Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / How a Bakery Scaled to 15 Million by Fixing Flour Costs
Transcript
- Lucas: So there's this bakery in Portland called Sweet Rise. Started by a pastry chef named Jenna Kwan in 2018. By early 2022 she'd grown it to about four million in annual revenue, mostly walk-in retail, pretty standard neighborhood bakery. Luna: And then wheat prices spiked. I remember that — the Ukraine war, bad harvests in the US. Flour costs jumped something like 30 percent for a lot of small bakeries. Lucas: Exactly right. For Sweet Rise, flour was about 20 percent of their cost of goods sold — so a 30 percent increase meant their gross margin dropped from roughly 60 percent to 48 percent almost overnight. At four million in revenue, that's a half million dollar hit on the bottom line. Luna: Ouch. And most bakeries I've talked to — they just raised prices or shrank the portion sizes. There's not a lot of room to maneuver when your main ingredient doubles in cost. Lucas: Right, and that's what makes this story interesting. Jenna didn't do either of those things initially. Instead, she looked at her procurement process. She was buying flour from a regional distributor on a month to month contract. The price she paid was essentially spot market plus a small markup. Luna: So she had zero protection from volatility. Lucas: Zero. So she spent about two months researching how larger bakeries handle this. She learned that mid-market and industrial bakeries often buy flour on fixed-price contracts — sometimes six to twelve months out. And some even hedge with wheat futures. Luna: Hedging futures — that feels like a big leap for a four-million-dollar bakery. I mean, you're talking about commodity exchanges, margin calls. Lucas: It is a leap, but she found a way to do it at her scale. She didn't open a brokerage account. Instead, she approached her distributor and said, 'I want to lock in a fixed price for next year, can we do that?' The distributor said yes — at a small premium over their cost. Luna: So she basically got her own mini hedge through the distributor. Lucas: Exactly. She signed a contract for 50 thousand pounds of flour at a fixed price — about 15 percent above the pre-spike price, but well below the spot rate at the time. That move alone saved her about 18 percent on her flour costs compared to what she would have paid on the spot market that year. Luna: And what did that translate to in dollars? Lucas: Her COGS on flour was roughly 800 thousand a year at the old prices. With the spike, it would have gone to about 1.04 million. Her fixed contract brought it to 920 thousand. So she saved about 120 thousand in year one. Luna: That's real money. Especially at a four-million-dollar revenue business — that's three percent of revenue straight to the bottom line. Lucas: But here's where it gets more interesting. She didn't stop at the contract. She realized she could buy even more flour in bulk if she had storage. So she bought a used refrigerated container for 15 thousand dollars, put it behind the bakery, and started ordering full truckloads directly from a mill in the Midwest. Luna: So bypassing the distributor entirely for the bulk of her flour? Lucas: Right. She cut out the middleman. The mill sold to her at a price that was about 10 percent below what the distributor charged, even with the fixed contract. But the catch was minimum order quantities — she had to buy 40 thousand pounds at a time. The container gave her the capacity to store that. Luna: And with that kind of volume, she also had to think about cash flow. A 40-thousand-pound order at, say, 20 cents a pound — that's 8 grand tied up in flour. Lucas: Exactly. She used a line of credit to manage the lumpy payments. And she timed her orders to match the harvest cycles. She'd buy right after the wheat harvest when prices are lowest. That added another 5 percent savings. Luna: So between the fixed contract, the direct mill relationship, and the seasonal buying, what did her total flour cost reduction look like? Lucas: Over two years, she brought her per-pound cost from about 24 cents at the peak down to about 18 cents — a 25 percent reduction. And because she kept her retail prices mostly steady, her gross margin recovered to 62 percent, even higher than before the spike. Luna: And with that margin improvement, she had room to invest. That's really the core of the scaling angle, isn't it? Lucas: Exactly. The saved margin — about 200 thousand per year — funded a second location in 2023 and a wholesale channel selling to local coffee shops. By the end of 2025, Sweet Rise hit 15 million in revenue. The procurement transformation was the foundation. Luna: So a bakery that could have been crushed by a commodity price shock instead used that shock as a catalyst to become a much more sophisticated operation. Lucas: That's the takeaway — and it's a lesson that applies across a lot of small businesses. If you're in food, or any business where a single input is a big part of your cost, procurement is a scaling lever that most owners underutilize. They focus on marketing, on sales, on hiring — but not on how they buy their core materials. Luna: Right. And it's not just about negotiating a better price. It's about the whole system — storage, timing, contracts, financing. Lucas: And it's worth noting that Jenna didn't need a Harvard MBA to figure this out. She read industry blogs, talked to a couple of larger bakeries, and did the math on a spreadsheet. The barrier to entry for this kind of optimization is lower than most people think. Luna: Yeah, it's a great example of a small business owner acting like a mid-market company before they had the revenue to justify it. Lucas: And that's really how you scale. You start thinking like a bigger company before you have the resources of one. You build the systems early. By the time you're doing 15 million, you already have the procurement operation of a 50-million-dollar business. Luna: You know, it reminds me — these conversations we have on the show, they're exactly the kind of thing that helps business owners think in that bigger way. And we keep the show ad-free intentionally, because we don't want to interrupt that thinking with a commercial for something you don't need. If these episodes have helped you see a new lever in your own business, one way to keep that going is to support the show directly. It's buy me a coffee dot com slash fexingo. No pressure, just an option for those who find value here. Lucas: Yeah, and we appreciate that. It lets us keep focusing on stories like this one, which we think are genuinely useful. So, back to the flour story — one thing that surprised me was that Jenna also started hedging wheat futures directly in 2024, after she felt comfortable with the basics. Luna: Wait, she actually went all the way to futures? How did that work at her scale? Lucas: She opened a small account with a commodity broker and started buying wheat futures contracts — each contract is for 5,000 bushels. She'd buy one or two contracts a quarter to cover her expected flour needs. It's not for everyone, but she educated herself, started small, and treated it as insurance, not speculation. Luna: And the upside was that in 2024 when wheat prices jumped again due to drought in the Plains, her futures position gained value, offsetting the higher flour costs. Lucas: Exactly. That year, her net flour cost — after accounting for futures gains — was actually below her 2022 fixed-contract price. She ended up paying about 16 cents per pound effectively. Luna: That's remarkable. And a big psychological shift — from being a price taker to managing price risk actively. Lucas: Right. And the key is that she never tried to predict prices. She was just hedging her exposure. If prices went down, she would have lost on the futures but paid less for flour — net neutral. That's the hedge. Luna: So the hedge allowed her to sleep better at night, knowing that a commodity spike wouldn't wipe out her margins. Lucas: Exactly. And that stability gave her the confidence to take on more risk elsewhere — opening that second location, expanding wholesale. She could make those decisions without worrying that a bad harvest in Kansas would wreck her business. Luna: I think the lesson for other small businesses is to look at your biggest variable cost and ask: can I reduce the volatility here? Even if you don't go to futures, a fixed-price contract or bulk buying with storage can make a huge difference. Lucas: Absolutely. And the Sweet Rise story shows that scaling isn't always about more customers or more locations. Sometimes it's about building a more resilient supply chain. Jenna's bakery became a 15-million-dollar business not because she baked better croissants — though she does — but because she treated flour as a strategic asset. Luna: So next time I see a bakery that's been around for a few years and suddenly opens a second location, I'll ask them about their flour contract. Lucas: And they might just smile and tell you they've got it locked in.