Profit Margin for Bakeries

Retail bakeries increase margins by serving customer needs and delivering exceptional service.

Retail bakeries increase margins by serving customer needs and delivering exceptional service.

According to a study done by First Research, the bakery industry generated $33 billion in revenue in the United States in 2010. Commercial bakeries were responsible for the bulk of these revenues with $30 billion in sales. Retail bakeries comprised the remainder. Profit margins differ between commercial and retail outfits, as does the level of competition. For both segments, profitability is tied to operational efficiency.

Bakery Industry Segment

The commercial bakery industry segment is highly concentrated but the retail segment is highly fragmented. According to First Research, 2,800 commercial bakeries exist in the US, with the top 50 companies responsible for 75 percent of the sales. Contrast that with the 6,000 retail bakeries, of which the 50 largest companies receive approximately 15% of the revenue. In terms of product, according to IBIS World, breads and rolls accounted for the largest industry product segment with 51 percent of industry sales.

Bakery Industry

Large commercial bakeries leverage size advantages to reap higher margins. Commercial enterprises typically bake large amounts at a centralized location and distribute to tens or hundreds of sites. Small retail facilities achieve higher margins by providing excellent customer service and sought-after specialty goods. The profit margin shows how much profit is earned on each sales dollar. The average profit margin for cake decoration entities was 6.3 percent in 2006, expected to drop to 5.5 percent for 2011. As the price of inputs — including flour, butter and milk — has increased over the past few years, profit margins at some bakeries have shrunk.

Profit Margin

Profit margin is calculated by dividing profit by gross revenue, numbers found on a baker’s profit and loss statement. Profit includes the costs of all the expenses incurred in operating a bakery including ingredients, personnel, machinery and baking ware. Profit margin analysis across an industry shows which segments or specialties are most profitable. An owner can use this information to make changes to her product offerings, expand the number of locations, or switch to a different segment.

Opportunities for Higher Profit

The bakery industry in the U.S. is a mature industry, so overall industry growth is low. However, new developments in the industry, driven by changing consumer tastes, has led to higher margins in certain categories. Artisan, or hand-crafted gourmet, breads is one development. The increasing demand for natural and organic foods and the rise in appeal of “gluten-free” are another. Bakeries that cater to these consumer tastes can charge higher prices and reap higher profits.

 

References