Formula For Business Growth Increased sales, but no profit?

I was sharing this story with a food business workshop I did this week for SF Made.  There were attendees at the workshop that wanted to start wholesale businesses and I knew they needed to know this.  I remember when Michael and I figured this out for our business, Noe Valley Bakery, we looked at each other and said, “why haven’t we known this all along”?

The revelation

In 1997, Noe Valley Bakery expanded from our single retail store to include a 6000 square foot wholesale bakery.  We bought four food trucks and had customers all over the Bay Area.

We built our company to have 100 employees and 3 million dollars in sales annually. But we weren’t making a profit in the wholesale division.

Every time we increased sales, our costs would go up equal amounts and it kept us cash strapped and struggling.  The retail store was carrying the whole company in terms of profits.  At a trade show, we met a consultant with whom we started to work with and he gave us a formula that changed our business.

He told us to add up all of our transportation costs and divide it by the number of delivery stops we were making at our customer’s businesses.  Simple, right?  Well, we had been tracking our transportation costs and looking at them as a percentage of total sales, but we did not know to calculate the number of stops we were making each month and use that number in our analysis.  Right away we started adding up the number of stops and at the end of the first month we had our number. When we took the transportation costs and divided it by the number of stops, we found that it was costing us $15 to make each delivery.  This was a huge revelation to us!  Many of our customers were buying only $20 – $25 each day.  We had lots of customers that had small restaurants and they would buy 20 baguettes each weekend day and even less on weekdays.  We realized as soon as we saw the cost per stop that we were losing money on every one of those small deliveries!  If it cost us $15 just to get the bread there, what was left to pay for the ingredients, the bakery labor, the packaging, and the administration of the office to invoice, bill and collect payments?  One of our cost problems became clear to us just by learning to use one more number in our analysis – amazing.

The result

What did we do once we had this information?  We raised our delivery minimum to $50.  This was a painful choice because it meant that many of our beloved small customers had to go elsewhere for their bread.  They didn’t need $50 worth of baked goods each day and so they had to leave us.  Firing your customers like that is really scary and difficult thing to do.  We are in the business of saying yes to our customers and here we were saying no.  Later, we even raised the minimum to $75 per stop.  We really pursued larger customers who could make each stop more profitable.

If you are wholesaling your product and will be delivering it directly, I urge you to do this calculation right from the start to make sure you are managing your costs.  I work with many of my clients to share the experience I have gained from owning Noe Valley Bakery for 20 years.  Check out my programs to see how we can work together.