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Well, let's think about it. So a bakery is basically a big box where people visit and purchase bread (which is usually made on site). So the price per loaf *

by jakarta 16y ago

Well, let's think about it. So a bakery is basically a big box where people visit and purchase bread (which is usually made on site). So the price per loaf * number of loaves sold = Revenues The food costs (flour, yeast, ingredients) and packaging costs = Cost of Goods Sold. But then restaurants have a whole host of other costs which might be somewhat fixed. Interest expense, Restaurant Wages, Rent, Restaurant Operating Expenses (utilities, maintenance of the building, repairs), General/Administrative (corporate level costs), Advertising/Marketing expenses. So the key is to figure out what is going wrong. If you have a bakery housed in a location where the rent is just really high, you'll either need to raise prices on bread (could hurt volume), increase volume, or reduce rent. If the interest expense is the issue then you need to either restructure the loan or pay the loan off asap. If they are not profitable, they will want to determine how to become profitable. That's either going to come from increasing volume, increasing prices, or reducing costs. But any of those strategies could have their own drawbacks. Price hikes can reduce volume. If you switch to inferior ingredients you might reduce volume if it alters taste. If you increase volume you will be baking more bread which will require more by way of labor. They need to first establish what their problem is, then they can analyze potential solutions.

marcamillion 16y ago
Thanks for the feedback and this feels so simple on paper. Yet when I dive in, the problems just feel insurmountable. But I guess taking it one step at a time. Perhaps rather than trying to decode their existing pricing, it might be best for us to come up with a brand new pricing strategy that includes profitability from the get-go.
- jakarta 16y ago
  What I would say is that if they aren't figuring out a way to keep basic financial statements (which seems to be true) then you should get them to start. I think it is important to understand what got them into the mess before coming up with a profitable pricing strategy. Figure out how much bread/baked goods they typically sell. Is is trending up/down/sideways? Figure out how much it costs to produce that much bread (ingredients + any packaging). Then the other costs (wages, utilities, advertising, rent) should all be fairly easy to find out since they are typically paid once a month or so. Get that into a spreadsheet and then start figuring out what the problem is and how to solve it. For example maybe the bakery has been producing too much bread which has forced them to have a lot of waste. So it could be a leakage problem. Maybe the prices are set so low that after COGS, there isn't enough left to pay for those operating expenses such as rent, wages. It's best to think of a business like an organism where every change will have some kind of effect in response.
  - marcamillion 16y ago
    You are right. That's what we had initially set out to do, but I think what happened is we went in and rather than coming up with our own numbers, we were trying to make heads and tails of theirs. But perhaps we should have gone in, and used a clean slate to start analyzing everything - for a month say. Then go from there. Thanks for talking this through with me. It really helped. Out of curiosity, what do you do? Have you run a bakery/restaurant before? Where'd your experience come from?
    - jakarta 16y ago
      I research and analyze distressed companies for investment purposes. I spend a lot of time looking at restaurant businesses and they tend to have managers that make the same mistakes over and over. Here's one of my favorite restaurant turnaround stories. This is probably not applicable to your problem, but I like telling it: A couple of years ago Steak N Shake (a fast food hamburger chain) was on the brink of bankruptcy because starting in 2002 or so, the management team decided to take on debt and rapidly expand their store-base. So they entered into markets where there was not enough demand for their products and in order to keep up with interest payments, they began raising the prices on all their menu items. When the recession hit, the sales volume plummeted (for good reason - even though people liked the food, it was costing too much for them). The management team was in a tough spot because if the company could not pay, they would have to file for bankruptcy. So they allowed a guy named Sardar Biglari (30 year old from San Antonio, TX) to take control of the company. He started a hedge fund right after graduating from undergrad (sold an ISP he founded back then near the top of the dot com bubble). Biglari came in and tried to find ways to lower the prices of the menu items in order to increase sales volume and store traffic. He changed a lot of little things which had inconsequential impacts on taste. He opted for a different kind of styrofoam cup which cost less money, switched from grape to sliced tomatoes in salads (salad sales were very low anyway), picked a different (cheaper) type of napkin they gave, and was able to reduce expenses overall by cutting costs in areas where most people didn't notice. Then he lowered prices a little bit and used coupons to increase traffic, while reminding people why they like the brand so much. In addition he reduced management salaries and paired the menu down to items where they felt they had an advantage and sold well (do less, but make it your best). They sold off some of their unprofitable locations and redirected cash flow to completely pay off their debt. The company never had to file for bankruptcy and performs well now.

by jakarta 16y ago

marcamillion 16y ago

Thanks for the feedback and this feels so simple on paper. Yet when I dive in, the problems just feel insurmountable. But I guess taking it one step at a time. Perhaps rather than trying to decode their existing pricing, it might be best for us to come up with a brand new pricing strategy that includes profitability from the get-go.

jakarta 16y ago
What I would say is that if they aren't figuring out a way to keep basic financial statements (which seems to be true) then you should get them to start. I think it is important to understand what got them into the mess before coming up with a profitable pricing strategy. Figure out how much bread/baked goods they typically sell. Is is trending up/down/sideways? Figure out how much it costs to produce that much bread (ingredients + any packaging). Then the other costs (wages, utilities, advertising, rent) should all be fairly easy to find out since they are typically paid once a month or so. Get that into a spreadsheet and then start figuring out what the problem is and how to solve it. For example maybe the bakery has been producing too much bread which has forced them to have a lot of waste. So it could be a leakage problem. Maybe the prices are set so low that after COGS, there isn't enough left to pay for those operating expenses such as rent, wages. It's best to think of a business like an organism where every change will have some kind of effect in response.
- marcamillion 16y ago
  You are right. That's what we had initially set out to do, but I think what happened is we went in and rather than coming up with our own numbers, we were trying to make heads and tails of theirs. But perhaps we should have gone in, and used a clean slate to start analyzing everything - for a month say. Then go from there. Thanks for talking this through with me. It really helped. Out of curiosity, what do you do? Have you run a bakery/restaurant before? Where'd your experience come from?
  - jakarta 16y ago
    I research and analyze distressed companies for investment purposes. I spend a lot of time looking at restaurant businesses and they tend to have managers that make the same mistakes over and over. Here's one of my favorite restaurant turnaround stories. This is probably not applicable to your problem, but I like telling it: A couple of years ago Steak N Shake (a fast food hamburger chain) was on the brink of bankruptcy because starting in 2002 or so, the management team decided to take on debt and rapidly expand their store-base. So they entered into markets where there was not enough demand for their products and in order to keep up with interest payments, they began raising the prices on all their menu items. When the recession hit, the sales volume plummeted (for good reason - even though people liked the food, it was costing too much for them). The management team was in a tough spot because if the company could not pay, they would have to file for bankruptcy. So they allowed a guy named Sardar Biglari (30 year old from San Antonio, TX) to take control of the company. He started a hedge fund right after graduating from undergrad (sold an ISP he founded back then near the top of the dot com bubble). Biglari came in and tried to find ways to lower the prices of the menu items in order to increase sales volume and store traffic. He changed a lot of little things which had inconsequential impacts on taste. He opted for a different kind of styrofoam cup which cost less money, switched from grape to sliced tomatoes in salads (salad sales were very low anyway), picked a different (cheaper) type of napkin they gave, and was able to reduce expenses overall by cutting costs in areas where most people didn't notice. Then he lowered prices a little bit and used coupons to increase traffic, while reminding people why they like the brand so much. In addition he reduced management salaries and paired the menu down to items where they felt they had an advantage and sold well (do less, but make it your best). They sold off some of their unprofitable locations and redirected cash flow to completely pay off their debt. The company never had to file for bankruptcy and performs well now.