat/whole grain products top the healthful product category in terms of the percentage of in-store operators selling the products (86%) and the percentage reporting sales gains (61%). Just as the commercial bakery aisle has shifted its allegiance from white bread to more whole grain varieties, in-store bakery operators too are meeting demand with specialty breads and rolls made with whole wheat, rye, oats and nontraditional grains, such as spelt.
These specialty breads are more readily available from frozen dough manufacturers that have improved quality during the years. In addition, the bread category is the primary category where in-stores are partnering with regional bakeries for high-quality branded bread products. Kings Super Markets, for example, gets bread delivered daily from New York City bakeries.
While some operators are turning to regional bakeries for local favorites, others are bringing more production in-store by finishing frozen doughs and batters at store level or using mixes and bases. Mix production in the bakery actually reduces ingredient costs by 5 percent compared to frozen doughs when calculating costs as a percentage of sales, according to the survey. While labor as a percentage of sales is a bit higher with mix production (29% versus 26% with frozen production), some in-stores are seeing the light in using the labor they have for more than box cutting and shelf stocking.
“We need to self manufacture some of these products and use the labor we have,” says Sean Snoznik, bakery merchandising manager, Giant Eagle Market District, Pittsburgh.
Ultimately, quality sells in bakery, and more than half of operators say they set their prices to reflect product quality regardless of competitors' prices. About a third of operators see supercenters as their most significant competition. But, that percentage is down by three points compared to 2006 as corporate management of most supermarkets realize competing with mass merchandisers on price is a losing battle, particularly in fresh departments like bakery.
As consumer reaction to recent price hikes indicates, pricing in the bakery should be determined by profitability and the reality that the consumer price threshold is somewhat elastic if the product's quality is there. In-store bakeries have the advantage of a captive audience looking to make fewer shopping trips, so in-stores should promote their best attributes.
“Bakery is the most impulse driven department in the store,” Buehler's Krueger says. “People don't come in with a list that says, ‘I need two cream sticks, a Danish…’ It is up to us to take advantage of what we have with the aroma of fresh baking, how it tastes and the way it looks. We need to let customers know during their entire shopping trip that we are baking in the bakery.”