Bakers feel the retail pinch

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In the last month the three biggest retail bakers in the UK - Three Cooks, Lyndale Foods and Greggs - have all hit the headlines. Most recently, Three Cooks has crashed into administration, but before that Greggs complained of disappointing trading. Lyndale has also admitted a major strategic review is under way.

This crescendo of gloomy developments at the three biggest retail bakery chains in the UK begs the question, what is going wrong? And how do you fix it?

difficult trading

When the 160-shop chain Three Cooks called in the administrators on 1 November, it blamed "financial difficulties arising mainly from a downturn in high street trading conditions."

Chairman Geoff Peppiatt, who has since bought 121 of its better stores from administrators to form a new ’Cooks the Bakery’ chain, explained what had caused the problems. He told British Baker the simple formula - revenue minus costs equals profits - was not working in the high street baker’s favour. He said: "There is now lower footfall on the high street, which means fewer sales; people are shopping more in retail parks and supermarkets. Even Greggs’ latest like-for-like sales are only up 0.2% and most companies will have seen like-for-like declines of 5% and worse - maybe 9-11% - over the summer period."

Peppiatt said retail rents kept rising, as landlords priced lower-margin operations off the high street, whereas businesses which sold higher-margin products, such as mobile phones, could afford to move in.

"Then there are the other things you can slice off your profit-and-loss account, such as food costs, wages, distribution, and other occupancy costs including business rates, water rates, electricity and service charges. These are all rising above the rate of inflation," he added.

Lyndale Foods has indicated that it plans to get round the margins issue in its business by rolling out its very upmarket Maison Blanc format nationwide, under the guidance of the turnaround expert Sandy Birnie. He joined in September to kick-start the review. This will complete by next March and Birnie is keeping details of his plans under wraps until then.

But he commented: "Everyone in retail is facing the same escalating rents and energy cost rises. Minimum wage increases in the last three years have been dis- proportionate to the retail price index. The economics don’t work and it’s affecting the high street a lot. Inflation is going to come through, the cost increases are going to have to be passed on to customers. Prices in the supermarkets are already going up."

Meanwhile, Greggs has blamed a drop in high-street footfall, a 69% rise in energy costs, a proliferation of takeaway competitors and out-of-town supermarkets and poor weather conditions for slackening growth in the last year. This August, it publicly abandoned its target of having 2,000 shops in the UK by 2010.

On top of the cost pressures, there have been huge structural changes in the marketplace over the past few years, with the growth of the coffee culture and the march of the supermarkets.

Sales are booming at chains such as Whitbread-owned Costa Coffee, which this month opened its 500th store in the UK, and Caffè Nero, with 292 cafés. They have attracted a new wave of customers, who meet up with friends in their cafés in prime locations or even hold meetings in the pleasant surroundings. And their ranges sell at high margins - for example, a biscuit costs £1.99 - thus addres-sing the overheads issue.

But as Peppiatt points out, it is not necessarily plain sailing for these and other rivals; it’s just that there are different econo- mics at work. Starbucks continues to expand in the UK, funded by its global profits. There are now just over 500 Starbucks coffee shops in the UK, with 292 in London alone. Starbucks does not expect to make a profit in the UK until 2010, a luxury its traditional high street rivals do not enjoy.

There is also Subway to consider as a rival, as more and more bakers develop extensive takeaway ranges. Subway now has 780 franchises in the UK and plans to have 2,000 in three years’ time. But its individual franchisees often trade for very long hours, and industry estimates suggest that, with its model, it is difficult for a franchisee to become profitable until it has around six outlets.

planning prosperity

So how does the traditional high street bakery chain ensure prosperity, when faced with a toxic cocktail of mounting costs combined with increased competition? What do you do if your rent has been reviewed skywards, your energy bill risen by 60% in the last year and your staff costs by 40%?

One industry source suggests consolidation is the only way to boost efficiency, and bakery chains should seek to merge their operations to reduce overheads. But Peppiatt has his own suggestion: "You have to be ready to reposition your retail estate and close your smaller stores or less profitable shops. With rising costs, an outlet that is marginal or breaking even will be making a loss next year."

Another industry expert comments: "The high street baker is facing major pressure on costs. These are labour-intensive businesses. People will be reviewing their business models and looking at developing their operations into wholesale, internet or offering more upmarket or takeaway lines at a premium."

Progressive bakery chains are already changing direction to ensure survival. For example, Wilmslow-based Peter Herd’s now has a buffet business, an internet shop and a celebration cakes business, which supplies local footballers’ wives - recently baking Wayne Rooney’s birthday cake.

If the expansion of the coffee chains and eateries such as Pret A Manger and Subway tells high street bakers anything, it should be that there is plenty of customer demand out there for their wares, The question is how can you profitably tap into it? n

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=== The big names ===

The top 5 high street bakery chains on store numbers:

Greggs (Greggs, Bakers Oven) - 1,334 outlets

Lyndale Foods

(Sayers, Hampsons, Maison Blanc) - 236 outlets

Cooks The Bakery (Three Cooks post-administration) - 121 outlets

Peters Cathedral Bakers

- 73 outlets

Cooplands (Doncaster) - 69 outlets

The top five sandwich/ coffee chains on store numbers:

SUBWAY - 780 outlets