What’s not to love about a bakery – the smell of fresh coffee and sugar with traces of cinnamon, a display so enticing that makes you forget any health-related promises you made to yourself, choices of bread that take you back to the ancient art of baking. Everything I mentioned and more suggests it is a promising business.
In reality, the underlying picture is a bit more complicated. The bakery industry is quite a bit more challenging than first meets the eye.
This piece will deep-dive into the nuances related to opening your baking empire. We promise it won’t be as glamorous as the food network baking shows, but it will be just as educational. We will break down the economics of a bakery and solve this long-pending mystery of how much bakery owners make!
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Dive Deep Into Bakery Economics
For those who naively think running a bakery is a breeze, let’s take a look at why it is one of the more complex formats of restaurant operations. Yes, flour is cheap, but organic butter is not – you cannot have a good croissant without good butter.
Now, mix in the low margins. Combine that with zero possibility of left-overs, remember baked goods tend to spoil or stale by the end of the day, resulting in a considerable loss of money.
So, the solution is just to make fewer croissants? Not only is making fewer croissants even more expensive, but you could also lose customers to another bakery. Nothing is worse than a line out the door and running out of your bestseller. Seeing dollars walk away is the most heart-wrenching feeling in the world.
Now, think about all the products, your favorite cafe sells, and the underlying economics of them. This thought process is not to say bakeries are not profitable; in the US alone, bakery retailing is a more than $3.5 Billion industry. Before entering a new endeavor, one should understand the financial construction of the business, and that is what this piece is attempting to do.
To understand how much a bakery could be making, one easy way to go about it is to dissect its components. Understand which are the venues that contribute to the revenues and costs. This analysis is what we will do in this article.
Analyzing the product offering can give a good insight into the kind of margins the bakery has the potential to make. In our croissant example, we saw that the game was about the volume and not high margins. But, if this croissant sold with a drink or coffee, this could increase the margin of that bundle and the entire business.
Often bakeries sell salads, drinks, candies, chips, etc. along with their products to get a wider and stronger margin.
Product-Related Questions You Should Consider
What Are Your Current or Expected Bakery Margins?
Some products provide high margins while some are there to increase foot traffic to the bakery. Looking at the product range can give you an estimate of average margins.
An interesting thing to note here is a small ingredient tweak can make a significant change, for example, pink chocolate. It is not just a fun way to ramp up traditional frosting, but also customers are willing to pay extra for the exquisite and cool factor.
Another example is alcoholic desserts. Cocktail cupcakes, rum cakes, pie with shots – all of these are priced much higher than standard desserts even with little or no alcohol content (remember to have all proper licensing to serve alcohol). Looking at the products along with the ingredients and it’s selling power gives you a better estimate.
According to most bakery owners, cookies, cakes, donuts, and bread are some of the top-sellers in their bakeries. Out of these, cookies and cupcakes are some of the more profitable items. They also revealed that “gourmetization of the product” helped them improve their profits. For instance, themed cookies can sell for as high as $2/piece vs. traditional cookies that sell for $4/dozen.
Paul Sapienza of Sapienza Bake Shop in Elmont, New York, puts it best when interviewed by bakemag.com, stating that “If you can figure out the ingredients and the labor, I wouldn’t stray from 50% gross profit.” He suggests the key to bakery success is knowing your market; “Every bakery, area, and market differ. You must figure out your own market.”
Some rough estimates of typical product margins on baked products range between 25% to 35%. The key drivers here are the quality of ingredients, pricing, and wastage. We see most mom and pop bakeries operate with a food cost of goods under 35%.
Are You Accounting for Daily Fluctuations?
Next, you could look at the range of products and their performance on specific days of the week. To explain this better, think about pastries. Many bakeries avoid having a more extensive range of pastries on Monday and Tuesday as people are less likely to indulge after a decadent weekend.
Understanding the product and the days it sold on will give you insights into possible revenue from the product line.
Is Your Bakery Adjusting for Seasonality?
Next, look at the seasonality factors and also include those. For instance, after the fasting of Yom Kippur, customers flock around to feast on treats. During those days, sales can go up a lot and generate substantial revenues for neighborhoods close to that faith.
During the school holidays, families are away, and this tends to result in less consumption in suburban areas. Understand which are the seasonal factors affecting the bakery, and account for some adjustments accordingly.
Have You Thought About Product Packaging and Presentation?
Artisanal packaging and presentation is a major contributing factor to the success of a cafe business. It is not just a way to stand out and be Instagrammed by the crowd but also can fetch higher prices for the relatively basic products.
When it comes to bakery products, there is a famous saying, “you eat with your eyes first,” this still stands true and can determine higher margins.
Have You Reviewed Your Portion Sizes Lately?
Portion sizes is another aspect worth analyzing carefully. Think about cakes as an example. Historically, we usually only got a full 2-4 pound cakes from the bakery. Later, they realized the potential of sliced cakes and individual-sized pies and started selling those to increase overall sales.
Mini or bite-sized desserts are another trend that can bring in higher margins and also encourage people to buy multiple items off the menu.
Portion sizes can help you predict sales volumes while simultaneously increasing margins.
Don’t Stop There!
Further, ask questions on the lines of: How often are new products introduced? What can you do with the leftover products after their shelf life? Does the bakery only sell in-house goods, or also branded external goods and make a substantial margin on those?
Answers to these factors and questions can help get a first estimate of the revenue potential and margins of the bakery.
Location, Location, Location
Finding the right space for a bakery is difficult. With the need for adequate spacing, specific permitting, and robust kitchen setups, this is a long list to fill. Now add in need for decent foot traffic and street signage, that is affordable, finding the perfect bakery location is nearly impossible.
This list of requirements and the related location impacts rent cost and pricing; thus, it is of significant importance when thinking about your bakery business.
Analyzing the location will help you estimate demand for your products in a few different ways:
Number of Potential Bakery Customers
Understand the demographics of the area. For instance, if the area has a large proportion of retired people who love to spend afternoons with coffee and baked goods, then it is positive (assuming you have affordable options). If the area has a lot of school children who look for sandwiches and treats, add another checkmark. If the area is adjacent to a considerable gym franchise, you can safely reduce a point (they are looking for smoothies, not chocolate cake 🙂 ).
Analyzing the crowd in proximity to the bakery and those in a short driving distance will help determine the expected footfall for the bakery. To make your analysis more comprehensive, you can also include commercial customers.
For instance, hotels, galleries, and other restaurants (that may serve your baked goods) could also be potential wholesale customers.
Competition in That Existing Location
Bakeries do not just face competition from other bakeries, but also supermarkets (e.g., cheaper sliced bread), and home bakers. Further, other food establishments have bakery products as part of their menu, for instance, coffee chains, or even restaurants. These establishments have in-house bakeries and also make their product available for taking out, adding to the competition that traditional bakeries have to face.
Charting a competition landscape, and comparing the bakery (and other establishments) you are analyzing can help you estimate a rough market share.
Rent costs, utility prices, time and behavior trends (average earnings for an area, family size, etc. are all available), willingness to pay are some of the things that can be determined by the location as well. These things will add up to total expenses, which tie in directly to actual profits.
Also noteworthy is location does not just refer to the neighborhood but also the nature of the area. For instance, if the bakery is inside a mall, or on the main street, on the campus.
Types of Bakery Owner
The bakery owner’s professional background plays a role in influencing the operation and the associated cost.
A bakery cannot run without someone who has baking knowledge and expertise. So when the owner is not from the same field, he/she usually hires someone who is from the industry, and that poses a significant expense for the bakery.
An owner with a baking background can himself plan the back-end of the business and also participate in the baking process. He will know the best practices, ways to optimize operations, optimal storing methods, better than an outsider.
This in-house expertise not only helps avoid the cost of hiring an expert, but this bakery specific knowledge also helps bring down costs and optimize operations.
The operation style or structure largely influences the costs and related profits. Operating factors include how the bakery is serving the customers, the size of the in-house team, and how technologically advanced the bakery is.
For instance, a sit-in versus take-out bakery will have a significant difference in their operational costs. Bakeries can take many forms. To name a few:
- Cafe-style: Where the bakery will have space and infrastructure for people to dine-in
- Self-service counters: More like a drive-thru, or order online and pick it up
- Food-Trucks: Like any other food-truck but selling bread and pastries and other bakery items
- Ghost bakeries: This new form is emerging where the bakery would just take orders online/via phone and deliver them. They do not have a physical location for sit-ins or pick-ups.
- Chain/franchisee: When a bakery has more than one location under the same brand. Even under such a format, the operation style could vary widely. Some chains have their production centrally and sell at different locations. Some chains have separate in-house kitchens to manufacture their products.
Next, technological advancement helps reduce costs. There are several tools out there for bakeries such as an app for cashiers, inventory management tools, menu management, marketing tools, optimization tools (reports to see which items are selling the best or at which time footfall is at peak).
These programs are not that expensive and can be managed by the owner. Staff and their competencies determine the salaries, which make for a bulk of fixed costs.
Operations cost also relies on baking methodology. Whether everything’s baked from scratch in the kitchen, outsourced, prepared from frozen materials, and supplied by local/organic/international vendors, have an impact on the cost of production of goods.
Analyzing the overall operations will help determine the total costs.
Start up Cost and Ramp up Phase
Start up costs help determine the timeline for the bakery to break-even and make profits.
To understand start-up costs, you first need to consider if the bakery was built out from scratch or took over an existing business. The start up costs vary a lot between these two situations, and usually a custom build out is quite a bit more expensive.
For context, buying an established business means you already have machinery and equipment in place, an initial stream of customers, negotiated vendors, suppliers, and so on. They may even have staff on hand and acclaimed recipes you can expand on. Albeit case to case, buying an established bakery is usually cheaper than having to start from scratch.
Most importantly, buying an established business usually can help you reach the break-even faster (assuming there are no issues with the location or the business).
Basic equipment is usually the next significant investment for a bakery after they have their operational space. These investments include items like mixers, cabinets, dough press, sheeters, rounders, dividers, ovens, to name a few. Understanding what the scope of equipment your bakery business will need will help you better understand these related costs.
Other expenses that you generally include in the startup costs are licenses, lease, furniture, staff, design, repair/construction.
On an average, bakeries take about 1.5 years to break-even but this is highly subjective and variable.
Pricing in the bakery business is complicated. It is difficult to account for factors like long preparation time, wastage, overheads, variable inventory. Many bakeries are unable to tackle this and price the products solely on factors such as market price and demand. As a result, they never break-even or run profitably.
When you are analyzing the bakery, ensure that the bakery has the potential to make profits by charging relevant prices or by reducing the costs. While this might not be so easy at the start, eventually costs can be controlled by several optimizations.
Try to analyze if the bakery has the potential to take such optimization steps.
There are over 6,000 retail bakeries in the United States, bringing in over $3,000,000,000 in combined revenue annually. That puts the average revenue per bakery at about $450,000.
The 50 largest companies (brands) generate over 75% of this $3 Billion in revenue (as stated by Bakery and Snacks). For those thinking about the retail bakery space, this means that the average sales per unit are likely less.
Even with the challenges of the larger market participants, achieving a few hundred thousand in annual revenue is not unrealistic. Most bakeries, on average, generate over $1,000 a day in sales, resulting in $365,000 in annual sales, approaching the $450,000 average mentioned above.
How Much Do the Bakery Owners Make?
This article had one goal, to answer your question about how much bakery owners make. Unfortunately, we had to educate you a bit about the industry to understand how we could adequately derive these numbers.
The profit margin is highly variable for the bakery industry due to many of the components mentioned above. However, industry averages can give some insight into the potential of the bakeries. The most profitable bakeries have a gross profit margin of 9%, while the average is much lower at 4%. The growth of profitable bakeries can be as high as 20% year over year. While a large number of bakeries never reach the break-even, a handful of them can even have a net profit margin as high as 12%.
Now that we know the net profit margin and its drivers. We can compare that to annual sales to get accurate dollar figures. A 9% net profit margin on $450,000 in sales equates to $40,500 on an annual basis.
For those underperformers that have a net profit margin of 4%, this looks more like $18,000 annually. Now, for those fantastic bakers, with a 12% net profit margin, they can see over $54,000 annually.
The bakery space is a creative outlet for bakers but also requires a solid business understanding. Reliance on aesthetic shelves and aroma-filled dine-ins is not sustainable. The baking dream has to be supported by a strategy that can yield a profitable business. This article is a framework that not only helps you determine the earning potential of your bakery but also helps you break down the business to drive more profits.