What Is the Profit Margin for Bakeries?
If you own a bakery, you're far from alone. There are about 6,700 retail bakeries in the U.S. that generate about $3 billion in annual revenue, according to a 2017 report by industry market research firm IBISWorld. This spells big competition in the bakery products industry, even before considering the more than 2,800 commercial bakeries that rake in $30 billion in revenue. But revenue is not the same as a profit margin. Knowing the difference and understanding your profit margin can help your business not only survive, but also grow in a world that's all about the dough.
Simply put, a profit margin is a percentage of your profit to sales, using factors that depend on what kind of profit margin you are calculating. A gross profit margin is beneficial with regard to the profitability of a single product by subtracting the total costs it took to make those scones from their total sales. A net profit margin is the preferred metric of choice when determining a business' overall profitability, because it takes into account your total revenue minus all of your expenses. For example, if your bake shop generated $300,000 in sales last year and accrued $250,000 in expenses, the difference of $50,000 would equate a net profit margin of 16 percent. Revenue and profit are important, but those alone won't give you the full financial picture.
Revenue shows how much you’ve earned and profits show how much money your company has made in absolute terms. But a profit margin tells you how much you're actually putting into your bank account, compared to your revenue. This makes it a more helpful tool in letting you know where your bakery stands financially. It can also help you determine where your time and resources may be better spent. Should you continue to churn out that jaw-dropping, 20-layer chocolate hazelnut crepe cake that draws more oohs and aahs than buyers each week? Or, would channeling those resources into those giant chocolate chip cookies that fly off the shelves daily be more beneficial?
Ignoring your margins can have a direct impact on your ability to effectively manage your emerging bakery. Understanding them will help you avoid issues with pricing and losing money on sales, both of which are the downfall of bake shops that appear to be thriving on the outside but are crumbling on the inside because of low prices and high operating costs that yield a profit of zero.
It sounds counter-intuitive, but if your bakery is just starting out, its margins will likely be impressive because of a smaller staff and lower overhead. This is particularly true in the service industry, in which a new business may see as much as a 40 percent profit margin, until the business hits approximately $300,000 in annual sales, which is also just about the time in which the business may start to hire more people. If all goes well over the next few years, increased sales will spark growth and revenue, all of which will result in more employees, a larger facility, more equipment and an expanded menu. This will lead to margin shrinkage, because an increase in sales doesn't necessarily equate to an increase in profit. However, keeping a close eye on your profit margins and making sure you are maximizing efficiency and profit on your sales will help your bakery remain on solid financial ground.
Increased competition may tempt you to implement low pricing. But keep in mind that this strategy is rarely sustainable and will make it difficult to increase prices later when you really need to, even with loyal clientele. Although it varies from region to region and the types of goods you sell, profitable bakeries and bakery cafes tend to keep food costs below 35 percent, according to industry resource Bake Magazine. Use this as a starting point to help gauge your margins. If you craft custom cakes or other signature products, keep track of the time spent on every facet from quoting prices via email to the painstaking detail on that elaborate five-layer wedding cake and appropriately incorporate that into your pricing.
If you're wondering which items you should stock more of and which items you should back away from, Bake Magazine's 2017 Retail Bakery Operations Study offers insight on bakeries' more profitable goodies:
Cookies take the top slot, followed by cakes, cupcakes, muffins/scones, cinnamon rolls and bread.
Cakes represent the largest portion of total bakery sales at 24 percent, followed by cookies (12 percent), breads/rolls (11 percent) and cupcakes (8 percent).
In the cake category, new offerings such as individual slices, individual celebration cakes, cake pops, seasonal cakes and specialty cake fillings ranked high.
Gluten-free and vegan options, particularly with cakes and cookies, showed to be the most successful new product introductions.
Limited-edition products tied to local events that are photogenic and social-media friendly are gaining in popularity. In this, think about specialty cupcakes or cookies flaunting designs that tout Teacher Appreciation Week, LGBT Pride Month or the home team's colors for that huge football game.