5% + 2.5% = Consumer breaking point?

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At a special forum this morning, it was estimated by purchasing professionals that food costs in 2011 would increase by approximately 5%. At a time when VAT will be going up by 2.5%, taxation is increasing and Government cuts are looming, the questions posed were:

• Would the consumer accept such rises?
• Does the average consumer understand that food has been relatively (too) cheap for a long period of time?
• What impact on the economy can we expect?
• How will this influence purchasing decisions and the way that companies approach the market?

Before delving into the topic in earnest, Chris Sheppardson took to the floor to give an over view of the market at the moment, using opinions and thoughts expressed at other EP forums.Chris noted that there have been four distinct topics of discussion, regardless of the sector which affect business, at every level.

1. The Economy
2. Banks
3. Food trends
4. Leadership & talent development

In regards to the economy it is generally agreed that London is faring better than the Provinces; hotel trade is improving; contract catering is a year behind and restaurants can really only be compared on an individual basis as they are very much dependant on their sector, location, chef and management team.It is believed that there will be more secondary failures in 2011 as companies struggle with their cash flows as the market grows...and especially if the banks continue not to lend to SMEs.The average consumer is more knowledgeable and conscious of the food they consume and its provenance. On the whole, people are looking for more choice and better value – and that doesn’t necessarily just mean cheaper.

The Discussion...When it comes to the contract catering sector, there was a consensus around the table that we haven’t seen the worst yet. This side of the industry is about a year “behind” hotels when it comes to really feeling the pinch. It was agreed that the old traditional model would have to change as working at 2% net margins was no longer practical and that clients were seeking new solutions, new ideas and innovations. Clients are asking for new solutions and ideas from this sector and it will be interesting to see which companies respond.The 2.5% VAT increase was discussed at length, with the upshot being that those in the room think the business sector will suffer the increase tolerably well whereas leisure travellers and consumers will be hurt.It’s important to note at this point that it’s not just the VAT increase that was being taken in to consideration. There is also the strong possibility that food costs in 2011 are going to rise, significantly.A show of hands round the table showed that – though some think it will be higher and others lower – people are anticipating a rise of circa 5% in the cost of food & beverage, across the board.Some larger companies are likely to go to their suppliers and ask for price cuts to counter this, but at what point must we stop squeezing our suppliers?

Joint Ventures are expected to increase now as companies decentralise their purchasing centres.Innovation in the market will be even more important for survival. Consumers have higher expectations than ever before. They know food. They know good service. They know fine wine, and they will demand more for their money. The increase in the cost of food and the VAT wont necessarily have people scurrying for the Supermarket own brands, but they will expect better quality for the price.