The nation’s economic landscape has fundamentally shifted. The crash of 2008 wasn’t as temporary as many had hoped, and those hunkering down, riding it out, and waiting for things to get back to normal will be sorely disappointed. Spendthrift lessons consumers learned during the recession aren’t quickly forgotten, especially with unemployment lingering at nearly 10 percent. It’s a whole new world–in many ways leaner, and necessarily more efficient. Profits are more difficult to come by, and consumers’ sense of value is the number one factor affecting the business.

But even as they’re caught in the middle of the three-way tug of war between the value consumers demand; the target margin, refills and charge backs of retailers; and rising input costs, bakery operators are optimistic about the future. In a situation in which the baker is most likely to give up margin in the supply chain, it seems price increases might be unavoidable. That’s just the new reality.

Baking Management’s Wholesale Baking Industry Survey revealed a marked awareness and acceptance of this new milieu, and an overriding positivity. Not an operator surveyed expects sales volume to go down this year, and 83 percent expect it to increase, an 8 percent jump over last year’s estimations. There’s a sense that things are improving, but improvement doesn’t mean things will revert to the way they were in mid-2007. There are unfamiliar health trends to be understood, more volatile commodities markets to be tamed, and a more value-conscious consumer to be served. But between ERP systems, online capability, and even social media, bakery operators are equipped with powerful tools to understand the new way of things, and survey respondents indicate that they’re up to the challenge.

Clean label demand makes significant jump
American food producers, including bakers, operate without definitive regulations from the U.S. Food and Drug Administration as to what “natural” means, but that hasn’t slowed down the consumer trend demanding simplified, more “natural-sounding” ingredient lists and clean labels.

Among those surveyed, 61 percent say that their customers are demanding simplified ingredient statements. This demand for clean labels eclipsed even the catchall general health category, which 55 percent of respondents claim their customers demand, and last year’s top vote getter, whole grains, at 52 percent. In a related note, respondents reporting a demand for natural products jumped by 15 percent, to nearly half.

When the question was rephrased to reference general health trends affecting their businesses, respondents again singled out the simplified ingredient statement as the most likely to make an impact.

“The biggest challenge is trying to make it cost effective,” says David Caine, president, Aunt Gussie’s Cookies & Crackers, Garfield, N.J. “It’s easy to make something that’s inexpensive using some of the more synthetic ingredients that are available. Using all-natural ingredients and providing clean labels is more expensive, and not every consumer knows what they’re looking for.”

Aunt Gussie’s began its path toward clean labels in order to sell to retail outlets with natural and clean label restrictions. It converted most
products to use expeller-pressed canola oil, which uses no chemicals during the extraction process, lacks trans fats, is GMO-free and has the lowest saturated fat levels of all oils. It is high in heart-healthy essential fatty acids–omega 3 and omega 6–and is a good source of vitamin E. But the company still gets a lot of calls from consumers wanting specifics about what appears on the labels.

“And they don’t always understand why it’s more expensive than the next product over,” he says. “That can be a challenge.”

For more charts and graphs depicting findings from the 2011 Wholesale Baking Industry Survey, click here.

One ingredient that many consumers are eschewing, rightly or wrongly, is embattled high fructose corn syrup, or corn sugar. The clean label movement took square aim at HFCS, and forced a reactionary campaign to clear up an ingredient that most feel was unfairly besmirched by an unrelated connection between obesity and soft drinks. According to the Corn Refiners Association (CRA), high fructose corn syrup (HFCS) is nearly identical to table sugar–both contain about 50 percent glucose and 50 percent fructose, the same basic components found in beet and cane sugar. The controversy is perhaps the most salient example of the battle between perception and reality in the clean label market.

Until the FDA comes up with its own regulations, American consumers must depend on independent watchdog groups, such as the Center for Science in the Public Interest (CSPI), to urge food producers to remove ingredients, such as alkalized cocoa and partially hydrogenated soybean oil, that either don’t exist in nature or have been chemically modified, or to stop calling them all natural. Although CSPI doesn’t have any legal teeth, it has managed to persuade such companies as Ben & Jerry’s and 7-Up to amend their packaging language.

Time to get to pricing
Since the commodities crisis of 2008, ingredients costs have weighed heavily on bakers’ minds. But many operators used the aftermath of the shock as an opportunity to revisit and sharpen procurement strategies. And as the recession dragged on, bakery operators cut the fat where they could, streamlined where possible, and bakeries that survived the economic beating are leaner than they were a few years ago. These changes, coupled with commodities prices that fell back to Earth in 2009 and 2010, have helped to mitigate ingredient price upticks and allow bakeries to absorb much of the cost without passing those increases along to the customer. But last year’s stable reality is gone, and commodities markets again look to be in turmoil.

“The wheat markets have been very volatile in 2011 and we’ve certainly felt that versus 2010.  There’s a long list of influences that can impact the price of bread flour outside of the basic supply and demand,” says Beth Cacciotti, marketing manager, Signature Breads Inc., Boston. “All of these influences have had their way with the market the past few months.  I anticipate that this increased volatility will be something that we will continue to see in commodity markets going forward.”

Three quarters of respondents ranked ingredient and packaging costs as the most expensive aspect of running their bakery business in 2011; less than one quarter ranked ingredient costs as such last year, when labor and benefits were the chief concerns. More than half of respondents cited ingredient costs as the biggest challenge facing their business, up from 39 percent last year. Less specific to ingredients, but germane to the new reality confronting bakers, every respondent reported that their suppliers raised prices on at least some of their products, with 77 percent claiming the majority of product prices have increased. Only 30 percent claimed that a majority of their suppliers’ prices had increased last year.

“Because the prices of commodities are changing so frequently, more attention must be paid to the markets,” Cacciotti adds. “In years past, price changes were smaller and more infrequent.  Today, significant changes can happen day-to-day, even hour-to-hour.  I don’t know that our procurement strategy has altered so much so as the focus in executing the strategy has been forced to intensify.”

This sea change focuses bakers’ ire on input costs, but procurement officers are caught between a rock and a hard place. Their relative successes in 2010’s comparatively stable market only amplify the difficulties they face in 2011.

“It’s so easy for the management guys to say, ‘We’ve got to get cost savings from procurement,’ but if you look at commodities charts, the procurement people haven’t had a single chance to buy something matching 2010 prices this year,” says Brian Stevenson, B. Stevenson and Associates LLC, farm to plate consultant. “If they bought at the bottom of the market in 2010 when wheat was less than $5 a bushel, and here we are today at up to nearly $9 a bushel, that’s a big swing. My heart goes out to procurement departments in CPG companies.”

Watching the Consumer Pricing Index (CPI) on breads, Stevenson believes bakers’ reluctance to raise prices is holding it back, as there is too much capacity in the industry. Margins will eventually get small enough where the inefficient capacity will have to leave the industry, as a $40-60 million plant chugging along at half capacity just doesn’t work.

“It is time to get pricing,” he stresses. “You don’t have to get an extra 50 cents per loaf if all your doing is covering the commodity uptick. Known, national brands are going to have the most pricing power, while those making private label bread, especially private label white pan bread, won’t have as much power.”

Survey respondents seem to have gotten the message, and bakery operators who absorbed rising input costs last year are planning on increasing their product prices this year. In 2010, only 19 percent of operators planned to increase their prices. That figure has jumped to 47 percent this year. And while 34 percent refused to raise prices last year, only 12 percent are standing pat in 2011. Perhaps most telling, 97 percent of respondents directly cited the rising cost of ingredients, to the exclusion of any other reason, as the impetus for raising prices this year. In the emerging economic landscape, constantly absorbing costs and trimming margins just isn’t going to cut it.

Product lines diversify
There’s a tension between a bakery’s devotion to core competencies and willingness to innovate. Survey responses reveal that bakery operators are trending toward greater inclusiveness in their product lines, as 69 percent of bakeries are adding products, compared to 25 percent who are paring down their offerings.

“Consumers are becoming more educated on what they eat as well as the restaurants that serve them,” Cacciotti says. “We find that they are looking for products that meet their needs in taste, nutritional value, and affordability.  While plain dinner rolls and the like will always find their place, ‘different’ breads like ciabatta and whole grain options seems to be more in demand.”

Of items being added, cookies and cakes have jumped to the forefront, perhaps an indication of consumers’ increasing willingness to treat themselves. Last year, the staples of bread, rolls and pan bread occupied the top growth spots, but in 2011, 25 percent of respondents cited cookies and 23 percent cited cakes as items with the greatest sales growth. Manufacturers’ sweetgood production jumped 21 percent and cookie production jumped by 15 percent over last year, though 4 percent fewer manufacturers are offering cakes this year than last.

Technology and sustainability
The overall reported use of ERP systems marginally slipped in 2011, but existing users moved slightly toward a more fully integrated system. “Our ERP system is a key tool in managing our business,” Cacciotti says. “The most used functions are financial, shipping/receiving, lot tracing, forecasting, and inventory management. Without it, it would be very difficult to have our business function as efficiently as it does.”

Lighting technologies and energy use monitoring are the most common methods of reducing energy consumption among bakery operators in 2011. Overall, respondents were 10 percent less likely to employ steps to reduce energy consumption compared to last year. This may reflect the permanence of measures already taken–for instance having already upgraded inefficient equipment. One area of increased attention though has been with shipping and trucking fuel efficiency as well as route consolidation.

Internet use is up across the board, with the web serving as a primary research tool. Nearly nine of 10 bakers rely on the internet when shopping for ingredients and equipment. Also, 85 percent use it for keeping up with industry trends, consumer trends, etc.

“Obviously, we are using technology across the company much more than ever before,” Cacciotti says. “It is important to be able to keep up with these advances to keep our staff current and abreast of all the information that targets our industry. The internet is an indispensable tool.”

Operators can broaden their supplier roster, research new ingredients, reach their customer base and follow national and global trends with the click of a mouse. Bakeries are still a part of the communities in which they are based, but their scope has been expanded significantly since the days before the internet.

Even social media have found their way into once stalwart bakery operators’ daily routines. Last year, three quarters of respondents didn’t use social media at all. This year, 60 percent use it in some form, with Facebook and Twitter being at the top of the list. Social media functionality is used mainly as a way to communicate more immediately and directly with customers and workforce.

It’s a brave new world out there, but bakery operators are equipped with powerful new tools to address it.