Almost every “how to start a business post” tells you to first validate your business idea to ensure sufficient demand.
And they’re right.
Bakeries, however, are one business idea we know is in demand. Always have been, always will.
The first recorded industrial bakeries date back to 300 BC when the Romans perfected the Rotary Mill. The Egyptians were packing their pyramids with loaves of bread to sustain their beloved in the afterlife as far back as 3,000 years ago.
Bakeries provide high-demand products universally loved; that’s why 13.9 million tonnes are produced in the U.S. yearly—more than any other country! It’s a 3 billion dollar industry with an average small bakery annual income of around $350,000.
So, starting a bakery business can be a great way to earn a decent crust; do it right, and your business profits will rise like an oven spring. But first, you need the critical ingredients of starting a bakery business.
Okay, enough of the wordplay—let’s get you baking.
Bakeries need to sell a lot of products to make a profit because the average loaf of bread, bagel, or bun, is pretty cheap. The problem with selling low-profit margin products is you need a lot of customers, and a couple of slow days could hurt you financially.
To make your bakery business a success, you need a mix of ingredients and this post is your recipe. The first ingredient is deciding on a bakery business model.
You’ve got 3 to choose from:
Retail bakeries sell their baked goods directly to the public, not other businesses, and there are several ways you can do it. Most new bakery business owners use one of the following retail business models; let’s find out why:
This is the original bakery model that you’ll see throughout the world. There’s a bakery out back with a small commercial shop front and a member of staff serving baked goods to walk-in customers.
A more recent approach combines a café and a bakery, selling confectioneries, tea, and coffee to eat in and take away.
Starbucks is a commercial example of the business model, but bakery cafés have been the focal point of local communities throughout Europe for 100s of years.
Food truck popularity has skyrocketed over the past 20 years. A fast and effective way to go where the demand is, such as local events, street fairs, industrial areas, festivals, and sports days.
Besides a retail business, you could also offer wholesale and deliver your baked goods to multiple local cafés and restaurants; we’ll look at that next.
Wholesale means selling your baked goods to another business (B2B), who’ll then sell them to consumers, like delis, grocery stores, cafés, and restaurants.
Wholesale bakeries deal in large quantities to meet commercial demand, so they are more extensive than retail bakeries.
Another pro about opening a wholesale bakery is you could do it from home, reducing your set-up costs and increasing your sales options.
Do a quick search on Google for “home bakery success stories,” and you’ll see dozens of ordinary people who’ve built thriving businesses, some with no baking experience.
You’ll also notice that many of these entrepreneurs started and ran their bakery businesses in different ways, and that’s great because it shows a diverse marketplace with a hungry audience.
Every business idea (even validated ones) needs a straightforward business plan, so the owner (you) knows the answers to the following questions: Who, what, where, why, and how much?
Once your plan answers those questions, your bakery business will have the ingredients it needs to succeed.
Here are 4 crucial reasons you need those answers:
A well-written traditional business plan summarizes your vision, manages progress, and strategies for unforeseen events. It covers how you’ll structure your business, what type of products you’ll sell, your marketing strategies, and finances.
Finances like your break-even projections, current monetary position, and other financial information so you can confidently approach investors.
There are 7 main sections to your traditional start-up bakery business plan:
The takeaway is that if you need a potential investor or a start-up loan, you’ll need a traditional business plan; if you don’t, then a one-page plan is often sufficient.
Unlike a traditional business plan, which is for investors to review your business, a one-page plan answers the questions you need to know.
One-page business plans are quick to write, help you set your goals, and implement strategies to reach them. It tells you about your current position and the next steps you’ll need to take to achieve success.
It’ll answer questions like:
Remember, one-page plans are only suitable for small businesses that don’t need funding; if that’s you, check out our article on how to write a one-page business plan by asking the right questions.
Naturally, business plans differ to suit each business owner’s unique needs and circumstances, but some keynotes your bakery business plan should include the following:
Your target market is the people that will want and pay for your bakery goods.
For example, I live in an Italian village with 11 bakeries—4 on one street! But they all sell out every day because they offer different treats. Some sell focaccia in its many variations, others focus more on the delicious Italian loaves of bread and pastries, and one or 2 provide gluten-free versions.
Your bakery won’t suit everyone, nor should you try. A better approach is to offer a range of products that serves a specific demographic of your local area.
Once you know your target market, you can create your menu. Will you specialize in artisan bread? Ethnic baked products like egg tarts or challah bread? Gluten-free or vegan-friendly goods? Cakes or Macarons?
An excellent example of how a selective menu can work a treat is Anthony Rosemond, the founder of Pastreez; he moved to the U.S. in 2017, tested a lot of bakery goods, and chose macarons. His online business has sold over 1 million of the tasty little treats, generating over $25,000 monthly with only 2 staff members.
The takeaway is to test different products and find your most valuable product (MVP).
Another critical element to include in your bakery business plan is equipment; we’ll look at what you might need a little later in the post.
Your bakery location should suit your target market. For example, if it’s hungry early morning commuters, then a location near public transport would get a regular passing trade. For families and special occasions baked goods, malls, and local high streets would get the right-foot fall. And for office workers, you’d set up shop in a business district location.
Choosing the right location is essential when you start a bakery business because when you’re new, people are unlikely to seek you out; you need to be where they can find you and, if possible, with convenient parking.
Some other things to consider when choosing your location are:
Your budget is essential when selecting your location because no one wants too much debt or financial pressure when starting a bakery business. That’s why choosing your location is a balancing act. It must suit your budget and have enough customers to provide a consistent cash flow to reach your break-even point as quickly as possible.
Your break-even point is when your outgoings match your income and when you begin making a profit. When considering a location, allow for all your operating costs, such as rent, local and federal taxes, licenses and permits, water, electricity, labor, and security deposits.
They all add up!
I discuss business start-up costs (what every new business owner should know) in this post.
While you don’t want to open your bakery in a saturated market, it’s a good location if those other bakeries are successful.
For instance, the 11 bakeries in my town flourish because Italians love bread and all things sweet. Still, they were also wise enough to identify different target markets and adjust their menus to cater to their tastes.
So, do your research, go to any locations you’re considering and spend the day there. Count the number of customers each competitor gets, see what products people buy most, then judge if there’s room for your bakery.
Counting your competitor’s customers is one way of knowing the average daily footfall in a specific location.
But if you’re setting up shop in an area without competitors, stake out your chosen property before signing a lease and count the number of people that walk by during regular business hours.
Footfall is essential, so put the time in, and you’ll earn it back in sales when you open your bakery business.
Service availability covers fast Wi-Fi, essential for opening a café-style bakery or taking online payments. You’ll also need good utilities like water, commercial-grade electricity, and waste management services. Plus, deliveries of fresh baking ingredients need to reach you quickly to ensure they go from the delivery truck to the fridge without delay.
Bakeries require lots of specialized equipment compared to many other business models.
Your bakery business model, target audience, and location determine the equipment you’ll need, so ensure you have those in place before purchasing any baking equipment.
Here’s a list of essential bakery equipment most budding bakers need:
Convection ovens are pretty standard equipment; they’re also the least expensive. Higher-end models have a steam injection and other specialized features that help you always bake the perfect loaf.
Double-ovens are also popular and enable you to bake different confectionaries simultaneously at different temperatures.
Ranges come in 3 varieties: Das, electric, and induction. Because of its controllability and speed, gas has always been the choice of the top bakers.
Professional ranges come with strong grates and insulated ovens, with burners firing up to 15,000 BTUs (British thermal unit)—far hotter than a normal range.
Bakers often use microwaves and convection ovens because they’re fast and efficient.
And using a microwave to finish baking cookies and other similar products results in a uniformed moisture distribution, giving your cookies a better texture.
Convection-style appliances work like regular ovens; you can use them for baking cakes, bread, cookies, and other goods.
Sufficient bakery ventilation is challenging for all bakeries because of the high humidity levels. You can combat this by placing fans throughout your work areas to encourage air circulation and using vent hoods and exhaust fans to extract the heat and humidity.
Most baked goods keep well at room temperature, but you’ll need a display fridge to maintain freshness when selling products with cream, milk, or custards.
You’ll also need fridges to store your ingredients; the 2 most common types use ammonia or organic compounds. But be careful when refrigerating cakes as it dries them out, especially sponges.
Most bakeries need 3 types of sinks:
Commercial dishwashers, also known as ware washing or ware washer machines, are industrial standard dishwashers that enable you to wash dozens of trays, bowls, pots, and pans at once.
Standard commercial dishwashers come in a door, under-counter, and conveyor dishwasher style.
You’ll also need hand-held equipment like knives, mixing bowls, piping bags, decorating tips, spatulas, spoons, rolling pins, doughnut cutters, and measuring cups. Not to mention cutting boards, pie pans, bundt pans, baguette pans, food processors, blenders, mixers, and storage containers.
To bake safely, you and your staff will require gloves, aprons, a first aid kit, date labels, sanitizer buckets, food-grade chemical supplies, and fire extinguishers.
Okay, we’ve covered a lot, but stay with me because now we’ll look at how you take your dream and make it a reality.
Go with me here for a minute: Close your eyes and visualize your bakery. You walk in and the smell of freshly baked bread and pastries fills the air. Your service counter doubles as a refrigerated glass display containing doughnuts and croissants filled with cream, marmalade, and chocolate.
On top in glass containers, there’s apple pie and cheesecake and numerous chocolate chip cookies waiting to be enjoyed. Behind the counter, there’s a blackboard with special daily treats. The coffee’s brewing out front, and you’re ready for another day.
Can you see it?
Now, do that with your place—visualize every square inch, create your floor plan in your head, then sketch it out.
Your goal is to ensure your floor plan flows and you achieve a balance between functionality and ambiance.
Don’t rush this stage and don’t feel overwhelmed. Here are some tips on what to include in your bakery business floor plan:
The following 6 are your work area; you’ll need to follow local laws and regulations.
Pricing is never straightforward for any new business; it’s a balance between value and profit. And in today’s online world, negative reviews about overpricing are bad for business, and underpricing could put you out of business.
Appropriate pricing helps ensure your first customers become loyal brand advocates; you can pay your bills and make a profit.
The ideal scenario is baking the correct quantity of products your customers will buy and charging the maximum amount they’re willing to pay.
If you overproduce a slow-selling product, discount it and bake less the next time. If you sell out of a specific range, you’ve found your MVP—bake more next time and slowly raise your price.
There are 3 critical elements to a pricing strategy:
Your overhead costs are the outgoings you must account for when you price your products. Overheads include ingredient costs, labor, utility bills, lease, licenses and permits, equipment and maintenance, cleaning products, waste, and marketing.
When you know your costs, you’ll know your profit margin, and that’s essential for staying in business.
You’ve got 2 types of overhead costs to consider: Fixed and variable costs.
Your fixed costs remain the same month to month; they can include your rent, licenses, permits, waste disposal charges, your POS system, etc.
Variable costs are those that rise in line with an increase in business.
For example, ordering extra ingredients, hiring more staff, and increasing utility bills as your business grows. And you might add a commercial business structure to your retail, increasing packaging and delivery costs.
When you price right, an increase in variable costs should indicate success, and your profits should rise accordingly.
Once you have your fixed and variable, you have what’s called your cost of goods sold (COGS) and can then determine your price points:
All your product prices should cover your costs plus profit. That said, many bakeries provide break-even products because they encourage sales of higher-profit items.
For instance: Coffee has a high-profit margin so to encourage coffee sales you could do a meal deal (such as a coffee and a pastry) at a discounted price. You’ll break even on the pie and earn 3 times the profit on the coffee.
You calculate your COGS using the following formula:
Cost per product = Variable costs + fixed costs + your profit margin.
Every U.S. state has rules and regulations concerning legal requirements, such as licenses and permits, so you must contact your Secretary of State or county clerk’s office to find out more. You can also learn about your state license requirements on the CalGold website.
Your bakery’s legal needs also depend on the business model and structure you choose and if you employ staff. That said, the most common licenses and permits for a bakery business are:
Most retail locations require a sales privilege license to sell their wares in retail. This license enables you to collect your local state’s sales tax (you might be exempt; I’ll explain why in a minute) on top of your sale price.
Before you pay an employee, you must get an Employee Identification Number (EIN) for your business by applying on the IRS website.
When running a bakery business from home, you must check your local zoning laws and get the relevant permits.
If you buy or rent a commercial property to run your bakery, you should also ensure it has the correct zoning permit as kitchens must adhere to strict health and safety regulations.
You only need a catering license (and possibly a food vendor license) if you go for a catering-style business model and deliver your goods to a client’s event.
A food handler’s license (also known as a food safety certificate) proves that you have gained adequate knowledge of handling and storing food. Anyone handling food (employees and unpaid help) needs one.
Your bakery must pass a health and safety inspection to gain the appropriate permits before you can open. Contact your local government health department to see what you need.
When you start a business, you must register for and pay federal income and state taxes.
The good news is in some states, baked goods are exempt from retail sales tax unless you sell your product with eating utensils.
When hiring employees, you’ll need to get an employer identification number (EIN), also known as a business tax ID. You can apply for an EIN on the IRS website.
To determine your tax obligations, research the U.S. Small Business Administration website or contact a tax accountant in your state.
Choosing your business entity is one of the first steps when starting your bakery business. To start a business and pay taxes, you must first choose your business entity. A business entity is an organization that conducts business.
All entities have varying structures that affect how you register, set up, and run your business. These structures also determine your tax obligations and level (if any) of liability protection.
I explain it in more detail in my article “Types of business entities: Everything you need to know,” including their pros and cons.
Here’s a quick explanation:
The 4 business structures (entities) you need to know about
All 4 of these structures are pass-through taxation business entities, which means you pay your tax obligations on your tax return and avoid double taxation.
Starting a bakery business is like baking a cake: You can’t skip any steps or leave anything out. Because if you do, it could collapse like an over-baked souffle!
Don’t rush the process; take it slowly and enjoy it.
Use the ingredients in this post and believe in yourself and your business idea. Your customers are waiting!
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.
Terry is a serial entrepreneur with over 25 years of experience building businesses across multiple industries – construction, real estate, e-commerce, hotelier, and now digital media. When not working, Terry likes to kick back and relax with family, explore Taoism’s mysteries, or savor the taste of fine Italian red wine.