How to Start a Bakery

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If you love baked goods and have always enjoyed preparing them, then opening a bakery might be the perfect business for you. Owning a bakery is hard work, but it can also be rewarding to see your foods bring joy to others. Before opening a bakery, though, it’s important to understand everything that will go into this type of business.

Business Overview

Bakeries offer freshly baked goods directly to consumers, or others are wholesale bakeries selling their goods to retailers and grocery stores. Some types of bakeries include a cafe design, allowing consumers to sit and enjoy the goods right in the stores. Others may adopt a catering model, selling their goods to people who are hosting events.

Bakeries can specialize in many different areas. A business might specialize in offering tasty yet healthy baked or gluten-free goods, while others might focus on elaborately decorated cakes or even in offering wedding cakes exclusively.

Industry Summary

From 2015 to 2019, the bakery industry underwent significant growth. According to IBIS World, during that five-year period, the number of bakeries grew to 11,533, and industry employment increased to 180,291. The industry experienced 2.9 percent annual growth, and in 2019 the bakery industry brought in $11 billion in revenue.

The growth of the bakery industry is partially the result of the increase in per capita disposable income during that time, leaving consumers with more money to spend on luxuries like baked goods. The bakery industry also combines the convenience of fast food with the quality of the food you would expect from a restaurant, making it a desirable option for consumers.

Industry Trends

Numerous trends are shaping the bakery industry, and understanding these trends can help an owner to position their bakery for success. According to Harvest Food Solutions, one of the major bakery industry trends is an increasing demand for healthier food options. Besides moving away from high-fructose corn syrup and artificial dyes, consumers are looking for foods that blend both taste and health. Many bakery owners are meeting this demand by using grains, fruits, cocoa, and natural sweeteners to create tasty foods that are still health-conscious.

Closely linked to the demand for healthy food is a demand for fresh foods that are baked using fresh ingredients. Consumers pay more attention to when products were baked and how fresh they are when they’re put up for sale.

Bakery owners also need to be aware of the focus on the taste, texture, and appearance of baked goods. A bakery owner needs to make sure that the foods they’re presenting match their audience’s demand for flavors, whether those are traditional or more creative, adventurous tastes.

Target Market

Bakeries will have different target markets depending on their business models. A bakery that includes a cafe might market to consumers with a love of fresh-baked breakfast foods and treats. A retail bakery that offers strictly breads or pastries will have a different audience, marketing to consumers who value fresh quality food or vegan baked goods with organic ingredients and who are willing to surpass the grocery store and make a special trip to a bakery.

Bakeries may also develop other target markets. Some may offer catering services and specialize in cakes and foods for weddings and parties. Others may focus strictly on cakes, creating highly detailed and beautifully decorated cakes at premium prices. All of these factors will affect a bakery’s target market.

Skills, experience, and education useful in running a bakery

While you won’t need a business degree to start a bakery, certain skills and experiences are useful and can increase the chances of your business being a success.

Baking experience. Experience working in a bakery is highly valuable in starting a new bakery business. Knowledge of baking recipes and decorating practices will help ensure that a business starts by offering a quality, consistent product.

Attention to detail. Attention to detail might be one of the most important elements in running a bakery since detail is everywhere in this setting. From creating aesthetically pleasing displays to ensuring that every product represents the bakery well, a natural eye for detail goes a long way in this industry.

Foodservice experience. Baking is only one part of the equation in running a bakery. If a bakery offers eat-in options and seating, then some food service experience helps take orders, prepare drinks, and serving customers.

Customer service skills. Great customer service skills can help a bakery owner to establish an excellent reputation for their business. The ability to listen to and address customer concerns in an understanding way is important.

Management experience. Many bakeries require at least a few employees. Experience in hiring, training, and managing staff can help an owner to navigate this process.

Networking skills. Networking talents can be helpful in this industry, especially for small businesses that offer catering options. Establishing and maintaining relationships with local event venue owners can lead to increased referrals and future business.

Marketing skills. The more marketing that a business owner can do on their own, the more they can save over hiring a professional marketer, which can be important in the business’s early stages. In particular, some basic photography skills and knowledge of social media marketing techniques can help get a business off the ground.

Costs to Start a Bakery

Starting a bakery can require a significant financial investment, but there are also ways to start your business on a tighter budget. Beginning the bakery out of your home kitchen can help you save on expenses, and you can start a home-based bakery for about $5,000. Expect to spend closer to a minimum of $40,000 – $50,000 to start a larger-scale bakery with storefront space.

Common startup costs include:

  • Inventory (The ingredients used to make baked goods)
  • Equipment, such as work tables, dough proofer, commercial mixers, refrigerators, ovens, etc.
  • Renovations to the building
  • Display cases and storage shelves
  • Furniture (for a sit-down bakery)
  • Delivery truck
  • Signage
  • Initial rent

Steps to Starting a Bakery

Step 1: Write the Business Plan

After coming up with the idea, the next step in starting your business should be to write a bakery business plan. The business plan will help work out the details of your business and focus on important aspects such as costs to get started, market research of the competitors, marketing strategies, and more. Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.

Related:
How to write a business plan
Free sample business plans

Step 2: Name the Business

Finding the perfect name for a business can be challenging. Not only does the name have to resonate with your customers, it also has to be available to use.

Related: Tips for naming a Bakery

Step 3: Form a Business Entity

A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from,: sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

Related: Comparison of Business Entities

Step 4: Select your Location

While it may be possible to start small as a home bakery business or operating from a shared commercial kitchen space, and eventually a larger kitchen and possibly a storefront for sales will be necessary. It’s ideal to find a lease property that is already equipped with a commercial kitchen, which can save on renovation costs. Rental costs will depend on the size of the building and its location. For a bakery with a storefront or a cafe-style business with counter service and seating, rental property in a high-traffic retail area can bring in walk-in traffic but will come at a higher cost.

Before signing a lease, confirm the landlord has or can obtain a Certificate of Occupancy.

Related: Choosing a business location

Step 5: Obtain an EIN

The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Federal Tax Identification Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file federal and state taxes, and more.

There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.

Related: How to Apply for an EIN

Step 6: Apply for Business Licenses and Permits

There are some bakery specific licenses that will vary by location. Some of these include food handling certification, food service license, and approval from the Health Department.

Also, there are some general business licenses and registrations, such as a sales tax permit, Employer Identification Number, and Occupancy Permit, among others.

Related: Common business licenses, permits, and registrations by state

Step 7: Find Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a bakery is another. Funding to start a bakery can be difficult due to the costs of renovations, inventory, and equipment. To get a loan, the borrower(s) will need to have good credit and be able to invest 15-25% of their money towards the total start-up costs.

Related: Finding the money to start a business

Step 8: Open a Business Bank Account

Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the income and expenses of the business.

Step 9: Get your Marketing Plan in Place

Marketing is essential to a bakery’s success, important in the early startup days of the business. Common bakery marketing activities include maintaining active social media pages, establishing a website, participating in local print advertising, and even incorporating online advertising methods into the plan. Exact expenses will vary according to the type of marketing being performed.

Related: Low-cost ideas to market a new business

Step 10: Get Business Insurance

Bakeries need several types of insurance to be fully covered:

  • General liability insurance protects the business if customers are injured while on the business’ property. This insurance can cover costs like legal fees.
  • Commercial property insurance protects the bakery against the financial loss of inventory and property after an event, like a fire.
  • Commercial auto insurance covers the expenses, like legal fees and medical bills, that can result if a company-owned vehicle is ever in an accident.
  • Workman’s comp insurance helps to cover expenses like medical bills or lost wages if an employee is ever injured while on the job.

Insurance policy costs can vary depending on factors like the bakery’s location, the value of its equipment and the building, and the number of employees on staff. To get an accurate idea of what insurance will cost, request quotes from multiple insurance providers. Then, compare the quotes, paying attention to factors like coverage limits and exclusions, premiums, and deductibles.

Related: Types of insurance your business may need

Step 11: Hire Employees

Depending on a bakery’s size, it may be necessary to hire one or more additional employees. According to PayScale, average hourly salaries for common bakery staff positions are as follows:

  • Baker: $12
  • Cake decorator: $12
  • Pastry chef: $13
  • Cashier: $9
  • Barista: $11

Employee salaries aren’t the only expense that comes with hiring staff. A bakery’s budget also needs to include expenses like workers’ comp insurance, paid time off, and health insurance contributions.

Related: Hiring your first employee

Step 12: Set up an Accounting System

Setting up an accounting system for your bakery is critical to the long-term success of your business.

Look into good Point of Sale systems (POS) which tracks sales, which will provide insights to what to stock more or less of, quickly track daily profits and more.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up accounting for your business

How much can you potentially make owning a bakery?

According to BizFluent, the annual income for a bakery general manager, who is often the owner of the business, ranges from $25,000 to $52,000 per year. Many factors can affect this income, including the number of years the bakery has been in business, the size and location of the bakery, its specializations, and even how efficiently the bakery is run. For instance, a manager who has an excellent idea of how much product the bakery will sell each day can customize production to meet demand more precisely. This minimizes inventory waste and helps to maximize profit.

Things to consider before starting a bakery

Expect to face some unique challenges when starting your own bakery business. The first will be to find out about food preparation regulations in your town. Some towns may allow you to prepare baked goods in a home kitchen with certification, while others will require a commercial facility.

Sales of coffee can be a big percentage of revenues for a baking business. Be sure to find a great product to offer in your store to encourage additional sales.

It’s also important to carefully consider how to price baked goods. The price needs to be competitive among other local businesses, but it also needs to be profitable for the bakery. Sourcing bulk-purchased ingredients at a discount will allow a bakery to balance these factors, but finding a quality and reliable source can be challenging, especially when just starting up. Many food suppliers will assist in helping cost each of your recipes which is valuable when determining the retail price of items, so be sure to budget time for plenty of phone calls during this part of the process.

 

Resources: 

Allied Trades of America
American Bakers Association
American Culinary Federation
American Pie Council
Bread Bakers Guild of America
Cookie & Snack Bakers Association
Independent Bakers Association
Retail Bakers of America