Food-price inflation is putting an unacceptable squeeze on operators' chances of profitability, says Peter Backman, managing director of food service analyst Horizons FS
Inflation will be constantly grabbing the headlines in the coming months.
Just a year ago, operators were seeing the cost of food rising at just 2%, a figure so benign that no one needed to bother about it. Indeed, some suppliers absorbed it rather than pass it on.
Fast-forward to the end of 2007, however, and food costs for the sector were growing at an alarming 5%. By February, this figure had gone to 6%.
And the increase won't stop here, as suppliers can no longer absorb these rises.
Exclusive research from Horizons shows that some sectors of the eating-out market are less exposed to this pressure on prices because of the mix of products they buy. Food price increases for contract caterers are running at 5%, while restaurants are having to stomach a rise closer to 6.5% - tough when food purchases account for one-third of your costs. Salaries and wages, rising at 3.4%, account for another one-third of costs, while the remainder is spent on everything else, including rates and fuel.
The fact that oil prices alone have increased by 23% over the past six months means that the cost of switching on an oven or grill is becoming something to worry about.
Overall, operators' costs are rising in excess of 5% a year.
The natural inclination of any business owner is to pass these rises on to the customer by increasing menu prices. But will the customer pay more? In the restaurant sector, menu prices are rising by 2.4% a year - nowhere near enough to balance the rising costs of running the business.
But operators can take action to mitigate this unacceptable squeeze on margins. Changing your menu in favour of cheaper alternatives is one option another is switching to lower-cost suppliers. Shrewd operators can also persuade customers to spend more with special offers on high-margin items, and by training waiting staff to become more adept at upselling.
High food-price inflation is not going away, and consumers will continue to tighten their belts during this economic downturn. Successful operators need to reduce costs and sell more to maintain profitability.
Some will not succeed. There will be blood on the carpet.
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