Croissantanomics

I came upon a great article by The Economist from 2015 by way of this (wonderful) economics blog by Jason Welker that I wanted to share with you.

This article observes a bakery in New York City, City Bakery by Maury Rubin. A prime example of creating value in a perishable products environment, this small business focuses on four key factors for its success: use data to understand demand and supply, product diversification, presentation, and product differentiation.

Life is hard for small businesses, especially for those in cities like NYC. Bakeries and restaurants open and close in a blink of an eye.

“A good bakery is bad business. Flour is cheap but organic butter, which makes up half a croissant, is not. Central locations for outlets are expensive to rent.”

First, Mr. Rubin focuses on understanding factors of demand and supply.

“In all, it costs Mr Rubin $2.60 to make a $3.50 croissant. If he makes 100 and sells 70, he earns $245 but his costs are $260. Since he refuses to sell leftovers—all goods are sold within a day—he loses money. “Welcome to the bakery business,” Mr Rubin says.”

Specifically, Mr. Rubin must understand demand specific to both his product and the interplay in his environment by collecting data.

“There are no brownies or carrot cake on Mondays or Tuesdays—people don’t buy rich desserts after decadent weekends. He watches the weather closely, as demand melts in the rain. He keeps an eye on school calendars, to bake less when children are away. He bakes more after the fasting of Yom Kippur, when demand from Jewish customers picks up.”

In addition to this longer term planning, he adjusts supply in the short-term (“Just In Time” inventory).

“And each day, after the breakfast rush, he fine-tunes supply by checking sales every 60-90 minutes. Trays of pastries are ready to be baked, but nothing goes into the oven until the numbers are in.”

Second, Mr. Rubin also diversifies his product offering.

“He also sells fancy salads and sandwiches to office workers, which have higher margins.”

Third, presentation matters.

“Late one recent afternoon, his counter offered trios of fruit on triangles of rice paper, cooked in sugar. This dessert looks lovely and is cheap to make. But Mr Rubin will sell only a few, as he makes them expensive: they are there in part to make his counters look pretty and full, to draw in coffee-drinkers at the end of their working day.”

Finally, product differentiation is essential.

“…his best creations are distinctly American: pretzel croissants (surprisingly tasty)”

In a highly competitive industry with relatively low margins, Mr. Rubin is able to succeed through understanding determinants of demand and supply, product diversification, presentation and product differentiation.

As Jason Welker said: “Economic Darwinism assures the survival of the most efficient”.

Katya