WATCH YOUR BAKES

JACK ROBERTIELLO

LAUREL, Md. -- The current preoccupation with home-meal replacement in supermarkets may be threatening the profitability of another, more established component of fresh-food marketing: in-store bakeries.

That's how bakery industry advocate Peter Houstle, executive vice president of the Retailer's Bakery Association here, sees it.

Notably, as chains try to get a handle on the procedural and sourcing challenges of HMR programs, the ripple effects are being felt acutely at the in-store bakeries, he said.

"I've talked to in-store people who say they're expected to manufacture breads for the prepared-food department and sell them at cost," Houstle told SN in an interview on the eve of the organization's annual conference and trade show. "What are we saying to the bakery department when that happens?"

Houstle said he understood that retailers may prefer to source products from within the store, especially if quality items with strong brand equity are available.

"They definitely want to use resources at hand, but the question is, how do you allocate the credit for that participation to each department?

Meanwhile, melding bakeries with the increasingly consolidated megachain supermarket industry isn't getting any easier, he admitted.

"I suspect most managers don't like having bakery departments. They are very labor intensive, equipment intensive and space intensive. The more you move toward scratch baking, the more these factors increase in visibility. And they not only have the problems of running a retail operation, but they also have the problems of running a manufacturing operation, to boot. It's a heck of a lot easier to put a box on the shelf."

Now, as HMR programs blossom, bakers may be reluctant to participate because it means increasing production by 10% or 20% to supply a prepared-food department at cost, he reasoned. Resultant bakery profit margins will suffer -- and managers compensated as a result of profits will be hurting their own profitability.

"I suspect that in a lot of cases, the way bonuses and compensation are determined get in the way of really effective cross-department merchandising," Houstle continued.

But apart from HMR and interdepartmental politics, the issue may point to a larger problem: the accounting process used in supermarkets which in many cases does not tell retailers which products, and bakeries, are profitable and which are not.

The classic problem is the gross-margin error," Houstle said.

While supermarkets calculate gross margin as sales less cost of ingredients, in manufacturing gross margin includes the cost of labor and packaging, he explained. But even then, applying the same labor costs to cookies and croissants skews the figures. "You apply that uniformly and you'll do a disservice to some items, and make others seem more profitable than they are."

To discover the real cost of product -- , especially important if, for instance, in-store bakeries are to be among the profit centers in HMR programs -- supermarkets must accurately allocate rent, equipment depreciation, utilities, insurance and other joint costs.

As important, and intertwined with profitability, is the in-store bakery's struggle to find employees that are consistent, of high quality and also affordable, Houstle said.

For instance, while the European heritage of traditional rustic breads may be back, the immigrants trained in those baking skills who flooded the country in the early part of the century are not.

"Most of what's been learned in bakery since then has been hand-me-down knowledge, rather than formal education. The problem is every time you do hand-me-down, there's a dilution of knowledge and skill base."

While programs like those at the Culinary Institute of America and the National Baking Center turn out good students, the graduates' experience levels are low, said Houstle.

"In-store bakeries will have to augment these programs with their own training. The people are available, but there are not a whole lot of them, and its going to take a while to build it up." But the pool won't grow when recent graduates are offered work at $6 per hour.

"Right now, you can go to an auto mechanic school and make three times what you can make leaving a bakery school," he said.

And while he acknowledges that there are some in-store bakeries with well-paid bakers, there are also chains like one Houstle knows of in the Midwest that pays bakery supervisors $4.75 per hour.

"That's not a bakery. We're seeing a lot of that 'cut the labor' going on -- and if that's the way your going to approach it, you're not going to be able to run an in-store bakery. You'll only be able to run an in-store parbaked, thaw-and-sell operation, for that kind of money. And even a frozen-dough operation requires some skill and knowledge."

As chains rely more on prebaked or partially finished products, in-store programs will be less able to differentiate themselves from commercial goods, he said.

"Because, in essence, when you buy a parbaked item, all you're really doing is taking a commercial item and sticking it in the in-store bakery. The more you move in that direction, the more you become what I call 'McBakery.'

The RBA suggests that in-store bakers focus on quality, not price, which may bring them only one in eight supermarket consumers, but ones that will increase sales per customer and margin per customer.

The result? "A profitable bakery selling fewer products to fewer people, but making more money and leaving the discounting to the commercial shelves."

Houstle also suggests that stores organize commercial bakery shelves and in-store bakeries under the same department. Keeping the two under the same control keeps bakery and grocery mentalities from clashing over merchandising, discounting and other issues, he said.

I've heard plenty of stories of the commercial aisle running a sale on coffee cake, and cannibalizing in-store coffee cake products, and vice versa, because there's a lack of coordination. And it connects to the labor issue, because you can really save by putting the money that goes into labor into the labor that makes the high-quality goods."

With commercial and in-store working in unison, then higher-ticket profitable products can come from in-store, leaving the high-volume, low-quality, low-price items for the commercial shelves. Otherwise, department managers may be tempted to continue losing money on items to boost volume, he said.

"There are some products you can make profitably at lower price points, but you have to coordinate marketing, merchandising and promotions."

In Houstle's view, judging from typical bakery merchandising, supermarkets seem to know little about their customers in light of the depth of information collected at the cash register.

"From a marketing perspective, they have a data source that most retail operations would die for -- they not only know what you buy, but when you buy and how much. Yet I've been to stores with Mercedes and Lexus cars parked outside, and inside the first thing I see is a discount bakery table. There's something wrong with this picture."