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Special to The Globe and Mail

April 7, 2008

Like many small to mid-size bakers, Michael Walter has been feeling the pinch as of late. Located in Peterborough, Ont., the organic bakery he heads up with wife, Annette Stickling, has long had a following in the health food market. But larger commercial bakers are inching in on this sector.

“Many of them are seeing losses in regular white bread,” says Mr. Walter, whose team of bakers produces traditional sourdoughs and other goods made from organic whole grains. “So they’re tapping in.”

Add the rising cost of wheat and its distant cousins Kamut and spelt (wheat has shot up 100 per cent since January) to this competitive climate and you can see the troubles facing small-business owners such as Mr. Walter.

The rising costs, he says, translate to roughly 15 cents a loaf - 15 cents that he and other bakers will have to pass on to consumers.

Like many artisanal bakers, Stickling’s got its start before the good-for-you boom. Founders Hans and Gisela Stickling (Mr. Walter’s in-laws) opened a shop in downtown Peterborough in the mid-eighties, and began selling baked goods to what was then a niche market - the “health-nutters” who frequented local farmers’ markets in search of something that now seems like plain common sense: good, wholesome food.

But as consumers became nutrition-conscious and grocery stores responded by opening health food aisles, business took off. “The late nineties were a very exciting time for us,” says Mr. Walter, who became involved with the company in 1988. “Artisan breads were really coming up strong.” By then, the Sticklings were distributing to independent health food stores and grocery stores in Ottawa, Montreal and Toronto. The upturn continued. “From 2002 to 2005 we doubled our sales.”

Given that competition has cooled growth in the past few years, Mr. Walter is now looking for ways to continue to expand. And while he’s pretty sure consumers will be understanding of price hikes, he’d like to lower the costs he passes on to them, if possible.

Should Mr. Walter look at using other, less expensive ingredients? It’s not a move he’s comfortable making. He says he’d rather expand distribution cautiously and continue to manufacture products for larger companies to sell under their own names. Creating specials, where products are sold to retailers at a 10- to 15-per-cent discount, is another way he hopes to increase sales.

What the Experts Say

Maureen Atkinson, a senior partner at Toronto-based J.C. Williams Group is familiar with trends in the luxury food business. Continuing to produce his product to high standards, she says, is the best decision Mr. Walter could make. “Consumers are going to be fairly understanding of the price jump, because it is happening across the board. The worst thing he could do is to make a lesser product.”

Asked if there is any concern that consumers will shy away from such products if rising prices continue, she waves the thought away. “There are big luxuries and there are small luxuries. His product is a small luxury.” Continuing to manufacture finished products for larger companies is a great way to offset costs, says Ms. Atkinson, since Mr. Walter will be doing so over and above the same fixed costs of his machinery. Ms. Atkinson emphasizes the importance of Mr. Walter’s brand image. “He’s definitely where you want to be as a [food retailer] right now,” she says, noting that the health food sector shows no signs of slowing. “Mr. Walter needs to continue to focus on conveying the quality of his brand,” she says, adding that this will help him to get his products onto even more retailers’ shelves.

By the sounds of it, Mr. Walter is already on the right path. Stickling’s products are currently available at Sobeys, No Frills and Loblaws in Toronto. He has inked a deal with A&P, and hopes to convince Dominion to take him on next. “If he’s not already at Whole Foods, he should try to sell to them,” Ms. Atkinson says. “He should also consider hotels and restaurants to build reputation.” The key here, again, is focusing on what makes his product unique. “He has to find the right words to describe why his product is special, the words that a restaurant owner would put on their menu,” she says.

Building his reputation could also help alleviate a secondary problem, Ms. Atkinson says - namely, how to attract and keep entry-level labor in Peterborough, where four major food manufacturers, including Quaker Oats and Minute Maid, are in operation. These companies dole out unionized wages, and Mr. Walter says he can’t compete.

“That’s a tough one,” says Ms. Atkinson, admitting that there may not be an easy solution. “But again, if he can emphasize the quality of the product, that it means something to work at Stickling’s, then he may have more luck.”

Steve Gibson of artisanal bakery Fred’s Bread sympathizes with the challenges Mr. Walter faces. Beginning 14 years ago with a sourdough starter, his bakery now produces a variety of sourdoughs made according to authentic French tradition; baked in a stone-hearth oven, loaves take more than 24 hours to complete. Mr. Gibson understands the competitive marketplace and also bemoans soaring wheat costs, but agrees customers should understand an industry-wide price hike.

Should Mr. Walter continue to deliver the same product? “Absolutely,” Mr. Gibson says. “There is an overcapacity of bakeries out there. If he compromises, then he won’t be differentiating himself from the competition.”

Mr. Gibson also agrees with Ms. Atkinson’s suggestion to get the Stickling’s product into restaurants. “We are in a lot of restaurants and that works well for us. A lot of people end up asking where they can purchase our bread.”

This is the reason Mr. Gibson thinks creating specials may not be the wisest idea. “If you are in the upper end, you know you are the best,” Mr. Gibson says. “You don’t want to price discount.” He suggests Mr. Walter invest his money in trials instead. “If someone tries your product in one of the venues and goes ‘That’s fantastic,’ then those people will come back. Whenever we do that, we sell a lot more.”

Asked about the labor issue, Mr. Gibson sounds equally perplexed. “To attract and keep people is a challenge,” he says, “whether you are in Peterborough or Toronto.”

“[At Fred's,] we’ve had to increase labor rates significantly in the past 36 months. The only suggestion I can think of is for him to mechanize more … if he can. That way, you can increase the wages of the people that are left.”

In a nutshell

1. Don’t compromise

If you’re a gourmet food producer, quality is your bread and butter. Look for other ways to offset costs.

2. Entice potential clients with product trials

If you know you’re better than the competition, it pays to get samples into consumers’ mouths.

3. Emphasize what makes your product stand out

If your baked goods truly are artisanal and healthier than the dreck put out by culinary copycats, let your consumer know.

4. Get your product onto restaurant tables

Satisfied patrons will ask servers where they can buy the bread.

5. Consider further mechanization

You can pay the remaining staff more to reduce turnover.