Starting a bakery is a dream for many. The smell of fresh bread, the sight of glazed pastries, and the joy of creating delicious treats can be incredibly appealing. Beyond the enticing aromas and delightful tastes, running a bakery is a serious business that requires more than just baking delicious treats.
People who love baking often believe that opening their own bakery is the next logical step. However, more than passion, patience, and a business mindset are needed for this adventure. If you’re interested in starting a bakery, keep reading as we guide you through the steps toward realizing your dream.
Business Overview
Bakeries produce bread, cakes, cookies, pastries, and other baked delicacies to sell directly to customers (retail bakeries) or businesses like grocery stores, restaurants, schools, etc (commercial/wholesale bakeries). Most bakery revenue comes from bread and rolls. Bakeries range from small “mom and pop” shops with just a few employees to large commercial producers employing hundreds.
Bakeries can also 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 exclusively offer wedding cakes.
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Industry Summary
Bakery cafes are expected to generate over $17.1 billion in 2023, according to research from IBISWorld. The industry is mature, but people view bread as a dietary staple, so bakeries tend to be recession-resistant. However, specialty bakeries selling higher-priced treats are more vulnerable to economic fluctuations.
The bakery industry is highly fragmented, leading to fierce competition among bakeries. In addition, bakeries face increasing competition from in-store bakeries in grocery stores and trendy cafe bakeries attached to coffee shops.
A few trends to be aware of:
- Growing consumer preference for locally sourced, natural ingredients over preservatives is expected to fuel growth, in addition to offering vegan options.
- Health-conscious customers are showing decreased demand for foods high in sugar, including cakes, cupcakes, and muffins.
- There is a rising popularity of “semi-homemade” convenience foods like ready-to-bake cookie dough.
- Bakery cafes tend to be distributed according to population density, with concentrations in the West, Southeast, and Mid-Atlantic regions.
Steps To Start A Bakery
Opening a bakery is a huge and complicated endeavor with many things to consider, but this checklist will help list the common steps to get started.
Step 1: Research the Market
Starting a bakery business is a dream for many people, but not every potential business owner stops to consider whether there is room in the local market for another bakery. Understanding the local demand and the competitive landscape are important factors when evaluating the viability of a new bakery. Here are some tips on how to assess the market before opening a new bakery:
Conduct a demographic analysis: The first slice of market assessment is to understand who lives in the area. Age, income, and lifestyle play a big role in what people eat and buy. Is the neighborhood full of busy professionals who might grab a coffee and a croissant on their way to work? Or is it family-oriented, where weekend brunches might be the norm? The Census Bureau website can help with researching the demographics in your area.
Conduct competitor analysis: Analyzing existing bakeries in your area is also very important for understanding the competitive landscape. Identify and closely examine your competitors, analyzing their product offerings, pricing, and customer reviews. This research provides insights into the strengths and weaknesses of your competitors, as well as identifying gaps in the market where a new bakery could effectively position its offerings. Be aware of what your competitors are lacking and emphasize those areas to stand out.
Determining if the area is under or oversaturated with bakeries will impact the viability of adding another bakery. An oversaturated market might indicate challenges in attracting customers or differentiating your business, while a market gap could signify an opportunity for your bakery to thrive.
Decide what kind of bakery you want to open: This research should give you a good idea of the competitive landscape and help identify whether your bakery should specialize in a specific type of baked goods (e.g., bread or cupcakes) or if you plan to offer a wide range of products.
Also, don’t forget to consider wholesale accounts such as local grocery stores, convenience stores, and restaurants. While the profit margins on these sales are often lower than selling in your store, these consistent sales can be consistent and worth pursuing. They can also increase your exposure and brand recognition.
Step 2: Write a Business Plan
Once you’ve finished researching the market and gained a better understanding of the potential for your bakery, the next step is to write a business plan. While securing funding is one significant reason, there are other important reasons to write a business plan.
Clarifies your idea: When you’re caught up in the excitement of starting a business, it’s easy to get carried away with your ideas. Writing a business plan forces you to think critically about your concept and clarify your business goals. You’ll need to define your target market, decide on the types of products you’ll sell, determine pricing, and develop strategies to attract and retain customers. By doing this, you’ll have a better understanding of what it takes to make your bakery idea a success and make mistakes on paper – not with your savings.
Tests the feasibility of your idea: Writing a business plan involves creating financial projections that analyze your bakery’s expected costs and sales. This helps you assess the feasibility of your idea and determine if it can become profitable. It also allows you to anticipate potential challenges and make necessary adjustments in advance.
Helps you stay focused: Starting a business can be overwhelming, but a business plan can help you stay focused and motivated. By creating a roadmap for your bakery, you’ll have a clear idea of what you need to do to achieve your goals. This can help you stay on track and avoid getting sidetracked by distractions or setbacks. A business plan can also help you stay motivated by reminding you of your why and the vision you have for your bakery.
Related: How to write a business plan
Step 3: Secure Funding
Once you’ve verified a market for your bakery and completed your business plan, the next step is to ensure you have access to the funds to start your business. Securing funding can be one of the most challenging aspects of getting started, but the following are the most common types of funding for a bakery.
Personal investment: First, look at your personal savings to determine how much you can use to finance your bakery. Given the cost of starting a bakery, you may need to explore outside funding sources.
Lenders: If personal funds are not sufficient, lenders are the most common source of outside funding. Most lenders will require you to invest at least 15% of your personal savings towards the total cost of the project, and a good credit score and collateral are also needed. If the bank considers your loan too risky, they may utilize an SBA (Small Business Administration) loan guarantee, which provides additional assurance that the loan will be repaid.
Friends and family: Another potential source of funding is friends and family. When seeking funding from them, put any agreements in writing to avoid misunderstandings or strain on relationships.
Microloans: If your funding needs are relatively low or you don’t have access to traditional credit through a lender, consider exploring microloans. Some microloan programs even offer business training in addition to providing funding.
Related: Finding the money to start a business
Step 4: Register the Business
Starting a bakery requires more than just a passion for baking and a solid business plan. It’s also important to ensure that your business is properly registered and legal. Here are some steps you’ll need to take:
Choose a business structure: The first task is choosing a business structure. This choice will impact various aspects, including liability, taxes, and management style. There are four main types of business structures:
- Sole proprietorship: This is the simplest and most cost-effective structure to set up. As a sole proprietor, you have complete control over your business but also bear all the business’s legal and financial obligations.
- General partnership: In a general partnership, two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor, or skill.
- Corporation: A corporation is a separate legal entity owned by shareholders. This means the corporation itself, not the shareholders (generally), is legally liable for the actions and debts the business incurs.
- Limited Liability Company (LLC): Like a corporation, an LLC provides limited liability protection while offering more flexibility in terms of management and taxation. It’s a popular choice for many small businesses, including bakeries.
Related: Comparison of business structures
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Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
Related: Tips for naming a bakery
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Related: Finding a domain name for your business
Obtain business licenses and permits: Depending on your location, you may need various licenses and permits to operate a bakery. This could include a business license and sales tax permit. Checking with your local and state government will help you understand the specific requirements for your area.
Related: State guides for general business licensing
Follow food service regulations: As a bakery, you’ll need to adhere to local health department regulations and federal food safety standards. This will typically involve obtaining a food service license or health department permit, in addition to regular health inspections and specific requirements for food preparation and storage.
Step 5: Set Up Operations
Turning your bakery dream into a reality requires moving from the planning phases into action. This stage involves making key decisions on location, equipment, and suppliers.
First things first, you need to find a good spot for your bakery. Location affects matters like attracting customers, accessibility, and convenience, especially if you plan to make deliveries. Your choice of location matters based on the type of bakery you have. For example, a bakery specializing in wedding cakes may require a different location than a bakery that specializes in bread. Additionally, if you plan to operate from a home kitchen, make sure you review the Cottage Food Laws to ensure compliance with commercial sale regulations.
After acquiring a location, you must determine if there are any renovations are needed. Construction and design can influence customers’ first impression of a bakery, so plan the space well. After identifying what needs improvement, make a budget, establish the timeline, and hire a contractor (if necessary). Doing this will help to identify the necessary permits and licensing. Check with the city council and with the fire department to guarantee safety and compliance with fire codes.
With the location settled, the next task is to equip your bakery. Equipping a fully functional bakery can be expensive, but it’s an investment that you will need to make. When selecting equipment, consider factors such as the size of your bakery, the number of baked goods you plan to sell, and your budget. You can either buy the equipment outright or lease it if you’re on a tight budget.
Last, a successful bakery relies on high-quality ingredients. Before opening your bakery, you need to decide what you’re going to sell and create a menu. Consider which baked goods you will specialize in and what ingredients you will need, and then find suppliers. This includes flour, sugar, eggs, and other baking ingredients, as well as boxes, bags, and other materials for packaging your products. It’s important to find reliable suppliers who can provide high-quality ingredients and materials at a reasonable cost.
Step 6: Hire Staff
As you set up your bakery, one of the steps you may need to consider is hiring employees. The hiring process involves several responsibilities and legal requirements that you, as an employer, must adhere to to ensure the smooth and compliant operation of your business. A few of these legal requirements you may need to address:
Obtaining an Employer Identification Number (EIN): An EIN is a unique number assigned by the IRS for businesses to report taxes.
Verifying employment eligibility: As an employer, you are required to confirm that each new employee is legally eligible to work in the United States. This typically involves completing the I-9 form.
Understanding state hiring requirements: Each state has different hiring requirements, which may include specific forms to be completed or additional taxes. It’s essential to check with your state’s labor department to ensure compliance.
Providing workers’ compensation: Most states require employers to have workers’ compensation insurance to cover any job-related injuries or illnesses.
Complying with labor laws: Employers must adhere to federal and state labor laws, which cover areas like minimum wage, overtime, record keeping, and youth employment.
Related: State guides for hiring your first employee
Step 7: Prepare to Open!
Before starting your bakery, there are a few remaining steps you’ll need to take care of. While the needs may differ for each individual, here are some common considerations to keep in mind:
Business insurance: Obtaining business insurance protects your bakery from potential risks and liabilities. It provides coverage for property damage, accidents, and other unforeseen circumstances.
Setting up bookkeeping: Accounting software is used to handle daily transactions, taxes, and financial statements, which will help you keep track of your income and expenses and make tax filing easier.
Opening a business bank account: Opening a business bank account allows you to manage your bakery’s finances separately and makes accounting and record-keeping easier.
Create a marketing strategy: To attract potential customers, it’s important to develop a comprehensive marketing strategy. This may include designing a professional logo and creating a well-designed and user-friendly website. Incorporate other marketing tactics such as social media presence, online listings, and traditional advertising to raise awareness about your bakery.
Preparing for the grand opening: As you approach your bakery’s grand opening, make sure to finalize any remaining specific items. This may include procuring supplies, training your team, creating a welcoming atmosphere, and considering any special promotions or events to generate excitement and attract customers.
Related: What kinds of insurance does a bakery need?
Common Questions When Starting A Bakery
How much does it cost to start a bakery?
Starting a bakery involves various costs that potential bakery owners should consider. These costs can vary depending on factors such as location, size of the bakery, and individual preferences. It’s important to note that these estimates are rough guidelines, and actual costs may differ.
On average, initial costs can range anywhere from $10,000 for a small-scale operation to well over $100,000 for a fully equipped retail bakery. Here’s a breakdown of the categories and estimated costs involved.
Location: The cost of a location for your bakery can vary greatly depending on the size, location, and condition of the property. A deposit is typically required, which is usually equivalent to one or two months’ rent. For a small bakery, this could range from $1,000 to $5,000, while a larger commercial space could require a deposit of $10,000 or more.
Renovations: Modifying a space to suit a bakery’s needs, including kitchen, sales, and seating areas, can cost between $10,000 and $50,000.
Equipment: Commercial-grade kitchen equipment is a significant expense. Ovens, mixers, refrigeration, and display cases can cost between $15,000 and $100,000, depending on the quality and scale of the purchases.
Inventory: Initial inventory of ingredients and packaging might range from $2,000 to $5,000.
Licenses and permits: Depending on the location, the cost for food service licenses and health department permits can range from $100 to $1,000.
Insurance:
Insurance: Initial insurance costs, covering liability and property, can be between $1,000 and $3,000 for the first year.
Marketing: Initial marketing efforts, including branding, website development, and promotional materials, might cost from $1,000 to $5,000.
How profitable is a bakery?
Based on industry research, a moderately successful retail bakery generating around $300,000 in annual revenue could potentially produce around $60,000 – $90,000 in profit.
The typical retail bakery brings in revenue through sales of baked goods like breads, pastries, cakes, and desserts. Assuming average transaction sizes of $5 and volumes of 150 customers per day, annual sales would reach $273,750 annually (150 customers x $5 average ticket x 365 days).
Common ongoing operating expenses range from 50-60% of revenue, including ingredients (25-30% of revenue), labor (10%), packaging/ingredients (5-10%), utilities (5%), marketing (2-3%) and other overhead costs. That would mean roughly $150,563 in annual expenses (55% of $273,750 in revenue).
Subtracting the $150,563 in estimated annual expenses from the $273,750 in estimated annual revenue results in $123,187 in gross profit dollars.
Further subtracting estimated payroll taxes, maintenance, credit card processing fees and other recurring overhead of around $30,000 – $60,000 means this hypothetical bakery could produce annual pre-tax profits in the range of $63,187 – $93,187.
However, it’s important to note that these are rough estimates, and actual figures can vary significantly based on a variety of factors.
What skills are needed to run 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. 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.
What is the NAICS code for a bakery?
The NAICS code for a bakery is 311811.
The NAICS Code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
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
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