Maintaining profitability can be a challenge for any business owner: A 2017 study by analytics firm FactWorks found 45 percent of small businesses consider it a major challenge. In the bakery industry in particular, profitability is subject to changing commodity costs for ingredients.
“Costs change a lot—eggs, butter—they fluctuate a lot,” says Libby Godecke, owner of Chicago Custom Cakes. To keep track of industry ups and downs—and make sure she’s bringing in more money than she’s spending—Godecke monitors her expenses, ingredient inventory and product pricing closely. Her recipe for bakery success constantly evolves, because in the vast and diverse world of baked goods, not all products are created equal—or with equal costs.
For Carissa Waechter, who opened Carissa’s The Bakery, a full-service retail bakery in East Hampton, New York, last year, finding products that allowed for the best margins was a bit of an experiment.
“We had our standard lineup of breads and added pies and cakes and all this stuff to see what sticks and what people are really looking for,” Waechter says. As the bakery continued to fill its shelves with different baked goods, Waechter’s team was careful to track two key metrics. The first was the profit margin on individual items, which measures how the retail price of a product compares to the cost of the ingredients, labor and packaging needed to make it. The second was the amount remaining at the end of the day, because high food waste can quickly negate any profit made on the items that sold.
The sweet spot lies in items that are both profitable and sell well, Waechter says. One unexpected winner? “We weren’t sure if people wanted custom cakes at first, but they do,” she says. And custom cakes satisfy both business goals: They’re more profitable than other bakery items, and because they’re custom-ordered, food waste isn’t an issue.
Here are some other considerations to improve your bakery’s profitability.
Size up the Cents
Understanding the costs that go into every single product is imperative to building a profitable operation, says Beth Fahey, owner and operator of Creative Cakes Bakery and Café in Tinley Park, Illinois. “Bakers need to do costing on every single product at least once a quarter,” she says. “We use a program called BakeSmart that [helps you analyze] your direct costs—your ingredients—as well as your indirect costs like labor and packaging.”
Those indirect costs are easy to overlook, but they’re perhaps the biggest piece of the profitability puzzle. “Time is everything in the bakery world,” says Waechter. “You may think something is cheap to produce because of low ingredient cost, but if you’re spending all this time making it or packaging it or selling it, it gets expensive.”
To understand those intangible costs, Waechter breaks down the time spent on each product and assigns a dollar amount to the labor hours. “Treat your time as though it were flour or sugar,” she says. “And at the end of the day, if something is not making any money, cut it from your offerings.”
Godecke, for her part, notes that wedding cakes cost more to produce than other bakery offerings. “It costs more money to acquire brides,” she says. “I have to exhibit at wedding shows, and those costs add up.” She says that the payoff is worth it, though, as wedding cakes bring in the most money.
Chicago Custom Cakes is a small but stable business, and Godecke has grown comfortable juggling expenses with profits, knowing it sometimes means saying no to business.
“It’s just the nature of our business,” she says. “We can do a fair amount of volume, but if people need 500 cupcakes three weekends in a row, I know we won’t be able to produce that efficiently.”
Trim Costs to Boost Margins
In addition to calculating how the cost of time impacts a bakery’s profit margin, Fahey urges bakery operators to measure employees’ productivity. “Track forecasted labor against actual labor, and track sales per man-hour—that’s an immediate tell on efficiency,” she says. “In the winter, for example, we’re running at about $20 of sales per man-hour. But in the summer, we manage to do $60 per hour per person.” Consider online management software like Teamdeck or Harvest Forecast, which can be useful in measuring productivity.
And as always, the actual ingredients still play a starring role in reaching profitability. Seek out ways to shorten your ingredient list—and achieve economy of scale and less costly food waste—while still selling customers exactly what they want with multiple products.
“I have three mother recipes that I use as bases, so I always know I’ll need those particular ingredients,” Godecke says.
For instance, she says, vanilla and lemon cakes—two of her staple items—leverage the same foundational ingredients, so she can confidently buy those items in bulk, without fear that lesser-used ingredients may go to waste.
Bakeries can also look into swapping a large number of costly scratch ingredients with a small number of versatile premade mixes, which can also save production time.
Simple and sweet? That’s a recipe for success.