We talk a lot about macroeconomic trends on the podcast. What's happening with inflation? Is the labor market too hot? Will there be a recession next year? On this episode, we take a closer look at how one business is dealing with these economic trends right now, and what its experience says about the economy as a whole. Ken Jarosch is the owner of Jarosch Bakery, which has been operating in the suburbs of Chicago for more than five decades. He's been dealing on the ground with all the things we talk about on the show. So on this episode we discuss how he sets pricing for cookies, cakes and donuts as input costs surge, whether he's hiring new workers, and if he's seeing any slowdown in customer demand. This transcript has been lightly edited for clarity.
Key insights from the pod:
Constraints on the baking business — 05:54
The price of ingredients — 11:05
How does a bakery set prices? — 12:46
Changes in employee productivity — 19:24
Inflation in packaging — 22:08
The bullwhip effect and stockpiling supplies — 25:29
Semiconductors and gummy bears — 28:39
On the wage-price spiral — 33:22
On hoarding labor --40:20
What he’s watching for signs of recession — 35:45
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Tracy Alloway: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:15)
Joe, you know, we are a smack dab in the middle of the holiday season.
Joe: (00:20)
That is true. I have a mixed feelings about this time of year because it's nice to take time off. It's nice to get some breaks, but on the other hand it means people aren't listening to podcasts as much because they’re with family. And so they're celebrating the holidays. They're outside, they're like giving gifts. But that means fewer listeners.
Tracy: (00:38)
I mean hopefully some people are still listening to podcasts, especially this one. I actually tend to listen to podcasts more around the holidays just because I listen to them while I'm cooking and baking. And Christmas of course is prime baking and cooking season.
Joe: (00:53)
You know, my wife is baking like 200 cookies today for various parties and kids' school things etc. I literally just got a text about how time consuming it is.
Tracy: (01:03)
I hope she's listening to Odd Lots while she's doing that to, you know, make the time pass.
Joe: (01:07)
She often does.
Tracy: (01:08)
Okay. Well this kind of got me thinking, you know, it's the holiday season. Everyone is off baking things or probably buying things for presents and I really wanted to talk to someone who is in a sort of seasonal retail industry and ask them how they are experiencing the economy right now. Because, as we've been discussing for some time, it does feel like we're kind of in this weird environment where there are a lot of concerns about inflation. We still have lingering supply chain constraints. There's a lot of talk about recession, but at the same time, a lot of the hard data that we get is saying that consumer demand is still relatively strong. Unemployment is still relatively low, things are sort of ticking along, and yet a lot of the sentiment surveys seem to indicate something otherwise. So I thought it would be great to speak to a small business owner about what exactly is going on.
Joe: (02:03)
Let's do it because baking is, you know, a bakery is also one of those things. It's, you know, it's laborious, it's commodity sensitive, it's rent sensitive, it's seasonal. There's so many things that sort of come together in baked goods, bread, cakes, cookies. So a great way to get a snapshot of what's happening in the economy right now.
Tracy: (02:22)
Yes. It's like we are taking all the ingredients that go into a baking business and dissecting them one by one. Okay. Well, without further ado, we are going to be speaking with Ken Jarosch. He's the owner of Jarosch Bakery, which is a bakery in the suburbs of Cook County, Chicago, actually where I used to live. Ken, thank you so much for coming on the show.
Ken Jarosch: (02:43)
You're welcome. Thanks for having me.
Tracy: (02:45)
So how busy are you around this time of year?
Ken: (02:49)
Extremely. You know, it starts at Halloween and goes through Thanksgiving and then Christmas or the whole month of December. For us in general, every day is busier than the day before. So we kind of call it the “HalloThankMas” season. You know, because it's busy. And this year, as you kind of indicated in your introduction, there is still a high demand for our product. That's a wonderful thing. You know, so we're pretty much firing on all cylinders as far as the demand goes. Keeping up with it is another challenge.
Joe: (03:27)
Can you just describe, how big is your bakery, roughly? I know it's been around since 1959. On your website, it looks like there's a bunch of amazing stuff from specialty cakes and wedding cakes and cookies. It all looks amazing, but how big just to give us a feel on like what are your customers and clients like and your geographic reach?
Ken: (03:47)
Sure. So we are a single location retail bakery. We're located in Elk Grove Village, Illinois. We are immediately adjacent to O'Hare Airport. But what separates our community and our business from the airport is a very large industrial park, but I'm told that it's the largest contiguous industrial park in the country. So it does a couple of things. It kind of buffers the noise of the airport from our community, which is a good thing. But we also have a lot of companies who are then also customers. So we do a great deal of retail business, you know, homeowners who just come in and buy stuff for their family and a lot of company corporate work for meetings and anniversaries and retirements and all that. We have about 55 full-time employees -- not full-time, but 55 total employees. About half of those are full-time
This time of year with Christmas, we kind of blossom up to about 90 or 95 employees, seasonal workers who help us pack the thousands of pounds of cookies that we make this time of year. We've been here for 63 years. We enjoy a very good reputation, the number of employees we have. And then the size of our physical store is bigger than I would say 90% of the bakeries in the country. But there are certainly much larger baking companies, corporations that provide for grocery stores and all that kind of stuff. So we're kind of a small business in the scope of businesses at large. But as far as bakeries, we’re one of the larger ones.
Tracy: (05:30)
So you mentioned that consumer demand was holding up pretty well, but it was a challenge to keep up with it. Can you expand on that a little bit? What are the constraints that you're experiencing at the moment? Because, you know, one of the things we talk about a lot on the show is everything from supply chain disruptions to higher input prices to labor shortages, all of that.
Ken: (05:54)
And it is all of that. So keeping up with it from a labor standpoint, we are pretty close to where we should be. Took us, oh geez, all of this current year to kind of get to the level that we're comfortable with for production. We're still a little bit short for the store and whether it's production or people in the store, either one can throttle back the amount of product that we could sell. I mean, if we can make it, but we don't have the people to move it out the door, that's a problem. And vice versa. If we can't make it you know, obviously we can't make it with the staff that we do have because they're a little bit less experienced than what we had had.
We have reduced some of the varieties of product that we make Because I'm not going to waste time making stuff that may or may not sell. I'm going to spend our time making this stuff I know is going to sell. So we do that. Cost of labor has definitely increased. We’re in Illinois, Chicago went to a $15 minimum wage two years ago, maybe three at this point. And our governor thought it was a wise idea for the whole state to go to $15, which fully takes effect in 2025. But when we saw that it became law, we looked at where we were in our employment costs to where we were going to be a number of years in the future. I drew a straight line. I just started increasing prices, you know, four years ago when it was inevitable. I'm glad we did that because now in addition to the increased labor cost we're dealing with increased ingredient costs, significantly increased ingredient costs.
Back on the labor, we increased our prices, like I said, and I was kind of overcompensating at the beginning, but I didn't want to have to raise prices exponentially toward the end as more and more of our people were bumping up against a minimum wage and such. As it turned out, I mean, after the pandemic and there's a labor shortage and blah, blah, blah, my people wouldn't work unless we paid them more. So, I mean, they didn't go on strike, but if they could have, they may have. So I had to increase our wages. In our business, we are close to 50% labor, not quite, it's like 45%, but in round numbers it's 50%. So people start making more money, it impacts our bottom line significantly.
You throw on top of that the significant increases for our goods. And we do deal in commodities. We're buying flour, sugar, butter, shortening, all that kind of thing and making it into bakery products. We are not buying, you know, pre-packaged HoHos and that kind of stuff. We are a manufacturer of bakery goods. So when you hear about the cost of, you know, flour going up significantly or the cost of eggs, as every consumer has experienced, going up 100% at times, we're experiencing that exact thing.
For instance, our cost for eggs, and this is kind of since 2019, 2019 was a banner year. It was a great year for selling stuff, great year for making profits. So since then, eggs have gone up between 280 to 540% depending on what type of eggs you buy. That's huge. Because we use a lot of eggs. Sugar has gone up like 40%. Butter has gone up. My supplier told me 45%. It feels a lot more than that. Chocolate has gone up. Everything, everything has just gone up.
And then in addition to that, you mentioned supply chain issues. It's huge. For a time we couldn't get certain ingredients or we perceived that some ingredients were going to be a little bit short. So I've had to stockpile cocoa powder for a while, couldn't get it. Fortunately I got enough from a couple of different sources and we made it through. Now our suppliers have plenty of cocoa powder, but just today they don't have one of our shortenings that we use. I don't think that's necessarily a production problem. It's probably more of a distribution problem from the manufacturer to our distributor. But, you know, needless to say, I'm scrambling to then figure out a substitution. It's all of the labor, cost of labor, cost of ingredients, and then getting what we need when we need it.
Joe: (10:25)
I have so many, I have like a million questions now after that, just on every different facet. But first another sort of, I guess, semi big picture question, which is, and it's pretty important for macro stuff and the Fed and everyone else, for all of the issues and the rise in egg and coffee prices and the rise in labor costs, etc. How would you compare conditions now and the challenge of operation to, say, either the start of the year or last holiday season last, what did you call it?
Ken: (10:55)
HalloThankMas.
Joe: (10:56)
HalloThankMas. I really like that. So in terms of like the various shortages and inflation, has there been some easing since the last HalloThankMas season?
Ken: (11:05)
Oddly enough, when the pandemic first hit, some of our prices actually went down because there was a glut of, let's say eggs and milk product on the market. So that was kind of weird. But then the following season, you know, which was last year, by then the prices had mostly increased to about where they're at now, at least ingredient prices. And they've just stayed high. They haven't come back down. So from a cost standpoint, other than labor, labor just keeps going up. The ingredients we've stabled at just, you know, overall painful, but at least they don't appear -- they're not increasing as greatly, as rapidly as they had. You know, prices always fluctuate, but they're stable at just exceedingly high.
Tracy: (12:10)
So one thing I always wonder about, you know, when we talk about inflation and we talk about higher input costs, like ingredients, like labor and wages, how do you actually make the decision about raising the prices of your own goods? So, you know, if the price of eggs goes up, do you immediately pass that cost onto consumers or do you sometimes wait a bit and eat some of that higher expense yourself? Just walk us through the process of deciding how much of this you actually pass on to your customers?
Ken: (12:46)
Sure. So if you look at it historically, you know, back 10, 15 years ago if there was a run on flour and there actually was some kind of a commodity thing on rye flour. Rye flour tripled in price and it made national news. It really didn't affect our bottom line. It was one ingredient for one product that we make and we honestly don't make a whole bunch of it. So we really didn't go out of our way to increase prices. We may have just because we tend to increase our prices once a year anyhow. But we would take those kind of opportunities. And whether it's rye flour or bird flu that impacts eggs, when it makes national news, just running a business, it's an opportunity to increase the prices without getting a whole bunch of complaining from the customers. It's not that we're out there price gouging, but ,you know, timing can be everything.
But that's when one commodity -- eggs or flour or sugar -- is going up, and everything else is staying the same, that's then an opportunity to work the timing to increase prices. Currently though, we have to raise our prices. If we don't raise our prices, we're going out of business. And for us, like I said, we're 50% labor. So as labor goes up, I'm raising prices immediately. As some of our ingredients fluctuate, I'm usually absorbing most of them. But when we have the level of increases that we have here, and so for me on a product, the ingredients itself might be 20%. So, you know, on a loaf of bread, if flour doubles, it increase my cost is by, by three or five cents or something. That doesn't bother me.
But when every ingredient in that loaf of bread goes up, either, you know, 50%, 100% or whatever, now we're talking some real increases. Bread, for us, is kind of a lousy example, but cookies and cakes that use the higher-priced items like the eggs that have gone up, you know, 350%, the flour that's gone up, the sugar that's gone up, every ingredient has gone up. Plus the labor. I'm increasing my prices and I, you know, I use math to do it. I look at what my costs are, what percentage of that increase is going to, you know, filter down to the bottom line. I have to put in all the overhead and all that. Some of that has gone up. Insurance is certainly never going down. And we come up with an increase.
And what we've done this year, you know, going back to like the end of 2021, we have increased our prices three times. Each time it's been around four and a half to five, five and half percent. So if you look compared to a year ago, we've gone up about 15%. We've never done that before. I mean, maybe my Dad did back in the seventies when inflation was going nuts. But for us in our recent history, you know, we tend to increase our prices 5% of the time. And then it's a question of how often we have to do that in the course of the year. And we hate raising prices. It's a lot of work for us. We have all sorts of price tags to change and signage and websites and all, you know, all sorts of stuff. So it's not a trivial exercise, but if we don't raise our prices, we become a charitable organization and I can't operate that way.
Tracy: (16:12)
So this actually leads into something else I was wondering, but when you raise prices, do you notice, is there a subsequent drop in sales or how does it work with baked goods? Like how price sensitive are consumers of cookies and cakes and bread?
Ken: (16:31)
Historically, the answer to your question is yes. We raise prices, customers either buy less or come in less frequently. This time around, since everything is going up, we haven't really seen a huge drop off in that demand. Also haven't gotten a lot of griping, or at least I haven't. Maybe my store staff has, but I haven't gotten much pushback. And when you're dealing with a holiday season, people are having 20 or 30 people over, they're going to spend the money. Now what we have seen is some of our higher ticket items, so our decorated cakes, we're not making nearly as many as we used to. And when we do, instead of making, you know, a half sheet or a full sheet, we're making eight-inch nine inch-cakes. So they're still buying stuff, but smaller sizes. I don't know that that's strictly because of our inflationary time here right now.
We in the industry, at least in the Chicago area, have tended to see a drop in decorated cakes, period. Mostly because the kids don't want, kids, people who are in their twenties and thirties don't want to buy the same things for their kids that they got from people our age, you know, when they were kids and stuff. So, you know, they want ice cream cakes or they do experiential things instead of having a birthday cake at home. So we're seeing a different cultural shift there too.
But one other aspect that I think you touched on too, and I've had this conversation with my accountant over the years. He feels, and I have to agree, that bakeries are somewhat recession proof. I'm not sure if we're inflation proof, but recession proof in that to some extent people still have to eat. Now you don't have to have a bon bon or a cookie or anything like that, but people do like to indulge.
They are not going to skip their kids' birthday party and businesses are still going to celebrate retirements. They are still going to have Christmas parties. It's just a matter of, you know, when the economy is good, a large corporation might have a Christmas party at the Marriott. If the economy's a little soft, well they have it catered and the caterers buy stuff from us. If it's a little softer yet, they skip the caterer, but they're still getting cookies and cakes from us. So in a sense we're still kind of making a lot of the same stuff, just selling it to different people depending on how the economy is going.
Joe: (18:57)
I want to go back to something, but mainly because if I don't go back to it now, I'm going to forget and there's something really interesting that you said, but can you talk a little bit more about the experience level of your employee base and your ability to be productive? And you pointed out how with the less experienced employee base, you've narrowed the range of things that you can make. Talk to us a little bit about experience, productivity and what that means in terms of your ability to produce goods?
Ken: (19:24)
We've actually been blessed, I think, we historically have had a lot of people, well many of our employees who had been with us for 10 years, 15, 30 years. We have just a handful who have been with us for 20,25 or over, you know, one guy’s close to over 40 years. Wow. We've had a number of people who left and not because of the pandemic or anything, they kind of aged out. It was just time. We have had a hard time hiring people who they themselves have 10 or 12 or 15 years of experience. So we've been getting people with less experience maybe right out of school. And so we are training them for how we like them to make our product. So things just don't get done quite as fast. We don't have the institutional memory because they weren't, you know, working for us at the time.
So it just takes a little bit longer. Now one would think that we would be paying them a little bit less because they're less experienced. But that's where this whole minimum wage thing kind of threw that out the window too. The new employees are coming in with reasonable skills and we tend to hire slow when we get a decent person, they're still fairly productive, but we just had to make decisions of yeah, we're not going to teach them to make that because, yeah, maybe it was kind of a slower moving item or it's just too time consuming. And so we just said ‘skip it.’
Where Covid played into that is we wanted to get people, customers, in and out of our store more quickly. Consumers didn't want to be lingering in a crowd of people, you know, breathing on each other and stuff. So we eliminated variety and things that were a little bit more time consuming to pack. Or we prepack them to get customers in and out quicker. So by looking at items that could physically be sold to customers quicker, if something wasn't one of those, we just got rid of it. And probably a good thing to do. Now that Covid is kind of not an issue anymore, they're still not coming back. I mean, you know, we're just not bringing those products back. We're kind of happy we got rid of them, some of them.
Tracy: (21:41)
You know, you mentioned packaging there, and this reminds me of something I heard from a fairly high-level economist, but they were talking about maybe one of the underappreciated aspects of food inflation at the moment was from packaging materials. So cardboard and plastic and things like that. And everyone was talking about the higher cost of ingredients, but actually it was a lot of the packaging that had gone up. Is that something that you've noticed?
Ken: (22:08)
Absolutely. Anything we would put in like plastic clamshells, those have gone up, I think I had some numbers on that. We're seeing between 40% and 75% increase in the packaging. And you know, that may not sound a lot when you're talking about a plastic container that, you know, just cost a few pennies. You know, literally went from 5 cents to 7 cents or something like that. But when you're buying cases of these things, well, that adds up real fast. Again, with supply chain issues in packaging, if we were using a package container that is kind of an odd size, those got discontinued. And so, you know, we can no longer get some of the sizes that we want.
For us, we had bags, wax bags, we put bread in or coffee cakes that, since I was a kid, we've had those things printed with our logo, our name and all that stuff. It gives credibility to us as a business. We can't get those anymore. The bag manufacturers are prioritizing large chains like Jimmy John's, McDonald's or whoever, where they are under contract to provide those printed bags and those sizes. And if they don't, they lose money, you know, [they’re] penalized and such. So we, as the little guys, if we can't buy half a million printed bags at a time, we're not getting those printed bags. So at this point, all of our bags are plain unprinted bags and people walk out of our store, it looks like they, you know, got their stuff from a food truck. Our boxes, we're still able to get those printed for the most part.
But yeah, the bags have, you know, they're just kind of plain. So again, that's because the manufacturers are having trouble keeping people working. Sometimes it's a matter of trouble getting the actual paper good, the product to make the bags. And that's because the people, you know, in Seattle or wherever they're, you know, producing this paper, they can't get the people to work out there. So it's definitely a domino effect on that. I did get word from one of our suppliers that maybe first quarter of ‘23, we may be able to purchase printed bags in the quantities that make sense for us. I can't, you know, I get 25,000 or 50,000 at a time, that lasts us six months to 12 months. For us to get a quantity of bags that last much longer than that, our supplier doesn't want to warehouse them and I can't afford to buy that many either. Just doesn't make sense.
Joe: (24:43)
So actually this sort of brings me back to another thing I wanted to touch on before I forget. You mentioned that with some of the raw materials you bought, you sort of scrambled and maybe overcompensated in your purchase. I think you mentioned cocoa powder is one that you had felt you had to stockpile and that's sort of been a theme, you know, across industries and this idea of, like, the bullwhip effect and there's a shortage of some good and then everyone puts in a ton of orders and then suddenly it turns into some glut because people are trying to compensate for a shortage. Have you seen that? Are there any categories in which either you've been stuck, you know, sort of over-inventoried or where you've seen a shortage turned into a glut and prices have dropped a lot as that cycle plays out?
Ken: (25:29)
Okay. So I've not seen the prices drop because of the glut. They're still elevated. Yes, I have probably been one who, and cocoa powder was one of them, I took it when I could. And now it’s not a big deal. Some of our starches, corn starch, I have stockpiled on that. None of it's going to go to waste. But we still can't get some varieties of corn starch in a food manufacturing facility like ours. It's not just cornstarch. There's a whole, you know, a bunch of different types of starches that we use. So I have stockpiled on some of them. I've actually sold a bag or two to other bakery owners who could not get them, possibly because I did, I mean, you know, that is a concern. You know, we need to get what we need to get. We also don't want to be hogs about it.
So to compensate when maybe I have overpurchased, I am accommodating, you know, the needs of some other bakery owners in the area by selling them a bag or two. And they're doing the same thing and we've traded ingredients back and forth. So, it gets to be a supply thing. And in our industry, and particularly a business our size, we kind of work on a just in time inventory system. We don't call it that. But when you're dealing with eggs and stuff that are perishable, you have to do it that way. And because I'm in the Chicago metropolitan area, I can get pretty much everything I need every week. So I don't have to have a warehouse to store all my ingredients. I just have a back portion of the bakery.
And because I can get it once a week, it works well. So we have had to change from a just in time to a just in case inventory system. And I won't say that I originated that phrase. I actually got that from a seminar I went to at a Baker's convention this past September. And the guy presenting was from a company called Grupo Bimbo. They are the largest bakery in Mexico and the United States, third in Europe or something. They supply a lot of grocery stores and such. They're facing the same problems we are. And he too said that they are doing a just in case inventory, as opposed to a just in time.
And one of the people in the audience said, ‘well hey, you know, if you're getting it just in case, I'm screwed because now I can't get it at all.’ He didn't deny that. But yeah, we all recognize that, you know, we have to do it. Oddly enough, he told a story about gelatin. They were having a hard time getting gelatin in Mexico and it's like, well why can't we get gelatin? Well, they're not slaughtering as many hogs. Well, they're not slaughtering as many hogs because they don't need as many hides from the hogs that they use to make cars and they don't need as many hides because they're not making as many cars. Why aren't they making as many cars? Because they can't get the chips from Taiwan.
Tracy (28:34)
We’ve come full circle.
Joe: (28:32)
Wow. So this is a chips episode. The chips shortage is turning into a bake good shortage.
Ken: (28:39)
Well, and then he finished that with saying one of the biggest users in the world of gelatin is the company that makes gummy bears. So it, you know, it turns out that you can't buy gummy bears because you can't buy chips from Taiwan. And so, you know, the main thing there, it's not just a supply chain, it's really a supply web and we are, you know, worldwide we are so intertwined and you just can't imagine the domino effect that one industry has on the other.
Tracy: (29:11)
Yeah. These kind of relationships I find absolutely fascinating. And I remember there was one instance from 2008, and I think I wrote about it briefly, but it was that there was a milk shortage because there wasn't as much sawdust being produced because people stopped building houses after the housing bubble burst. And it turns out that cows like to sleep in sawdust and if they're not sleeping comfortably, they produce less milk.
So these are the types of things that I think you only realize once you start to have these types of disruptions. Anyway, I wanted to ask about one other big input, presumably into the bakery business, but that's energy prices. Have you been affected at all by higher gas or electricity prices? Is that something that that's impacting you?
Ken: (30:02)
Not directly. I contracted both our natural gas and our electricity either during the very beginnings of the Covid thing, or just before. So I've got a pretty decent rate per kilowatt hour, and our gas has been tolerable. Now the distribution charges, you know, ComEd and Nicor seem to figure out ways to increase that, but that has been probably one of the more stable inputs into our business.
Joe: (30:31)
Hmm. What about transportation? I imagine deliveries and stuff like that in terms of, not just in terms of your receipt of them, but also your ability to deliver to corporate clients, etc. We talk a lot about sort of long-haul trucking, but what about local deliveries, things like that?
Ken: (30:48)
Yeah, huge impact on that. We do deliver, we have some, you know, as I mentioned earlier, corporations in the area that get cakes and stuff for meetings. And so we, you know, have a delivery van, drives around. Oh man, my gasoline expenses have for sure doubled -- sometimes worse. At the same time we got rid of our really small delivery van, which was like a, what do they call it? Transit Connect. So it's those little boxes that drive around and we have more of a full size van. Not one of those, you know, U-haul rental van type things, but you know, the kind of van you could put seats in and go for a drive. But my gas usage increased just because, you know, the mileage isn't as as great on that. So the two combined have been really big. You know, in and of itself, percentage wise, huge increase. Bottom line, it's not a major component of our business, so it's more of an annoyance than it is a price increase-driver.
Joe: (31:48)
Another thing, while we're just sort of talking about random components, what about equipment in the kitchen? And I'm sure stuff breaks down, you know, everyone has ovens and dishwashers and everything that breaks down and being able to get people either out to service it or replacement parts. What's been your experience with that and is that getting any better?
Ken: (32:09)
So I'm knocking on wood as I speak. So far so good. But yeah, that is a concern because you could have piece of equipment that doesn't work and you can't get that one little, you know, $20 part, but without it, you're, you're out of luck. And like I say, knock on wood, we have been fortunate on that and getting service people out so far has not been a major problem.
Tracy: (32:52)
You know, earlier when we were talking about pricing, you spoke about how when there's a big event in the news, like a supply shortage or maybe just generalized inflation, it sort of gives you cover to raise prices. Can I just ask, does that same dynamic happen with your employees and wages? Like, if everyone is talking about how inflation the cost of living is going up, do you have more people who come asking you for a wage adjustments or cost of living adjustments?
Ken: (33:22)
Yeah, I haven't thought about it that way, but yeah. And whether it's really cost of living that people are feeling their money isn't stretching as far, or if it's more of ‘Hey, my buddy just got a job, you know, and he's getting, you know, $15 or $16 and I'm working here at $13, you know, I want more money or I'll just go get my job at the factory.’ And so it it's more of a competition for employees. And that's what we were dealing with more recently. You know, supply and demand. There was a slowdown in the supply of labor, so the demand went higher. People like us were willing to pay more. And we have been, but so is everybody else. I don't know that my employees are necessarily feeling the pinch of inflation and relating that to ‘Hey, I need more money,’ compared to ‘my buddy just got a better job. Why can't I get paid more?’
Joe: (34:18)
Are there non-wage things that you have done to compete for labor?
Tracy: (34:23)
Do people get free cookies? Sorry, I had to ask.
Ken: (34:26)
Yeah, we've always had that policy. I mean, pretty much people can sample our goods throughout the day, I mean within reason. It's not a really good idea to take a piece out of a decorated cake, the customer gets kind of ticked off at that. But we have a fairly generous policy, I mean we figure you can only eat so much. After a while, you're just going to, you know, either explode or pass out. So yeah, we, we do have that.
We also have a profit-sharing program. Now that's, you know, it does cost money. It's not a direct wage that the employee sees, but it's, you know, it's definitely an expense for us. You know, sick days and vacation and all that. We’ve had those for decades, but lately, no, I don't think we've had any non-monetary type of incentive to stay around.
Tracy: (35:18)
So there's been a lot of talk about a looming recession as the Federal Reserve raises interest rates. And I'm wondering, do you get a sense on the ground in a bakery business of, you know, an impending downturn in customer demand? And then secondly, what would a generalized economic recession actually look like for a business like a bakery?
Ken: (35:45)
So as we speak today, middle of a holiday season, we're just, we're busy. January will be the telltale sign of what either, almost buyer's remorse in a sense as people start getting their credit card bills and all that. January's always slow, people are tired of eating. But there's slow and there's dead. We expect slow. This year could be dead. But like I said earlier, we've just found that people still want to treat themselves and we continue to do okay even in a recession.
I mean, I hear the same fears of recession because of the radio station I listen to. It's hard for me to quantify that as we're experiencing it. It's more what I'll see at the end of the year, the end of the quarter, comparing it to previous ones. It's, you know, holy cow, it was not busy. It felt busy, but it wasn't. I'd love to say we're definitely recession proof, and I believe we are definitely re recession resistant. And another thing that I've noticed is that we are, our business is excruciatingly steady throughout any kind of a year. We can advertise, we promote, we do things on Facebook or whatever, and business just kind of plugs along. People pretty much ignore our advertising, I think. I don't know.
Joe: (37:14)
But you still advertise? Why do you still advertise if you can't really tell a difference from it?
Ken: (37:20)
That's a good question. But I don't do it in newspapers anymore, and I don't do it in Yellow Pages, if anyone even knows what a Yellow Page is. So we've shifted how we advertise. But you know, the point being, you run promotions, even if it's in-store promotions, you know, it doesn't necessarily set the world on fire, at least in our industry. And again, like I said earlier, our customers can also only eat so much, even if something's on a two-for-one special, it's like, well, I live by myself. I can only eat one, buying two of them and having one to throw out doesn't make any sense either.
Tracy: (37:54)
Ken, you've never had me as a customer. I guarantee you I could eat all of everything. Anyway, go ahead.
Ken: (38:01)
I guess that’s a long way of saying we'll see it in just my employees getting done at 11 o'clock in the morning having started at, you know, 4:30 or 5am instead of getting done at 1:30, or 2:00 in the afternoon on a Friday, let's say. That's kind of a measure of just slowdown and work. Again, if that happens in January, it's normal. If that happens in March when we've got possibly a Paczki Day, I won't even tell you what that is, but we've got St. Patrick's Day, we've got Pie Day, that's a big one. Possibly Easter. And we’ve got Easter in either March or April. You know, if we're not working hard at that time of the year, then we're definitely in a recession.
Joe: (38:44)
Wait, did you say Casimir Pulaski Day? I remember that day. I went to school in Illinois for a while.
Ken: (38:48)
Well, no Paczki Day.
Joe: (38:51)
Yeah, I don't remember that one.
Tracy: (38:53)
That's Polish, right?
Ken: (38:53)
It's Polish, it's big in Chicago and it's big in Detroit. And, you know, we sell tens of thousands of those things and it's a wonderful day
Joe: (39:02)
Because I remember we used to get off for Pulaski Day, which is also in March, but maybe that's not as much of a baked goods holiday. I don't know.
Ken: (39:11)
It is not a bake goods holiday. It was great for going on ski trips because Chicago area, we'd all be off and we could take the kids out of school and go to Colorado, you know, on a Monday, which is always what it is. The slopes would be relatively unpopulated. But yeah, they got rid of Casimir Pulaski, and I don't know, they got rid of President's Day too. I'm not sure what we get off anymore.
Joe: (39:35)
I just have one last question, and it actually goes back to this idea of the hoarding question. But, you know, during the worst of when it was the most challenging to hire workers, I'm curious whether you saw labor hoarding as a phenomenon where maybe you felt, okay, we might be overstaffed relative to the amount of demand, but given the difficulty in hiring or competing with the next bakery over for employees, it still makes sense to keep that level? I'm curious if A) that was something you experienced and B) can you just talk a little bit more how it, you know, what it looks like December 8th, 2022, which is today, the day we're recording it versus, say the start of the year when, you know, sort of the quits rate and other measures of labor market Intensity seemed to be much higher.
Ken: (40:20)
So as far as labor hoarding in our industry, and I do hang with several other bakery owners and we are talking constantly, we were not labor hoarding whatsoever. We were asking each other, ‘Hey, is there someone you want to get rid of?’ You know, and then the answer was, ‘no, I'm looking too.’ So we were just definitely short of bodies. I think most of us are, again, we are closer to being fully staffed. Comparing today to when people were quitting maybe more rapidly, I don't know that we necessarily saw people quitting per se, we just lost people for other reasons. Some of them just wanted to pursue other careers or work for a different type of bakery. And it still, it actually seems like it's been a little bit easier to find employees. And I used Indeed to try and find people. I'm not necessarily promoting it. I'm not dissuading people from using it, it is what it is.
Joe: (41:29)
I think they advertise on a lot of podcasts. They're going to like that there is a a totally organic mention of them. Anyway, keep going.
Ken: (41:37)
But yeah, it worked. It was not immediate and it took many interviews and many, many responses of, ‘we'll call you back someday’ to find the people that were going to be a good fit in our business.
Tracy: (41:53)
Are you advertising for potential employees more in general? Like, do you post a lot of job openings?
Ken: (42:01)
Oh man. So compared to 10 years ago, we never had to advertise for employees. People would walk in asking if they could, you know, work for us. So compared to that, yeah, we're having to advertise much more. In the store, you know, a retail sales clerk – it’s really hard to post a job on Indeed for that because you just get a lot of weird responses. Putting a sign in the window and word of mouth is what has worked best for us. For the professional staff, for the bakers and the cake decorators, we advertise. For the people in the store, we just hope and pray that they come in and generally that has worked okay.
Tracy: (42:39)
So I have just one more question. It's an extremely important one. We could talk for easily another few hours, but I know it's your busiest time of the year, so I don't want to take up too much of your time, but very, very important question. What's your favorite baked good to eat around the season of HalThankMas?
Ken: (42:59)
Oh, man. So I have to say, I mean, I like everything, most everything we make, not so much of a fan of the Poppy Strip, but this time of year, for me, one of the best things, and I take a sample of it every time is something called Stollen.
Tracy: (43:17)
Oh, Stollen! I love Stollen!
Ken: (43:20)
Yeah. And when it's fresh out of the oven, you let it cool down a little bit and we always have to sample at least one in every batch, you know. I've acquired a taste for that. Didn't like it as a kid, but I just really enjoy that. But, you know, if we're not making that, if it's not Christmas time, oh, then I go for a Bavarian cream-filled chocolate iced…
Joe: (43:45)
That's what I like. Yeah. That's what I'm a fan of.
Tracy: (43:48)
All right. Ken, you're making us both very, very hungry. It was amazing having you on, really appreciated getting your perspective and getting to hear, you know, how a business owner is actually interpreting a lot of these big macroeconomic themes that we talk about on the show a lot. So thank you so much.
Ken: (44:05)
Thank you. Thanks for having me.
Joe: (44:07)
Thank you so much. That was great.
Tracy: (44:23)
So Joe, I love that conversation and there are so many interesting things to pick out of it, but I mean, I guess let's just start with the productivity thing because, you know, not only does it sound like he's struggling to sort of keep up production at pre-Covid levels, but also just this idea of consciously cutting back on things that might be more difficult to make, just to sort of simplify the overall production process. That was really interesting.
Joe: (44:52)
Yeah, that is really interesting. And I know we've talked and, you know, productivity in general is this interesting question and, well, how productive can any entity be with a younger, less experienced workforce? Maybe that means productivity is set to improve in the future as less experienced workforces has become more experienced workforces. That is an interesting thing. I thought the thing about printed bags was interesting and…
Tracy: (45:17)
Oh, totally. Bigger companies getting priority?
Joe: (45:20)
Yeah, and specialization. And the idea that it's like, well, you could make a bigger order for bags, but then you have to warehouse all the bags yourself, and you don't have that space. Obviously the fact that, you know, the chip shortage is now contributing to a gummy bear shortage is like one of those sort of classic things…
Tracy: (45:36)
You never know where the semiconductor shortage is going to crop up! It is everywhere, all around us.
Joe: (45:41)
Seriously, who knew? But it makes total sense once you say it, but you would never have sort of intuitively come to that any other way.
Tracy: (45:46)
Absolutely. Also, the inventory point, because this is a big thing, you know, people are wondering to what extent strong consumer demand is people just making up for shortages. And the same thing for businesses and the idea of Ken, you know, accumulating big pots of cocoa powder. I thought that was pretty interesting. And also a secondary market in trading cocoa powder and corn starch and other essential baked goods. I mean, I hadn't thought that that existed, but it makes sense.
Joe: (46:16)
I want to be a fly on the wall when the, you know, the heads of all these different Chicago bakeries get together and they talk about who has extra cocoa powder, who has an extra baker in the kitchen that's looking for a different job. So many interesting economic ideas to tease out of that.
Tracy: (46:33)
Yeah. Well, and the one other thing I was thinking about was Ken mentioned that, you know, it's actually difficult to raise prices because you have to change all the labels. You know, you have to go on the website and change prices. And one thing I've heard that's kind of interesting, and it's just a pet theory at the moment, but you know, with technological advances and with automatic pricing systems for big businesses, for big box chains and things like that, there is this idea that actually it's a lot easier to raise your prices and change them than it has been in the past. So I've heard people talk about that as like one reason maybe that prices went up so quickly, but I guess it means that prices could go down quickly too.
Joe: (47:18)
I hadn't realized that. That was very interesting what he said about how in the past sort of big notable disruptions were a good moment to sort of raise prices, right? So if everyone's talking about, you know, sort of like the opportunistic or strategic timing of price increases, and then you think, okay, well now we have inflation and so many different things are going up and this idea that okay, you can easily raise prices in 5% increments multiple times over and over again. And the fact that no one really seems to push back on it, or at least so far, is pretty notable.
Tracy: (47:53)
Yeah, absolutely.
Joe: (47:55)
I guess that’s how the spirals happened.
Tracy: (47:57)
You mean chocolate spirals, right? All right. All right. We should leave it there because I need to go eat some sort of baked good.
Joe: (48:06)
Let's leave it there.
You can follow the Jarosch Bakery on Twitter at @JaroschBakery.