Saturday, April 4, 2020

Will My Bakery Choose To Make Money or Bread?

May You Live In Interesting Times

I delight in bread from the local bakery. The anticipation as I walk a few minutes from home to acquire the treasure, the smell of the shop, the choosing and the build in excitement as I head back home to savour the prize. It's especially good if it's still warm but will it still be affordable and available in the new world of wacky economic incentives?
Artisan Bread Is A Treasure

The bread is not much more expensive than factory bread and with everyone getting double the previous unemployment benefit or at least 70% of the pre coronavirus median wage it is a small luxury we should all be able to afford. I expect the demand for artisan bread will increase as the customer base sits at home pondering the delights of the next meal but the bakery owner has a strong incentive to leave  more than 30% of existing customers unsatisfied.

Without government incentive the bakery will be making at least as much profit as before and probably a little more but if turnover can be reduced by 30%  the bakery can make a motza. Flour is cheap so rent and wages would be most of the bakery's expenses, let's guess wages are two thirds. Staff work two shifts daily seven days a week and they are part time. From friends that have worked there I've learned they pay minimum wage, so the $1500 per employee will mean a pay rise for staff while taking out direct  wage costs for the bakery. There is still some staff overheads so overall staff expenses are reduced by perhaps 75%. The previous and new revenue distribution is shown in Figure 1.

Figure 1 - Comparison of bakery revenue distributions with two Jobkeeper scenarios. Source: Model

Profit before was perhaps 5% of turnover but now it is 11%. That is lot more profit as a proportion of turnover but on a 30% lower turnover, it's less impressive but still more dollars. But how is the bakery to achieve the turnover reduction? The best way is to increase prices but if a 30% price rise reduced bread sales by 30% turnover would be unchanged and the bakery still wouldn't get Jobkeeper. Assume prices are doubled to reduce by roughly two thirds the quantity of bread sold they open less days, then that will lower expenses again. Lets assume wage costs are halved again and other expenses are halved, but rent is fixed so that rises as a proportion of costs. This produces a fabulous 40% profitability but again on a lower turnover. The profit under all these scenarios as a proportion of original turnover is shown in figure 2.

Figure 2 - Comparison of original profitability with Jobkeeper profitability. Source: Model

There is still nearly four times the original total profit achieved.  In the next 6 months the bakery can generate as profit that normally would take nearly 2 years. How good is that? For the bakery great, but for me not so much. I'll probably have to go back to factory bread and if the factory responds the same way I'll be eating perhaps a third of the bread I eat now while paying twice as much.

I hope the bakery owner cares more about making bread than making money.

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