Przegląd Piekarski i Cukierniczy, December 2022
Hard times are approaching. At such times, savings and new solutions are sought, elements burdening processes are removed, and resources are directed to where the probability of earning money appears greatest.
What can a bakery do to survive the coming months? How can biscuits and cakes be sold when, in the face of high prices, people are saving on everything? How can one compete with amateur confectioners selling cakes online for half the price?
Probably the worst problem is the increase in the price of every kind of energy and gas. Coal-fired bakeries can also be found. Both modern and traditional plants must face a drastically increased Technical Cost of Production resulting from energy prices.
What, then, should be done? Raise bread prices, look for cheaper flour, or dismiss some employees and begin baking bread oneself?
The bad situation affects everyone
All entities are equal within the economic environment. Of course, there are privileged entities: monopolists or companies that, because of an excellent location or access to rare technology, are able to cope better than others. There are unlikely to be monopolists in the bakery industry; everyone has similar access to energy and a scope of activity limited to the local community.
The fact that we all have similar opportunities means that competitiveness among bakeries does not change. No one is privileged. Everyone is in the same situation. Who loses and who wins depends on who is more resourceful, more innovative and open to new solutions. A crisis undoubtedly intensifies the race for competitive advantage.
I reluctantly use the comparison that naturally suggests itself. When dinosaurs ruled the Earth, the climate changed for some reason. Those large animals, with their enormous requirements for food obtained from the natural environment, had no chance of survival. Small animals that could shelter in burrows and feed on roots were privileged.
Are large entities worse off?
Fortunately, a deep economic crisis is not a meteorite impact. When economic conditions deteriorate, entities dependent on working-capital loans, with many machines and vehicles under lease and numerous rented commercial premises, will certainly have a more difficult time. On the other hand, small bakeries may not collapse, but they will not benefit from the crisis either. Their situation is unlikely to change. Despite their requirements, large bakeries may benefit significantly from the crisis. Above all, an economic slowdown affects every industry. Some industries will be hit harder than others. This is where the first opportunity appears.
We can remain calm. The bakery industry is exceptionally stable because bread is a basic consumer product. It requires neither imported raw materials nor exceptional production conditions.
Other industries may find themselves in genuine trouble. A phenomenon may therefore emerge in which commercial premises previously used by travel agencies, bars or clothing shops are taken over.
Investment does not always lead to increased efficiency
During a crisis, one must know how to invest. In times of prosperity, investment is often consumption in disguise. The efficiency of invested capital is the quotient of revenue divided by the total investment. The monthly cost of repaying the investment should be significantly lower than the monthly revenue from the investment. Thinking that we will earn money on an investment after it has been repaid is a mistake frequently made by managers. The investment must be profitable while it is being repaid.
Someone had previously used an old coal-fired oven and bought a new gas-fired one. Does this mean an increase in the bakery’s efficiency? The new oven requires servicing and specialist operation and, above all, monthly loan instalments. Thanks to the new device, work is more pleasant, baking takes less time and the bread retains greater repeatability, meaning better quality. Unfortunately, production profitability deteriorated. The improvement in bread quality did not translate into improved profitability. Something we regarded as modernisation exposed us to a decline in profit. New investments sometimes improve every parameter of the business except profitability. This usually happens when improved productivity is not accompanied by organisational solutions.
As a result, during a crisis, an opportunistic purchase of another property, new machine or delivery vehicle will bring us closer to losing financial liquidity. For a new oven to contribute to increased efficiency, it must produce two or three times more bread, which must then be sold in the market.
Investments are not for convenience
There is a rule that if an investment leads to a decline in efficiency, it can be treated as consumption. A new delivery vehicle breaks down less often and consumes slightly less fuel. Ultimately, however, it contributes to a decline in the plant’s profitability.
Instead of buying a new oven, it is better to purchase a new shop somewhere on the outskirts of the bakery’s sales area. Using one’s own property is less expensive, making it worthwhile to bear the costs of delivering bread over a long distance. Since we have succeeded in maintaining a distant foothold, we can rent several more shops in that area. Longer routes necessitate the purchase of a larger and more reliable delivery vehicle. The additional shops contribute to increased production. The old oven cannot keep up with baking the required quantity of bread, so we buy a new one. Fixed costs rise again, but this time turnover is higher and profitability therefore increases. We are effective! “It’s the economy, stupid!” Bill Clinton hung this slogan in the Oval Office during the difficult 1990s. He did not write: “I must win the election” or “Consumption is the most important thing.”
Is money always necessary?
There is a rule: if a business can be developed without money, it will be possible to develop it. How can a bakery be developed without money? Absurd! But who said anything about baking bread? One can act solely as an intermediary in sales, using new online-sales methods. Amateur intermediaries fresh out of secondary school are able to sell products from another continent by using prepayments and forcing buyers to wait many weeks for their goods. Anyone who owns a bakery also usually has extensive knowledge of the confectionery and bakery market. Why, then, can someone without experience or appropriate knowledge, without money and without becoming involved in launching production, push us out of the market? Why do people from outside the industry act as intermediaries in the sale of confectionery products or sell bread purchased from a bakery?
There are areas that laypeople cannot enter because they lack resources. Even so, experienced entrepreneurs are reluctant to consider new opportunities.
Let us return to the example of the oven, the shop and the new vehicle. Perhaps instead of returning empty from a distant outpost, the new vehicle could bring back biscuits produced by a distant confectionery. It may turn out that our confectionery produces at a higher cost than others sell at. Perhaps it is worthwhile to diversify the offer in our bakeries. There is nothing wrong with trade between competitors.
Is diversification a good idea?
Until now, baking has been a prosperous industry; let us hope that nothing changes. Until now, there was no need to diversify.
My lawnmower recently broke down. It turned out that all lawnmower repair shops had been closed that autumn. I therefore reached a distant service centre. It turned out that, in addition to repairing lawnmowers, it housed a Still company shop and a courier-parcel collection point.
I am far from encouraging anyone to do something against their nature. This example does, however, show how difficulties can be overcome. Thanks to diversification, when prosperity returns, this centre will probably become the only repair workshop in the area. One can, of course, imagine someone additionally setting up a florist’s shop in a bakery or delivering courier parcels while delivering bread.
Diversification is not a good solution. It forces an entrepreneur to deal with many, often dissimilar processes. Dispersing attention among other processes causes the quality of the core process to decline. Baking is too stable and prosperous an industry to seek other occupations when faced with a crisis.
A crisis is a cleansing process
Under conditions of prosperity, there is little reason to seek savings or optimisation. Running a bakery is sufficiently absorbing to tire the entrepreneur and discourage additional effort. During a crisis, however, small innovations and improvements begin to matter. For many years, in the pages of Przegląd Piekarski i Cukierniczy, I have described how to optimise the sales structure, seek savings, optimise inventory levels and stimulate sales through the skilful promotion of one’s activity on the Internet. Every such small innovation that is implemented effectively increases the probability of survival or development under difficult economic conditions. Above all, it is necessary to check which products generate the greatest losses from returns.
Returns may result not only from excessive production but also from poor allocation of products among different shops. One reason may be that some products are so similar that the customer sees no difference between them. Perhaps the opening hours of points of sale should be examined, or sales moved to shops whose entrances have no steps. We remember that such a layout kills sales.
It is also worth examining the product-range structure and whether product prices are appropriate in relation to the means of production employed. There are a great many methods of seeking savings and profits. Over the last several years, I have described many of them in the pages of this magazine.
Summary
A crisis is approaching, but it should not be feared. The word “problem” in Chinese (“wèntí”, 问题) consists of two characters; separately they mean “ask” and “question”. This can be interpreted as: devise solutions. In Chinese, everything is a suggestion or a riddle. When someone speaks openly, they offend their interlocutor.
A crisis affects everyone within an industry more or less equally. It affects different industries differently, however, which is an opportunity for industries toward which fate has been kind. Whether someone is doing well is relative. If everyone is falling into ruin but one person falls into ruin more slowly, that person becomes wealthy in relation to the others. Every innovation or investment that increases efficiency will improve the chances that the crisis becomes an opportunity. If not now, when should we undertake efforts involving optimisation and restructuring? Therefore, ask questions and devise solutions!
Wojciech Moszczyński — expert in mathematical optimisation and predictive modelling. For years, he has been involved in popularising econometric methods in business. He specialises in optimising sales, production and logistics processes. For 15 years he worked as a financial expert specialising in controlling and management accounting. For 10 years he has worked as a data analyst (data scientist). He is a graduate of the Department of Econometrics and Statistics at Nicolaus Copernicus University in Toruń. He is currently employed as a Senior Data Scientist at the Polish company Unity Group.