NEW YORK -- After 15 years of rising popularity, the in-store bakery concept is finding its profit margins challenged, as competition from alternative venues becomes tighter and the market in general matures, according to a report by Packaged Facts, a brand of the Manhattan-based consulting and research firm, Find/SVP.
The study, called The U.S. Market for In-Store Bakeries, urges retailers to reassess the role their in-store bakeries play in the consumer's overall shopping experience.
If they are successful in that reassessment, Find/SVP concludes, in-store bakeries could extend their winning streak for the next five years, at an annual compound rate of 5.3%. At such a rate, total sales would surpass the $11 billion mark by the year 2000, Find/SVP said.
According to the report, the U.S. market for in-store bakeries reached $9.5 billion in 1997, up from $8.9 billion in 1996, an increase of 6.5%. Overall, the market has sustained a solid compound annual growth rate of 6.5% since 1993.
The study notes that "the question most supermarket owners face today is not whether to operate an in-store bakery but how to operate it most profitably." Researchers note that this question is defining the current debate.
"Calculating the true profitability of an in-store bakery can be a tricky business," said Deborah Alessandro, of Find/SVP's Strategic Consulting and Research Group.
Retailers will have to be especially sensitive to the business plan of their bakeries, cautions Find/SVP, since its research foresees an eventual decline in profits as the size of the industry swells and market saturation approaches. Those companies with a strong conception of the roles that their in-store bakeries play will remain in the game.
While they are all for more of a winning thing, retailers interviewed by SN reported numerous benefits to operating an in-store bakery, besides profits. The department provides a forum for direct customer interaction, and can be a valuable source of feedback, not only on the bakery program, but the store operation in general, they said.
They can also foster the perception of value-added service, especially in those in-store bakeries where custom orders are the rule.
"We call it customer intimacy," said Ed DeYoung, director of bakery sales for D&W Food Centers Inc., Grand Rapids, Mich. "Our bakery associates play a very important role. Customers are greeted, offered samples, and have all their questions answered."
DeYoung added that all in-store bakery employees also exercise what the company calls a "10-Tile Rule," in which associates are expected to introduce themselves to customers if they come within 10 floor tiles of them, the rough equivalent of 10 feet.
Patrick Quinn, director of deli and bakery for Homeland Stores, Oklahoma City, Okla., noted that in-store bakeries not only help employees develop relationships with customers, but play a critical role in establishing a store's image.
"Bakery is one of the only service departments left in the store where the customer can go and greet-and-meet," Quinn said. "There are relationships formed, to the point that customers remember that and come back again and again."
Find/SVP researchers found that in 1997, the number of in-store bakeries reached a record 22,407, up 2.2% from 1996 and 9.1% from 1993. The report concludes that the number of units will top 24,000 by the year 2002.
Looked at another way, current in-store bakery saturation rate is at more than 74%, and rapidly growing (it was 68% in 1993).
Still, such dramatic numbers belie the fact that in-store bakeries have changed very little over the years, according to some industry observers.
Ed Weller, president of Weller & Associates, a Los Angeles-based bakery consulting firm, noted that in-store bakeries may look nicer, but they are still basically operating under the same procedures as before.
"The physical appearance of in-store bakeries mirrors the overall increase in the level of a store's sophistication," he said. "If they put in self-serve racks, they're installing beautiful oak racks, not the old wire mesh. The decor is much better."
With regard to the question of in-store operations and profitability, meanwhile, D&W's DeYoung observed that "the ability to calculate a CTO [contribution to overhead] is very easy," DeYoung. "The ability to calculate net profit is very difficult."
DeYoung said that the dual role of the in-store bakery as both a manufacturing facility and a retail outlet makes it hard to factor in all of the costs, "specifically utilities, front-end expenses, and labor."
For the purposes of its study, Find/SVP based its definition of the traditional in-store bakery on three principles: it operates as part of a larger supermarket; bakes on-site; and has as its primary mission the creation and sale of baked goods.
But because it functions in both the manufacturing and retail arenas, it is an almost unique venue in its ability to adapt to the fast pace of evolving store formats.
The flexibility of in-store bakeries provides many options for progressive-minded retailers to pursue. The report warns, however, that this asset can turn into a liability if retailers fail to develop a specific business plan for the department.
Not surprisingly, breads continue to be the mainstay of the in-store bakery, capturing the lion's share of sales in the U.S. All told, variety breads and rolls, white bread and rolls, and bagels/ croissants/muffins account for nearly 38% of total in-store bakery sales, according to Find/ SVP. Of those items, the bagel/ croissant/muffin category has shown the greatest growth over the past five years.
DeYound said D&W's newest offering for customers is a hot bread kiosk that brings fresh artisan breads into the aisles. The action station is operated by a store associate, who offers samples from an oven, where the par-baked varieties are finished every 30 minutes or so.
A renewed interest in artisan breads, made from ancient recipes, is an avenue to profits, Find/ SVP's research indicates. Variety and premium breads are moving beyond the specialty category and quickly becoming more mainstream. Focaccia, pita, and other flatbreads, crafted from Old World ingredients like olives, grains, and nuts, have all helped to boost profits amid an impressive increase in demand.
"It's quite a category," said Quinn of Homeland. "I'm in Oklahoma, and here, bread is white. French bread was gourmet. Now, [artisan bread] is getting to be common."
Quinn attributed the growing acceptance of these specialty breads to their availability in restaurants, where customers can sample the varieties before committing to purchase them in the store.
Cakes, both decorated and custom-decorated, have also maintained their traditional strong showing, accounting for roughly 10% and 9% of sales, respectively.
Most retailers report that they have extensive cake programs that include custom designs for special occasions, including weddings.