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.