

Ask HN: Does anyone have any resources for turning a pastry shop around? - marcamillion

I have a friend that has been running a 'seemingly' successful business. On the outside, their brand holds cachet, and their customers love their products.<p>They are running a pastry store.<p>However, for the longest while they have been barely breaking even or running a loss some years. A good deal of it is because they have taken on loan financing in years past to fuel expansion, but things have changed and haven't always panned out like they anticipated.<p>Bakeries/pastry shops tend to have high overhead because of the many hands it takes to do the actual baking every day.<p>It's a small shop, with no distribution partners.<p>Does anyone have any advice/resources that I can use to help them turn their situation around? Perhaps case studies of other turn arounds? Regular resources about how to establish distribution partnerships, etc.<p>Btw, the founder has a good marketing/product eye, but not so much for the business side of it.<p>The business is not based in the US.<p>Look forward to your feedback.
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jakarta
It's tough to say without seeing the actual financial statements to get an
idea of what needs to happen.

Usually, in the restaurant industry when management makes the mistake of
taking on debt and opening up break-even/not profitable stores the way to
reverse it is to basically close those locations down and cut costs (without
impairing the brand) while paying down the debt.

~~~
marcamillion
So you would say that the best bet is to focus on paying down debt, then
trying to grow organically?

~~~
jakarta
It's difficult to say without figuring out what their big problem is.

If they have always been struggling to break even then there is either an
issue with volume/pricing (depending on the structure between fixed and
variable costs).

If they were doing well and then took out a loan + executed the expansion
strategy, which caused costs to rise (esp. due to the fixed costs of new
locations + increased interest expense) then maybe that is where they need to
focus their attention.

~~~
marcamillion
Another issue has been their pricing strategy. Do you have any resources on
how to figure out pricing? i.e. how to calculate COGS - from both variable +
fixed costs.

The more I think about it, is the more I think pricing/volume is the bigger
issue.

~~~
jakarta
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
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
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
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
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.

~~~
marcamillion
Nice! That's a pretty interesting story, and there can potentially be some
parallels to my situation.

I am going to do exactly what you suggested.

I am going to recommend, starting next month, we record everything. All the
revenues for all the items (there are more than 60), and all the expenses.
Then, from there we see if the 80/20 Pareto principle applies (to both costs
and revenues) - I suspect it does.

Then from there, figure out how to allocate costs (because I don't think it is
being done properly now).

Then we will see how it goes from there.

Would you mind if I reached out to you via email, if I had any additional
questions? I promise not to badger you too much :) If not...no worries.

~~~
jakarta
postalservice at gmail.com

