September 28, 2015 - 12:34pm
Gross Margins and Net Profit
I'm in the throws of generating a financial plan for a bakery in Silicon Valley I would like to open. I have a couple questions on which I would like some input. I have scoured the internet for answers to the profit margin questions to no avail. So here she goes:
- Range of gross profit margin percentage [(sales-ingredient cost/sales)100%] for artisanal bread
- Range of net profit percentages (GP-Other Costs/sales)100% for artisanal bread
- Same questions for croissant
Any input or suggestions are appreciated, and I thank you in advance for the same.
If for example you have rent of $500 dollars and utilities of $500 and projected sales of 1,000 loaves you could calculate what each loaf has to contribute to your fixed costs a reasonable profit. Without any specific information best you can hope for is industry averages which may mean nothing for your situation.
Thank you for your response. In the case of GP, I only need the cost of food for generating the GP and the percentage is simply the GP divided by the sales/revenue. GP has noting to to do with the other costs associated with running the business. Further, I'm asking for a percentage range for both GP and NP, which takes out size of the operation reporting only percentages. I will seek information from the public library too, but thought I would check the knowledge on this site as well. To be clear, I am seeking percentages, not actual numbers and a range of percentages one might expect. My region, the Silicon Valley, will impact the range so if someone has more specific regional information that would be helpful.
Thanks again for your interest and help.
I know what gross profit is but you need to take the reality of your situation into consideration to determine a valid forecast. If the volume forecast is removed then really what can you determine. A person working out of his garage selling at a market stand will have different margin requirements than a person that is renting a store front, employing sales staff etc. The rule of thumb use to be 30% food, 30% labour cost but I don't think it has much validity for every situation.
my understanding of GP in the food industry, in fact all industries where goods are sold as distinguished from sales of services, is that GP = sales revenue - cost of goods sold (i.e., cost of ingredients). GP does not include cost of labor; cost of rent, insurance or any other costs. It's simply REV - COGS. As a percentage it takes out the volume or among of revenue and is impacted by the choice of ingredients (e.g.) organic v conventional). I suppose location can play into costs by vitue of shipping charges, but this should be relatively minor.
Net Profit = GP - ALL OTHER COSTS and the percentage can vary on where the business is locate and some other factors but I'm looking for ranges.
I appreciate your responses, but we are debating something I believe are pretty well settled accounting principles. I don't agree that GP is impacted by location to any significant degree nor does the cost of rent impact the GP. Net profit can be impacted by location and other area specific costs. In net profit I'm looking for ranges of net profit percentages, just something to give me an idea. If the ranges are area specific, all the better.
I'll be interested to watch this thread and see if anyone is willing to share this information. It's generally closely held, in any business, not just bakeries. I think that's why you're not finding it.
If the due diligence required for a financial plan could be done by looking on the internet, the success rate of start-up business would be much higher than it is. In my experience, it takes a lot of careful analysis, often coupled with novel ideas for cost-savings, to demonstrate viability.
Location will have a bearing on the price that the market is willing to pay for your product.
In my opinion, if you are really serious about this, you'll need to pay a (reputable!) consultant to get this data. Given your location, SFBI would be a very good resource.
I have crunching the numbers for doing this out of my garage for selling at Farmers Markets. To keep it simple, I am planning on offering 2 loaves, a commercial yeast "french" and a levain sourdough. I might add focaccia to take advantage of the high initial temps of firing the brick oven. Costs of materials is the same either way, labor is much lower because focaccia does not need a final proofing, bakes in 5 min, and shape is less critical...
I can only do this as a mental exercise, because I can't claim I have run a bakery, but given the dearth of info, maybe it will help? Helping me to get my mind right on it myself. =)
Loaf size: 1Kg batard (wet dough weight, 700 or so after baking) (Same size for the Focaccia)
Cost of Flour, Salt, yeast: 40c
Cost of Fuel (wood): Variable, but I am estimating 60c. Could be as high as $1.20. Depends on how many loads it takes to drop the temp enough to require re-firing. Right now I am a slow loader, so I am losing more heat than I might after a year of doing it.
Cost of electricity for a refrigerator (that I can get free) to hold the bread: $15 per month, or $4 per week.
Cost of table at FM: There are several, some are free or nominal cost, while the largest charges $80, but there are 10K people on a typical day and the bread sellers from local bakeries bring small vans worth of bread and sell out in hours, so there is the possibility of selling a LOT of bread. The small ones might have 100s show up, so selling ~50 loaves of bread might be a challenge.
You would to figure out what a store front costs where you are opening. That is such a wide range I can't even estimate for you on that one. $1K? $3K? $6K? way too many factors. Looks like $3 a sqft is the typical retail cost in San Jose? So for 1500sq foot space that is $4500 a month.
400 loaves a day, 12000 a month, 33c per loaf.
Labor: This is where the model breaks, because the most expensive part of the bread is the labor.
The basic business model says if I want to sell a $6 loaf, this cost must be around $2 maximum. The same for a $2.75 croissant, it can't be more than 91 cents in labor.
Realistically, there won't much margin there unless your labor costs are half what I have above, unless you are willing to work for $15 an hour take home.
Which means big batches and labor saving devices like sheeters and portioners and a large oven that can do many loaves at a time. At the theoretical 400 a day you need to bake at least 100 at a time to spend only half the day baking (granted in the meantime they can do other tasks, like clean and get the next days bread started)
At a real labor cost of $22 dollars an hour for a $15 an hour employee, that is a lot of productivity you need per day to make the labor costs work. How many loaves can one person make in a day? My though is 200 a day to make it viable. 400 a day if you are also paying someone to man the counter.
But the guys in the back are scalable, you could have 2 guys producing 800 a day and the person up front might be able to keep up if the average sale is 2 units, but not if it is below that. Ugg, complex!
So lets work with a $5 batard, 400 loaves a day, one person to bake, one to sell:
Fuel: 20c, assuming electric or gas
Other: 50c (insurance, wastage, marketing, packaging, blah, blah, blah)
So I am at $2.40 for a $5 loaf, net profit of 115%? Meets the threshold of 100% markup for retail. And I have probably got some costs wrong. I think I am high on labor, low on storefront, might even out.
Not sure 1200 storefront could handle baking 400 loaves a day my model predicts, and sell it too with 200 to 400 customers a day.
We haven't even touched low cost high return add on things like coffee to go with the bread...
So hopefully this helps... even if just gets you thinking it was a fun mental exercise for me!
Thank you for your thoughts. It provides a good frame work from which to begin. I think part of the decision is the scale one wants to reach, which will determine asset costs (mainly oven and sheeter), where labor can be added as one grows. I will likely use a gas fired deck oven, not wood burning. I just saw Tartine Bakery in SF is going to use circulating thermal oil oven in its new bakery. I'm trying to find the brand of that oven, any ideas? Whatever the case I will buy one large enough to grow. I will also work pastries (morning buns, croissant, pain au chocolate, to start) into the line up. I will start in an industrial area in Redwood City and sell and deliver on-line. Selling at farmer's markets is a great idea too. The price point is going to be $6.50/loaf (~700g baked), $4.50 for pastries, more if delivered.
Gas fired will definitely fix your costs.
Wood is usually free for the cost of picking it up out here in Sacramento, the Black Oak die off and now drought have unfortunately created a glut of firewood.
I still anticipate having to buy a significant chunk to ensure I have it.
Costs for a non-store front space like in a warehouse or industrial park would definitely reduce the cost if it can be made California Food Safety compliant.
Thermal oil oven? Holy cannoli Batman! Emulates a brick oven as close as you can get for indirect heat baking. Whatever brand it is, I bet it costs it's weight in gold!
For a first commercial oven I would look at used. Having several smaller ovens means you can schedule the different breads better. Having your big oven only half full because of incompatible temperature requirements... bread is 450 to 500, pastries and egg breads (Challah, brioche) are usually 350 to 400.
Pavailler deck ovens have been mentioned before on this site. hearthstone decks with steam injection is just the ticket, and in the Bay Area, gas is the way to go, electricity is crazy expensive.
And in the Bay Area being in an industrial park is not that big of detraction as it is elsewhere. Breweries and even some interesting restaurants are starting to show up in Sacramento's industrial park spaces.
Semi-wholesale bread store? Sounds perfect!
I bet it is one of these:
apparently they invented it.
I saw this as well, and believe you may be correct. I recall reading or hearing it was a German outfit that was supplying Tartine with new oven. Thanks again.
you are a lawyer.
Ok, it was a barter. Friend of mine raises chickens and traded a dozen eggs for 2 loaves.
Figured it was a pretty good deal considering the cost of farm fresh eggs is $8 to $10 at the roadside stands
Fittingly, she will probably feed the chickens any stale bread she ends up with... thus closing the loop!
I'm giving my trials, no longer trials really, to friends for evaluation. I have sold a couple, but feel pretty strange about selling to my friends. This feeling will go away soon, but for now it's symbiotic.
Reading up on MIWE, and these ovens look amazing. I emailed rep for a contact to learn more about their ovens and other equipment.
Friends I don't charge either, but if they want to offer something they made/grew themselves, I see it as a fair trade.
She has 5 laying hens, and she gets a dozen eggs every 3 days or so. She lives across town, but works just a half mile from the house so I brought them to work. Here is the review:
One loaf is nothing but the heels now. The crumb is to die for. The chewyness of the inside is awesome. Pretty close to the best bread ever
The staff at the office said $5 until they tasted it, then it went up to $7.50 =)
One way to keep costs down is to concentrate on one product that has high demand. First create the demand at the flea market then slowly increase volume. Mystique and word of mouth create the type of bread myths that enable waits in the "modern" bread line - this is a very good thing. Mudding down in spread sheet math before you develop enough skills to bake up a tasty doorstop maybe the "arse end of the horse around".
Just a thought about another way of looking at the formation process.
Wild-Yeast, you are so right. It is my plan to start with product(s) I know will work and will be in high demand. Pain au levain (sour dough, country loaf, whatever you want to call it) will be the base product. Bread skills are a known. I'm in the process of further developing skills in laminated doughs. I'm close but not quite where I want the product. I am looking for a test kitchen that has commercial level equipment (sheeter in particular) to hone these skills.
Your point, don't open till you know what your doing and start with limited quantities, is extremely well taken. I'm working the numbers in parallel because it is at least as important to a successful bakery as producing top notch product, and it's a time consuming ordeal.
Thanks for your post, the guidance is appreciated.
Do what you love and the money will come, but it still has to make basic economic sense. =)
Redwood City isn't in silicon valley, which ends at the boundary between San Mateo and Santa Clara counties.
What kind of competition do you expect in Redwood City? For bread, factor in every Safeway and any other supermarket that sells par-baked loaves as well as baked loaves such as Acme.
If you're going to bake in a space in an industrial area you won't have much foot traffic to speak of. If you deliver, you have to factor in the cost of maintaining and insuring a delivery fleet (even if it's only one vehicle) as well as paying a deliveryperson, in addition to rent for your bakery space. If you're going to be a wholesale bakery you're going to face a lot of entrenched competition. Come to think of it, there may be a business in selling bake-at-home loaves such as par-bakes to the public.
I would think pastries are often consumed on the premises with coffee or tea, something to think about, maybe have a coffee counter with stools.
Are you sure you wouldn't be better off in a storefront in a retail area where there will be more foot traffic and walk-in business? You might pay a visit to Palo Alto Baking Company at 381 California Avenue in Palo Alto. It is in a retail district on a street that is well-traveled with pedestrian traffic.
Of Milpitas, I don't think there was that distinction per se.
Yes, geographically that is correct, but culturally the whole Bay Area is more or less Silicon Valley. If I blindfolded you and dropped you in Redwood city away from the water, it would look just like the rest of the Valley.
San Fran is different, even though the number of high tech companies like Zynga, Cisco, Riverbed, Uber, etc. are based there, it is a different culture.
Redwood city? Pretty much the same as Palo Alto.
to have a loyal following in an industrial area. In Ottawa Ontario there is a bakery called Art Is In and it is in two industrial bays it is busy and it has great products. We went there for lunch on a motorcycle trip to the area last summer.
Is $6.50 per loaf a competitive price? Is it on par with what the supermarkets charge? It frankly sounds a bit high.
Looks as if Tartine charges about $10 per loaf. He sells out every day. Supermarkets may not be the competition if you can successfully brand your product as "artisanal". Of course, it may have taken Chad Robertson 10 years or more to get to the point where he can charge that much.
And the cost of doing business in San Fran is just insane. Min wage is 12.25, soon to be $15, plus the cost of retail space is obscene.
I am sure he is charging a premium, but i bet his margins are not much better than a $5 loaf in say, Stockton or Modesto CA.
Redwood City will be cheaper than San Fran, but still pretty high.
what the supermarket charges you have to cost your product to come up with a price that you can make a living at. If there is no market for $6.50 bread than you have to look else where for your bakery. Marketing to cheap people isn't a winning proposition as they will still tell you your products are too expensive.
I purchased an Acme Italian batard back in February. I don't recall the exact price but I don't think it was as high as $6.50. A quick tour of the local markets would give him an idea of the going price.
You charge what the traffic will bear. If your price is too high you'll price yourself out of the market. Not being an established brand, he has a competitive disadvantage to begin with.
you need to sell the qualities that make your product stand out not that you are at the same price as the Supermarket. I would not cross the street to buy a loaf of bread because it is priced the same as the super market but I do drive out of my way for taste, freshness and consistency.
This time of year we make a lot of caramel apples, we charge twice as much as the grocery store and $1 more than a semi local competitor. We sell the fact that we cook the caramel from scratch, no preservatives, no hydrogenated fat and use local fresh picked apples, the competitors use a caramel bought in a brick form that they warm up in a slow cooker to dip there apples. We pretty much sell out each batch but we do get the occasional customer that says they would rather not spend as much and we accept that as we can't be all things to all people.
While I share some of your skepticism, I do not believe you are thinking about it in the correct frame of mind. You initially commented that Safeway bread was the competition and my price was too high. But, as I mentioned, Safeway bread is not my competition.
I commented that ACME provided some incredibly good products, for mass production anyway. You responded that you purchased Italian Batard by ACME and did not recall the price at $6.50. Italian Batard at WFM costs $4.99 and the Levain costs $4.99. The batard uses, I believe, a mix of wild and commercial yeast so not really in the same category as the bread I will sell. The Levain uses 100% wild yeast and more closely resembles the bread I will offer. Nevertheless, both excellent products. Mine will be better still.
A 30% premium for better more unique bread is not entirely uncommon. Some people will not pay it and some may not notice the quality difference, neither of which are my market. However, I do not need to convert every ACME buyer, just the ones who select ACME because its the best of the mass produced breads and there are no other alternatives readily available. These latter people will be happy to pay a premium for better and more unique bread.
Is there risk in this potential venture, of course. But lowering prices simply to meet what ACME charges will not bring people in the door, or, in my case, get them to order it. People will choose my bread because its better, not because it's the same or lower price. Lowering price will only kill profit margins, with no real volume increases to offset the shot in the margins.
Someone mentioned earlier that Tartine commands a super premium for its bread. How can they do this? Two fold: (i) it's an amazing and unique product (though for some ACME remains good enough); and (ii) chad robertson has developed a super premium brand (people come to his bakery from far and wide just to have his bread). Does the product justify the super premium price. For some the answer is yes and they go back religiously. For some it's a novelty because they know of chad and want to try his bread. Whatever the case, he only makes 250 or so loaves a day, but he could sell more. His new bakery will have a much larger capacity. Bread does not keep chad in business. That is the job of his wife's pastries that are equally amazing, but I digress.
Re. establishing brand: you are right that I will not have an established brand. However, lowering price will not serve to establish a brand. Maybe the contrary. If I devalue my product by pricing it low people will perceive a lower quality product, even though it's not. On the other hand, if you charge for the bread quality and uniqueness over what else is in the market, people get the idea that it's a premium product. The key here is that many/most people will try to determine whether there is a quality difference. If the product does not meet standards, then you're screwed. Nothing can make up for less than the BEST quality, even if you give the stuff away. I will establish brand by supplying the best quality, and the best atmosphere.
I always have skepticism and appreciate the push back. Nothing in this venture is risk free. My goal is to understand the risks and mitigate it to the degree possible.
You are so right. See my last post.
business success stories, after a near failure, where great products are married with a cult following willing to pay super premium prices - Apple. That CA company has insane, near criminal gross margins of 70%, I spent my whole career in the food distribution business happy to get 20% gross margins, net out 3%, shoot for half a million dollars in sales per employee per year and hope no one got killed. My how things change
The best bakeries I know about all make their money with value added breakfast and lunch where their superior products take a back seat to their food service where the real money is made.
Tartine and Apple is well documented.
One flaw in that line of reasoning is that your product has no reputation as yet. You're asking people to pay a premium for an unknown without giving them a justification to do so. Another is that "quality" and "uniqueness" are intangibles. They're ephemeral. There are plenty of bakeries in the area already producing quality bread.
My comment about Safeway was not about bread made by Safeway, but bread sold at Safeway, encompassing many different brands. You will be competing with them. You might want to get a better handle on the competitive field you want to play on.
I wish you the best of luck.
build a thicker skin if you think mixinator's comments were nasty. I believe he was giving you an honest opinion. Unless you are baking on demand you had better figure waste into your equation....especially at the outset. You should really figure out a strong marketing plan as well, so when someone demands to know why you are charging so much you can gracefully state the reasons.
Fotomat1, just to be clear the subject of that post was supposed to include a rather lengthy response. I had problems with TFL post function when I was at a remote location, and apparently the text of my post was excluded. The subject appears very conclusory, evidencing one "without a thick skin". I assure you, I am not that and I will repost the text of my post. After that, you can call me think skinned, if you continue to believe that to be the case.
Listen, I appreciate your comments, but I'm not here to have an argument. People specifically going to Safeway for a loaf of bread are not my market, pure and simple. The "flaw" you point to is not a "flaw". One must develop the reputation, it does not materialize like magic. I never pretended to think I will enter this market with a reputation, good or bad. It is up to me and my business to develop that reputation with outstanding products, word of mouth and marketing. Lowering your price point to match stuff sold at a supermarket is not the ticket to developing a good reputation on quality, as I described above. But make no mistake, there is a market for a superior quality product and I firmly believe I can fill that niche better than the others currently trying to do it in this area. There are several trying, and some achieving moderate successes. I have had their products and they are average in comparison to my standards. As I stated, I'm not posting here to have an argument with you are anyone else. Your slight "you might want to get a better handle on the competitive field you want to play on" is not particularly appreciated in this context. You are posing many valid issues, to which I provide thoughtful responses, and with which you seem to disagree. That's fine, so we have a difference of opinion. It certainly does not warrant an attack on my knowledge base simply because you happen to disagree with my analysis. If I should ever open this bakery, I welcome you to stop by for a sample loaf on me. You can then judge for yourself whether brands at Safeway or ACME is good enough for you, or, as I hope, you will realize the superiority in quality of well made country loaf, among hopefully other varieties as I expand the product line. Again, I thank you for generating the thinking process it has helped me refine and define what I'm about here. Cheers
Here are some photos of the bakery in Ottawa Ontario that I mentioned in a earlier post. It is located in a nondescript industrial plaza in and they used imagination rather than big dollars to build an appealing bakery. Their patio is the area in front of what is intended to be a loading dock, the loading dock itself is actually the dinning area and the decor is definitely functional and yet they draw in customers willing to pay premium prices, bread was $7 dollars a loaf. It was probably the best lunch we had on last year's motorcycle trip.
Waiting in line to order
10 cents worth of bread and value adding a bucks worth of other stuff and turning it into a $5 sandwich or toast for some sausage, pancakes and eggs! They have some serious volume with the fresh stock they are keeping but the number of tables is where the money is. Love the scissor lifts to change the light bulbs too :-)
Love this place
This is the idea. Get into an industrial type complex. Don't need foot traffic, because the product and atmoshphere will bring the foot traffic. Idea is to start small(er) and build product line from a small core product line. Love the picts. thanks for sharing.
Go for the cheap industrial rent then look into a Food Truck - nothing like making a play on the old bread delivery truck routine with a prepared fresh twist ...,
I like that motorcycle-themed bakery. You could call it a bikery.
It's equal parts bakery and cafe. The customers are all walk-ins, aka foot traffic, with customer seating and on-premises consumption. There is no mention of delivery on their web site so there is no delivery fleet to operate/maintain/insure as the O.P. was planning to do. No Internet ordering, but they do offer catering. I can't tell what the surrounding area is like, if there are shops or businesses that bring him customers.
I saw several small bakery-cafes like this on a recent visit to San Francisco, just not as industrial looking. They all offer a mix of breads and pastries. Josey Baker is somewhat removed from local foot traffic and when I went there it was mighty quiet inside, despite his excellent products.
He'll need a thick skin if he's going into business, particularly one that serves the public, and has to deal with hired help.
it is a bike themed bakery, it is just that I was too cheap to pay for parking so I parked at the edge of the patio. The plaza had a pay and display parking system, I later found out the first hour was free.
Ottawa is Canada's capital so lots of government offices, and meetings that need catering. This area is outside the normal tourist traffic but only ten minutes if you want to go there.
If there are a lot of government offices around, I bet it gets a lot of lunchtime trade.