In-stores Play Through the Rough

The past two years have proven to be a tough course for the nation's bakeries. Faced with a variety of hazards, the in-store baking industry is working its way back to par.

Jun. 1, 2010 Katie Martin | MODERN-BAKING

Many in-store bakery officials would probably like a mulligan or do-over of the past two years. While the recession may be technically over, customer spending hasn't been quick to bounce back. In 2008, the last time Modern Baking conducted its Supermarket Bakery Research, the world was a slightly different place. The economic downturn (it wasn't yet called a recession) was in the early stages, and consumer confidence hadn't yet tanked (many of us were still trying to spend our way out of a recession as the federal government told us to), but in-store bakeries were being hit by soaring commodities prices and rising fuel costs.

Now in 2010, commodities and fuel seem back on an even keel, but consumers have felt the full effects of the recession, and due mostly to high unemployment rates, they have yet to return to their pre-recession spending habits. “I think the consumer definitely traded down in 2009,” says John Chickery, bakery director, Riesbeck's Food Markets, St. Clairsville, Ohio. “In 2010, they traded down even more. Everyone I talk to is telling me the same story — sales are lagging, profit structures are down or losing growth. We're one of the few companies with bakery sales that are up.”

But it is not all doom and gloom. Bakery, although an indulgence, is often thought of as a recession-proof product because it is an affordable indulgence that many don't give up completely. And some glimmers of hope are beginning to show.

“We're starting to see some recovery,” says Kevin McFadden, bakery director, Schnucks Markets, St. Louis. “It's not been quick, but we're starting to see some areas bounce back, like the higher-end items. It's not all the way back, but we're seeing some strength coming back into our outer areas.”

Average ticket declines

In 2008, the average bakery sale per customer was almost $4, a significant increase over previous survey results. That number has dropped to $3.50 in 2010, about where spending was in 2004, according to Modern Baking's 2010 Supermarket Bakery Research. Overall in-store bakery sales have increased over 2008 levels, but much of that can be attributed to the increase in retail prices that occurred in 2008 as a result of increased commodities prices. The bakery shopper at Roche Bros., Wellesley, Mass., is spending less on average, but the company is seeing higher customer counts, reports David Hay, bakery merchandiser/trainer for Roche Bros. “People are coming in more often, but they're looking for specials and bargains,” he says.

“I think there's still a lot of people unemployed, and there's still not rampant discretionary spending going on,” McFadden adds. “The retails went up, so you got your additional sales, but your items aren't going up because the customer isn't making that extra purchase, that impulse buy.”

In-store bakery officials remain optimistic, but maybe not as much as they were in the past. More than half expect sales to remain stable this year, according to the survey, with one-third predicting increased sales. This reflects the current economic reality. To give some perspective, 64 percent of those surveyed in 2006 and 50 percent in 2008 predicted per customer sales to increase.

The percentage of store shoppers who also shop the bakery dropped to less than 22 percent in 2010, down from almost 30 percent in 2008. “It's hard to get a new customer; it's much easier to get the customer we do have to buy more. If we can sell them one more item it gives us an opportunity to move ahead,” Chickery says. In order to do this, Riesbeck's has implemented some changes in marketing and merchandising.

For its weekend product promotions, Chickery has increased the display size and instituted more sampling, which is seeing positive results. “We are doing more sampling than we've ever done and I stress ‘let the customers eat it.’ You're going to throw it away anyway, so let the people eat it,” he adds.

The company also has increased the value of some of its coupons. After seeing half and full sheet cake sales decline in 2009 despite a $3-off coupon during the graduation season, Chickery increased the coupon value to $4-off this year. The additional dollar off led to 110 more customers redeeming the coupon than did last year. “That $1 made a difference. If you take that 110 times $43, that's a lot of money, and it didn't hurt the profit margin that much.”

Cakes sales struggle

Seeing an increase in cake sales at all is a bonus according to the survey results. Decorated cake and all-occasion cake sales are down across the board. Both categories have seen a more than 2 percent drop in sales since 2008. However, another segment of the category, upscale dessert cakes, seems to be prospering. This may be due to the popularity of smaller cake sizes with lower price points that many in-stores offer, which makes it easier for customers to justify purchasing a dessert. Smaller portions seems to be what customers want, Hay adds.

White bread and rolls also saw an increase in percentage of sales, while other bread categories have declined slightly. “It's because of the economic conditions. People are looking for something a little less pricey, and certainly white breads offer that versus whole grains,” Chickery says. “Whole grains, no matter where you are in the country, are pretty high priced compared to white bread. You're going to pay $2.79 to $2.89 for a loaf of white bread, but you're going to pay $4 plus for whole grain bread.”

Schnucks is seeing something a little different in its market. It's not the traditional white bread sales that McFadden is seeing increase, rather value-added white breads, such as the white whole wheat breads or breads supplemented with omega-3s. Artisan breads also are seeing a bounce at Schnucks.

“You're really going to see that have some impact as people are looking for white bread that gives them more than the white bread of the '50s and '60s,” McFadden adds. On the commercial side, which comes under the control of the in-store bakery department at Schnucks, McFadden is actually seeing steep discounting on price for white bread, with some promotions offering two loaves for $3.

Continue to next page

Pies also saw a slight increase in percentage of sales, and in-store bakers are reporting an increasing consumer interest in pies, especially half pies. Some even report that customers are buying two half pies in different flavors instead of one whole pie, and offering variety drives sales. The spike in half pies also is part of consumers' demand for smaller product sizes. The popularity of half pies brings about a little deflation in dollars, but increases unit sales, Hay says.

However, you can't simply offer traditional pies and expect them to sell, McFadden says. Value-added pies with a twist to them are what sell at Schnucks. He attributes the increase to the fact that consumers are still eating at home. “They're looking for that restaurant experience,” he adds.

Dietary products show stamina

Consumers' dietary concerns also play a large role in what types of products bakeries offer. Whole grain/whole wheat product offerings continue to be popular, with 86 percent of operators reporting that they offer the products and 62 percent are seeing sales gains in the category, virtually unchanged from 2008.

Another dietary category that continues to garner attention is gluten-free. These products are often challenging for in-stores to produce, and those that offer gluten-free often turn to specialty wholesale bakeries specializing in the category to supply them with product. Operators that offer gluten-free products has remained steady at 38 percent, but those reporting increased sales rose from 20 percent in 2008 to 33 percent this year. The rise is sales can be attributed to two factors. Many consumers view gluten-free as a more healthful way of eating even if they are not gluten intolerant, and the number of people diagnosed with celiac disease or gluten intolerance continues to go up.

Some of the biggest changes are seen in the reduced or zero trans fat and organic/natural product categories. The steep decline in reduced trans fat product offerings (down to 38 percent from 60 percent in 2008) is not surprising, as many in-store operators reported that the trans fat issue has been mostly a governmental or legislative issue and not a consumer-driven one. For the most part, it remains an issue in only those areas of the country with bans on trans fat. In other regions, consumers are not concerned about trans fat in their bakery products, in-store bakers report.

Roche Bros.' Hay has seen his trans fat-free product offerings increase, but Massachusetts has three communities with a ban on trans fat. Instead of making a different product line for the stores in those communities, Roche Bros. decided to make its entire bakery line trans fat-free. “Sales are still good, even in communities without the ban,” Hay says.

The decline in organic/natural product offerings and the corresponding decline in sales increases are a bit more surprising. In 2008, almost 70 percent of operators offered natural or organic products, with 38 percent reporting an increase in sales of the items. In comparison, operators offering the products in 2010 dropped to only 33 percent, and only 10 percent who offer them are reporting sales gains. The drop may be explained by customers' continued penny-pinching. Organic ingredients traditionally cost more, which drives up retails, something that many may be willing to cut back on with their smaller food budgets. Companies also are beginning to see increased skepticism on the part of the consumer about the term “natural.” Currently, no guidelines govern what constitutes natural, and as more consumers read and understand labels, manufacturers are seeing increased pushback on products labeled natural.

Top concerns changing

Another sign that times have changed since 2008 are the issues concerning or worrying in-store bakers. In 2008, cost of ingredients topped the list, and with good cause. At that time, survey respondents reported that 100 percent of their suppliers had raised ingredient prices that year. In 2010, only 60 percent of suppliers were reported to have raised prices, and less than 20 percent of respondents listed cost of ingredients as their top concern. “Ingredient costs are not as big of a concern now as they were last year because the main ingredient, flour, isn't bouncing around. But there are some others like cocoa and sugar that are taking its place,” McFadden says.

While the price increases were difficult to live through, Chickery believes the increases were beneficial to the industry in the long run. “It was on the national news every day that prices were going up. It gave us an opportunity to raise our retails, which we should have done a long time ago,” he says. “It was a golden opportunity to raise retails, and nobody said a word.”

Without the increase in retail prices, in-store bakeries may not have weathered the recession as well as they did. “You don't see a lot of stores dropping retails for the most part,” Chickery adds. “Once customers get used to paying that price they will continue to do so. 2008 was probably one of the best things to happen to the baking industry.”

Ingredient costs were knocked out of first place as the main concern by labor, packaging and fuel costs. More than one-third of respondents reported those costs as their top concern. For the last several years, bakery has experienced a dearth of skilled labor, and even with the current high unemployment numbers, labor is still a struggle. “There's a critical shortage on the bakery side of well-trained people that want to work in the bakery side of the business,” McFadden adds. He also notes that as sales go down, labor costs go up because more labor hours are used by senior members of the baking team to keep them at 40 hours a week.

In-store bakery officials also are paying close attention to fuel. Chickery predicts fuel costs will rise again. “We've seen a lull, but overall I see this only as a temporary measure,” he says. “Fuel is going to go up, and due to oil-based plastic packaging, packaging costs are going to rise. I don't see them coming down.”

McFadden also expressed concern about the growing number of retailers getting into the food business, such as Target and Sears, and even Wal-Mart's recommitment to its food business. “The market we operate in has a lot of competitive activity from non-traditional supermarkets. We're looking at putting together strategies to help get additional customers in the store,” he says. “Right now, our customer counts are fairly consistent. Overall, our customer count is having some bounce back but it's not a huge jump back to what it was. We're hoping for steady.”

Continue to next page

This attitude of maintaining current levels may be the best the industry can hope for in the current economic environment.

“I see this year as being stagnant overall,” Chickery says. “I think it's going to be very difficult to simply maintain because of the overall economy. But I'm very hopeful that 2011 is going to be on the upside.”

Here's hoping.

Organic, trans-/fat-free product offerings tumble…

(Percentage of in-store bakery operators that offer products for special dietary needs; total exceeds 100% because more than one category cited)

	2010	2008
Whole wheat/whole grain	86%	86%
Sugar free/no sugar added	81%	84%
Reduced/zero trans fat	38%	60%
Gluten free	38%	35%
Organic/natural	33%	69%
Low fat/no fat	33%	55%
Kosher	19%	36%
Low carbohydrate	5%	19%
None of these	10%	3%