A bakery business is one of those ventures within the food industry that can earn you nice profit returns if managed well. Before starting a bakery, you need to know what the revenue potential for the business is. You can then adopt strategies for increasing your revenue potential. Other factors that’ll also influence the success of your bakery, or lack thereof, are the type of business structure you choose and whether you can adjust the business for seasonality.
What’s a bakery?
A bakery is an establishment where flour-based food products are baked in an oven for sale. Examples of food products produced in a bakery include bread, pastries, cakes, pies, and cookies.
A bakery can also be referred to as a bake shop or a patisserie. It may also be classified as a café/restaurant if it makes and sells non-baked items like beverages and confectioneries.
How much does a bakery make?
In the US, the average annual revenue for small bakeries is between $350,000- $450,000. Though this average is lower than that of restaurants, bakeries have a higher profit potential due to significantly lower operational costs.
To get a close estimate of what your new bakery will make annually, you need to forecast your bakery sales using your production capacity, labor expenses, and raw material expenses. Since it’s a new venture, you won’t have any sales data, which is the most important factor to consider when projecting annual bakery sales. However, you can make up for this by factoring in other indicators, such as your daily sales potential.
To calculate your annual sales potential as a new bakery, add your daily wholesale and retail sales (assuming the business has been operating for a few days) and multiply that by the number of working days in the calendar year.
Meanwhile, to compute the profit potential of a bakery, multiply the monthly sales by the profit margin. Generally, the profit margin for businesses in the food sector is between 3%-5%.
Ways to increase what bakery owners make
To boost your bakery’s profitability, you need to implement smart marketing strategies, optimize your range of products, and lower operational expenses.
Implement smart marketing strategies
One of the most effective yet low-cost marketing strategies is social media marketing. For example, you can post pictures of your bakery’s products in the restaurant area on sites like Facebook and Instagram to boost brand awareness and attract more customers.
Another marketing strategy worth trying is offering loyalty discounts. A good example is offering freebie products for every customer that spends over a certain amount.
Optimize the range of products
To optimize the range of products in your bakery for improved profits, start by assessing which products have the highest potential for optimization. To do this, consider the following: your best-selling products, products that generate the most revenue, most profitable products, and least profitable products.
After the analysis, consider strategies for improving the profitability of each assessed product, including:
- Raising the selling price.
- Changing the recipe to lower the cost of production.
- Increasing the average order value by bundling menu items to create deals.
Reduce the operational expenses
When looking to keep operational expenses at a minimum, the main things to consider are the payroll expenses and the cost of supplies/equipment/facility. To ensure payroll expenses don’t weigh down on your bakery’s profitability, look for inconsistencies in the work roster and role allocation, and make the necessary adjustments. The goal is to have staff-generated output exceed the payroll costs.
Meanwhile, to lower expenses on raw materials, you need to control material costs by optimizing your recipes, limiting waste by optimizing production quantities, seeking cheaper suppliers, and leveraging economies of scale by buying in bulk.
Type of bakery ownership
You can choose to set up your bakery as a sole proprietorship, a corporation, or a limited liability company (LLC).
This is a business structure whereby one individual owns and manages the bakery. The owner and the bakery aren’t legally separate, making this the easiest and cheapest type of business to start. Sole proprietorships are also subject to fewer government laws and rules, with aspects like financial disclosure not being required for such entities.
On the downside, the sole proprietor assumes unlimited legal liability as the owner and business aren’t legally separated, while the amount of available capital is also limited. This type of business structure works well for small bakeries but is not recommended if you’re planning to set up a large, industrial bakery.
You can also choose to set up your bakery as a corporation, whereby the entity is registered with the state and is separate from the owner as an individual. There are two types of corporations: an S corporation and a C corporation. An S corporation is one whereby the profits appear on the shareholders’ tax returns, while taxes are paid on the business’s profits in a C corporation.
Limited Liability Company (LLC)
An LLC is a business structure that combines a corporation’s legal perks with a partnership’s tax framework. It, therefore, limits the liability of the owners/company shareholders.
Is your bakery adjusting for seasonality?
It’s no secret that orders for baked products increase during certain times of the year. For instance, demand for cakes and pastries is likely to be higher during holidays, weekends, weddings, or other special functions. Ensure your bakery adjusts for such seasonal shifts in demand by increasing the menu supply.
i. Internal Revenue Service (IRS): Sole Proprietorships