There’s little doubt that bakeries are big. Bakeries, pastry shops and bagel sellers are growing at a rate of 5%, according to AnythingResearch.com.
When launching a bakery program, convenience store retailers are urged to start with an in-depth market study that profiles the target customer base, current sales in the market area for the product category, pricing and product features of competitors, plans for differentiation in the proposed products and expected sales, noted Kirk O’Donnell, vice president of education at the American Institute of Baking.
There are a few convenience store chains the industry can point to that produce their own fresh-baked goods, from breads to doughnuts and muffins, in their own commissaries. Names like QuikTrip, Sheetz, 7-Eleven and Circle K are among the prime examples.
Each of these companies has earned the scale to justify food-focused buildings and the corresponding distribution network. For the vast majority of chains that do foodservice, commissary operations just don’t make sense, especially since the category accounts for a small portion of revenues.
The alternatives to proprietary baking are co-branding with a QSR, delivery of packaged products or a heat-and-serve frozen delivered product.
Going to Market
Gilligan Oil Co. in Cincinnati recently chose the first option, partnering with Dunkin’ Donuts in six of its 35 locations. Too many chains to reasonably count choose to simply have doughnuts, muffins and sandwiches delivered fully formed and ready-to-eat. Some, such as Stripes of Corpus Christi, Texas; Nice N Easy of Canastota, N.Y.; and High’s Dairy Stores of Baltimore, decide that some form of preparation and oven work is best.
Stripes is well-known regionally for its Laredo Taco Co. foodservice brand. Its Tex-Mex menu brings in a higher percentage of profit than many proprietary foodservice operations, a plan cooked up in the late 1990s by executives who foresaw the decline of cigarette sales.
Tortillas, burritos and soft tacos are all staples on the menu. Stripes makes them fresh on-site in each Laredo Taco location, and accounting is only part of the reason, said director of category management Wendell Funk.
Funk noted Stripes did try to buy the tortilla dough, but the flavor profile wasn’t right. “It just didn’t come off as original,” he said.
The company even waited to install the Laredo brand in the stores they purchased from Town and Country in 2007 until the locations got the right equipment—mixers, fridges, grills.
Each grill and prep area is visible to customers, so part of the attraction is watching the tortillas—lumps of dough refrigerated overnight—flattened with rolling pins and heated on the grill. The theater, sights, sounds and smells all contribute to Laredo’s success.
Pat Kelly, director of foodservice purchasing for 75-store High’s Dairy Stores, said 55% of High’s bakery sales come from the doughnuts it bakes and ices each morning. High’s muffins, cookies, Cini-minis, Danishes and bagels add another 1-6%. Kelly said a baking program can produce as much as 25% of a company’s foodservice sales.
High’s baking operation began 15 years ago under the Bakers Blvd. brand. Stores proofed and baked breads, sub rolls and hot dog rolls, as well as cinnamon logs and cookies. As freezer-to-oven products improved, labor and consistency became more efficient. Each baking location now has a Deluxe convection oven.
“It can be quite a large investment in equipment alone, not to mention the daily labor, training, product development and advertising,” Kelly said. “Consistency is a challenge, especially with multiple locations, which is why it is so important to have continued training on product preparations and quality control, as well as foodservice sanitation and safety.”
Nice N Easy features three different methods in its bakery offer: thaw-and-serve, freezer-to-oven and fresh baking. Thaw-and-serve has the advantage of no labor, but also has low margins. Fresh-baked muffins boast higher margins, as well as higher-quality taste. The freezer-to-oven Danish sticks and scones produce the best margin and high-quality taste.
Executive Vice President of Foodservice Jack Cushman said Nice N Easy is also testing a freezer-to-oven European Danish. The chain uses local bakeries for doughnuts, as well as thaw-and-serve, and takes the margin hit on the non-customized item. Cushman said other higher-margin products compensate for doughnuts’ low margin.
“The trick for us is having a convection oven that can make cookies, sub rolls and the baked goods,” Cushman said. “One convection oven can do a lot of things and is great for the lunch and morning dayparts.”
For retailers considering proprietary baking, Paul Sapienza, vice president of operations for the Retail Bakers of America, said operators can realize a 10% net profit. Working backward from that number, Sapienza said gross profit has to be 50% (50% of the sales price should be for labor and ingredients and packaging).
Salaries might take up 18-20% of that gross profit, with what he calls “factory overhead or physical plant” gobbling up 10-12%. Administrative expenses hack the net profit down to around 10%.
A good place to lock in margin is in healthier flours, like wheat and multi-grain. “They don’t cost much more than white flour,” Sapienza said, “and people will pay a premium for healthier.” However efficient a system, he added, and whatever products are offered, two aspects are mandatory: cleanliness and a quality product.
Convenience retailers across the board are rolling out innovative approaches to boost their foodservice sales, and many are looking to the trusted breakfast daypart as a proving ground for new ideas to lure customers.
This means plenty of opportunities for bakery and foodservice suppliers, who have shown willingness to work with retailers who want to boost sales with add-on bakery purchases.
In some cases, bakery offerings like muffins, doughnuts and rolls are being conceptualized and produced entirely by retailers who manage the entire supply side of foodservice, such as with Sheetz and Kwik Trip.
Sheetz, for instance, unveiled its new Sheetz Bros. Kitchen in 2008, a colossal facility that will help the chain develop new menu items for Sheetz bakery products, such as Shweetz doughnuts, cookies, muffins, cinnamon rolls and more.
Sapienza and Kelly both agree retailers should rely on vendors for guidance and consumer trending data when developing their own programs.
“Vendors can keep you up to date on what’s on the horizon in the baking industry,” said Kelly. “Remember, this is what they do and do well, so listen and experiment.”