PHILADELPHIA -- True profit per item is an elusive measure for the in-store bakery -- and the Retailer's Bakery Association is trying to help supermarket executives pin it down so they can use it in category management.
Peter Houstle, RBA executive vice president, told attendees at the Laurel, Md.-based trade group's convention here that in-store bakeries have to uncover their labor costs per product, or they'll never really know how their departments are performing, much less be able to plot out how to make them better.
"It's the key, if you're going to use category management," he said.
During a convention seminar, Houstle said RBA's recently completed profitability matrix computer program can help bakery executives evaluate the true, or net, profit on each product.
"Calculating the true profit on items manufactured in a retail environment is particularly tricky because you're in a constant battle with grocery mentality," he added. Profit on grocery items usually has been figured in terms of their gross margin, a measurement too simple for fresh bakery.
"That makes sense if you're just taking things out of a box and putting them on a shelf; but when you're manufacturing a product from scratch or a mix, there are a lot of variables to consider. You have to factor in such elements as labor per product, and what about the costs of display fixtures and checkout? Those may be joint costs, but they're still costs. Until you know what percentage of the retail price they represent, you won't be able to find out how much money you're making on a particular item," Houstle explained.
RBA's profit matrix program provides data on the times required to execute various phases of production, based on extensive time-motion studies carried out in conjunction with the American Institute of Baking, Manhattan, Kan.
Labor is the biggest variable when looking at how different products perform for profit, Houstle pointed out.
"In fact, when you apply labor to the mix, you may find that the product that has the highest gross margin is not making you any money at all," he said. By the same token, a product with a smaller gross margin could be the best contributor to the bottom line, once labor is factored in.
"When you can identify the specific labor cost as a percentage of the retail price, it tells you if you are truly making money on a particular item."
In that respect, retailers can determine what production method is best for particular products, he said. The matrix compares the labor costs of scratch, mix and frozen for each of more than 50 products.
Besides helping to identify the most practical, profitable production method for each product, the matrix can help spot production bottlenecks, set production standards and identify the department's cash cows and dogs.
Houstle emphasized the need for tailoring production methods, as well as product mix, to each individual store.
"For instance, there may not be enough skilled labor in your area for a scratch or mix operation. The manufacturer's answer to that is thaw-and-sell products," he said.
"You also need to think of the value of mechanization to your particular operation. For instance, at low production volumes, mechanization may not be the best way to do it. After a short production run, if it takes 20 minutes to clean the cookie machine, you're better off doing them by hand."
Also, he urged retailers to think about the effect of mechanization on the product itself. "Cookies will no longer look hand-made. You need to know whether that's something that's important to your customers. Quality is not just making the best product; it's making the right product for your neighborhood. You really have to decide whether yours is a McBakery or a Le Bakery."
What's more, products and merchandising must both be consistent with the type of retailer running the in-store bakery. If price and convenience are the priorities, the product mix, marketing strategy and merchandising should be in line with that, he said. If the retailer has a quality niche in an upscale market, price is not that important and assortments in the bakery must reflect that.
"I recently went to a supermarket that had Mercedes and Jaguars and other cars like that taking up most of the parking lot. And what did I see, right inside the door? A rack of day-old doughnuts at a special price. I asked myself, what's going on here? I don't think this is a day-old doughnut market.
"Your aim should be to deliver a quality product that your core customers want at a price they're willing to pay -- and make money doing it," Houstle concluded.