Beware inflation! What the hospitality trade needs to know

Matthew Wyatt FCA on the return of food inflation and how proprietors should plan around it.

For the last three years the hospitality trade has enjoyed a remarkably benign period of food deflation: UK food prices either remained steady or actually moved downwards. Now, with Brexit under way, new skills will definitely be needed among leadership and the workforce to deal with the challenges of rising prices.

A brief and recent history of food inflation

From 2008, when it spiked at 13%, food inflation has been tumbling ever since. It fell below 5% in 2012, then 0% and even minus territory in 2014 and ever since. At a time when costs in other areas - wages, pensions, rents and rates, energy - have been continuously on the rise, the cost of food has been a stable component of the business mix. Alas, no longer.

Source: tradingeconomics.co

The impact of Brexit on importing food

With the referendum result to leave the EU came a significant depreciation in the value of the pound relative to other currencies. Prior to the vote sterling traded at $1.49 and then sunk as low as $1.20 in January of this year.

This has meant that many of the foods and ingredients we use everyday became more expensive than they were before the Brexit vote. Indeed, one buying specialist, Lynx Purchasing, claims that a basket of goods routinely bought by caterers has risen by 9% between March 2016 and March of this year.

Inflation is here for the foreseeable future 

This is a sign of the times. Food manufacturers and suppliers are already raising prices. Items such as coffee, sugar, tea, spices, much of our flour and meat, some of our fruits and vegetables will cost more for as long as the pound remains at its present lower value. The reason being so much of our food is imported. 

Some economists have cited that the pound is undervalued and due to appreciate against currencies such as the dollar however, the rebound predictions are to levels still lower than prior to the Brexit vote. 

According to the Office for Budget Responsibility, CPI inflation is set to hit 2.7% by the end of this year while the RPI measure will reach an eye watering 4.1%. Food inflation on the other hand is set to rise by 5%-10% within the next 12 months.

It means those restaurateurs and food and beverage managers who have been blithely maintaining menus without taking food price inflation into account, will have to do some recalculating. Catering and running a restaurant can be a notoriously low margin businesses at the best of times. Price rises of this magnitude, alongside many of the other cost hikes of recent years, could be the straw that breaks the unwary proprietor's back.

What you should do about it 

The onus thus is on owner managers to cover the extra cost by either raising prices on menus or finding new less costly dishes, different recipes, or more efficient ways of working. Otherwise some businesses will undoubtedly go under. This means taking action now and equipping yourself with a skilled workforce capable of re-engineering menus in the kitchen and up-selling front of house.  

Food prices rising significantly and steeply means getting into the practice of weekly, or even daily, costing. A 5% cost rise for a restaurant using £500 worth of food a day will result in an annual budget increase of around £9,000. The busier the business, the greater the potential loss. So, review the following carefully:

• Identify where wastage is occurring and cut it
• Be smarter in purchasing when it comes to suppliers and ingredients
• Find new ways to make dishes more cost effectively
• Use subtle price increases that aren't obvious to the customer
• Analyse other business areas to identify potential savings

Make sure your back office systems maintain the all-important gross food percentage as well as other key ratios. If you haven't got this in place yet then consider the investment because such systems save significant time and money while providing accurate performance data that helps really drive informed and effective business decision making.

Ultimately an eye for detail, a skilled workforce and making use of modern technology to monitor and control the business will be the mark of the wise and successful hospitality operators moving forward. It's a case of survival of the fittest.

The content of this post is up to date and relevant as at 05/04/2017.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.