JACKSON, Mich. -- After attaining annual sales in excess of $10 billion, the period of exponential growth for in-store bakeries may soon be coming to a close, according to industry observers.
According to the most recent study of ISBs by Kalorama Information, the New York-based research firm, the annual growth rate of retail bakery sales is expected to top out in the five-percent range due to market saturation, and the effects of store closings and market re-alignment brought about by industry consolidation, among other factors.
Still, ISBs are hot properties, and retailers have realized that they are high-profile departments with an ability to attract customers and dollars. But calculating profits in retail bakeries is no easy task. Unlike other departments, ISBs are more than just a merchandising center; they are also a manufacturing facility that requires skilled labor, a multitude of raw ingredients and a physical plant that goes beyond simple refrigerated cases or dry gondolas.
Dawn Food Products, based here, has participated in the evolution of the ISB into a store destination that indeed holds high profit potential. But, in becoming a destination, the bakery has become a department with special needs, which are often beyond the grasp of mainstream supermarket executives.
Specifically, retailers confess that they are inexperienced in running the ISB's manufacturing side -- and calculating the various hidden costs that go with it. In such a case, they are turning to suppliers for guidance in determining how best to deploy the ISB's limited resources. This strategy encompasses determining which items are sourced ready-to-eat and those made from scratch; where to focus labor; how to cost ingredients effectively; and maximizing customer service.
"The competition really exploded recently, and it's important that the in-store bakery has a point of differentiation, and knows how they're going to go out and capture that consumer for the (sale)," said Dave Kowal, vice president marketing, Dawn.
With ISBs "at a crossroads," Kowal sees bakery product manufacturers like Dawn taking on even more responsibility in supplying retailers, not only with ingredients and finished product, but also with after-sale support in the form of merchandising and marketing.
"It's no longer about us trying to sell product to our (retail) customers," he said. "It's selling product 'through' our customers, to the consumer, and coming to the table with everything required to do that."
Founded in 1920 as a retail bakery, Dawn Food Products today manufactures fillings and icings, cake mixes and bases, ready-to-sell cakes and a wide variety of related items. But more critical for the ISB, Dawn also provides a level of expertise that is problematic in a typical ISB.
"It's not just about product," he said. "You need other services and resources, like merchandising, point-of-purchase, and a calendar of promotions to drive top-line growth around your product.
"And, then, it's important to have some of the market information on consumers, and where they are going to buy their bakery products," he continued.
One piece of information Kowal is eager to share with retailer customers is that manufacturers, in general, have been able to develop products that taste like they're made in-store, from scratch.
"Today, you are able to get scratch quality in a frozen form, a more convenient form," he said. "And, that quality has been driven by the fact that there isn't any labor in the stores to be doing everything that you want to in terms of quality."
Removing the skilled labor variable from the retail business formula has been a key driver to the success of ISBs. Manufacturers like Dawn fill the void by developing products that either are delivered pre-assembled, or require no special knowledge to finish.
Most recently, Dawn acquired Grandma Knaub's, a company that manufactures ready-to-sell cakes. ISBs can sell them as-is (dome packaging is included), or use plain, assembled cakes to be decorated in-store, if the bakery has a decorator on the staff.
Likewise, the company has introduced a new premium frozen cookie dough line, called Cookie Jar Classics. The frozen pucks include higher-quality ingredients (and particulates) than those found in traditional frozen doughs, said Kowal.
"We saw that there were a lot of (companies) competing for price around cookies," he said. "We concluded that the consumer is willing to pay a little bit more for indulgence items like cookies, if we put that same amount of money into the ingredients."
According to Kowal, the program has been a win-win situation for retailers, consumers and the company, because "it drives the top line, and produces better margins for the in-store customer."
These types of value-added products, designed to ease the burden that scratch production places on ISBs, have allowed supermarkets to concentrate on customer service and merchandising the finished products. Dawn Food Products provides its retailer accounts with a number of proven after-sale support programs.
"We tell (retailer customers), 'Here are four or five ideas to help you sell more cookies or more cakes or more muffins,"' said Kowal. "'Here's better placement; here's how you use POP; here's some pricing strategies that work pretty well.' Part of our job is to act as this resource for our customers, because they don't have the time to do this."
Kowal believes ISBs can learn a great deal on merchandising baked goods by studying the popularity of bakery cafes. Some forward-thinking retailers have been quick to catch onto the trend, and have either opened their own concepts (usually a coffee bar format) or have entered into lease agreements with independent operators.
"I think there's a lot to be learned from this segment because they do a really good job of connecting the right products with the right service with the right segment of the customer base," he said.
The fresh meals department is another area that has yet to be fully utilized by ISBs to expand their influence outside of the traditional bakery department, noted Kowal.
"The grocery industry sees home-meal replacement as a real growth trend," he said. "Every meal has two or three bakery plays built right in, from a roll, to a corn muffin, to dessert."
If an ISB can increase the value of the overall meal in the eyes of the consumer, then the resulting meals sales boom will certainly increase the value of the bakery department in the eyes of store management, added Kowal.