From food ingredient costs to labor expenses, the cost of doing business as a retail bakery owner is perhaps the single most important factor in determining your success or failure. As Rick Crawford writes in his comprehensive book, “Opening and Operating a Retail Bakery,” sales per labor hour are “huge targets. So many things have to be right. Your workflow, batch size, inventory levels are just the start.”
Crawford, managing partner of the RPIA Group, points out that when you achieve your dollars per labor hour targets, your wage percentage is always in line.
A good rule of thumb about key matrixes for retail bakeries to follow can be found in the chart below. If your percentages match up, your operation is probably in pretty good shape. But if your percentages are higher in key areas like payroll or ingredient costs, you may need to adjust retail prices or make other changes to ensure sustainable profitability.
Food Costs & Pricing
The US restaurant industry does a great job of tracking industrywide matrixes and provides a valuable comparison for you to put your operation up against.
Restaurants are typically more expensive to run than retail bakeries, but here are the latest figures. Food and nonalcoholic beverage costs represented a median of 32 percent of total food and nonalcoholic beverage sales in June 2016, up slightly from 31 percent in April and May, according to a new National Restaurant Association survey.
At 33 percent, casual dining operators reported the highest ratio in April. Fast casual operators came in the lowest, at 28 percent.
There are several different methods for retail bakeries to calculate food costs and determine profitable pricing parameters. One is the 25 percent rule in which you determine yield per batch and the cost to make each item and then multiple the results by 4. That’s your price. This calculation was a common practice in the retail bakery business in the 1950s and ‘60s when labor was more plentiful and wages were low.
Basing the health of your retail business off of gross margins became a much more common practice over the years, as labor costs and other intangible costs rose. In its simplest form, gross margin can be calculated by taking your net sales and subtracting labor, materials (or ingredient costs) and packaging. A good goal in this method would be to achieve a 44-46% gross margin.
When determining net margins, always remember to factor in all costs – both direct and indirect. According to studioD Accounting, the extra energy you use to run your production line increases your utility bill and is a direct cost of production. When an expense benefits several areas of your business, such as your rent or insurance, this is an indication that it’s an indirect expense. Some direct costs are fixed, such as the mortgage on your production facility or a shift manager’s salary. Other expenses, such as the cost of material you use to make your product, are variable because they change based on your production levels.