What are the key tools to fight food and drink inflation
David Read, Founder & Chairman of Prestige Purchasing explains the five things to know about managing food and drink inflation in 2022
The last time UK inflation broke into double figures was back in 1981, over 40 years ago. But last week Andrew Bailey, the Governor of the Bank of England speculated that CPI inflation will likely exceed 10% by this Autumn (it’s already at 9%). Appearing before the Treasury Select Committee, he even used the word “apocalyptic” when referring to food and warned that a "very big income shock" from the increase in global goods prices would hit demand in the economy and push up unemployment.
A lot has changed in the 40+ years since 1981. A 25-year-old junior manager then would now be aged 66, so the management playbook certainly needs some updating regarding how to operate in this highly inflationary market.
The most immediate challenge of course is to hold the line on margin. Simply saying no to reasonable price increases may be a workable tactic in more stable times, but won’t be the most effective route now. Shopping does improve one’s understanding of true market price, but risks creating waterbed outcomes where switching a product to another supplier pushes up costs for other goods from the original one.
Thirty years in food and drink buying has taught me four key things about managing margin. Broadly, these are:
1) Think hard about what you sell
Look hard at menu ranging, product specification, provenance and dish margin – and view them all through the lens of stability of supply, potential to reformulate, and customer price elasticity. Work with suppliers to find ways to deliver more customer value with less cost. Be ruthless with dishes that are vulnerable on price and availability then innovate to find better outcomes.
2) Make data driven decisions on selling prices
Unusual circumstances often drive diverse behaviour, with some hospitality operators passing on supplier increases, whilst others are cautious, and some even stick with current price to maintain customer loyalty. Menu pricing is often a decision lightly made, but in unstable times sub-optimal pricing can be damaging to revenues and/or volumes. Invest in good market data about competitor pricing, it will be worth it.
3) Be loyal to your good suppliers and get as close as you can
As we have already learned through the pandemic, this is a time to keep faith with any and all suppliers that are doing a good job for you. To do this effectively you need to be closer than ever to them, building a positive and challenging relationship, and encouraging them to innovate to keep cost as low as possible. If you have been trading with them for some time they will know better than anyone how to do this – engage positively with them and expect/demand good outcomes. Most of all, ensure that you and your team are really well-informed about the product and commercial drivers of the upstream markets that you buy from.
4) Be informed - use good quality market data to manage supplier prices
The reliance on competitive tender to measure how good a supplier price is becomes much less effective in periods of high instability. The measurement of inflation in supply markets to hospitality has been available since 2015, and line-item price benchmarking based on real contract/transaction data is an economic way of being well-informed about live market pricing. Using these tools will help you push back on unreasonable increases, and always obtain optimum price. When a supplier is asking for an increase of 10%, even a relatively small reduction on it may be very material in cash terms.
Perhaps less immediate than protecting margin is the fifth lesson, potentially of greater importance even than the first four. The primary drivers of Brexit, the pandemic and climate change have been pushing supply markets into a greater state of flux than I have ever seen before. This throws out both risks and opportunities, and business leaders need to be well-informed, open minded and analytical about the way that inflation impacts business beyond just margin.
Here are a couple of examples:
- the cost of building materials, particularly steel have risen drastically because of the war in Ukraine, sending operators back to their business case spreadsheets and in some cases fundamentally altering investment plans.
- Brexit precipitated a 44% drop in animal feed imports from the EU pushing up prices dramatically. The war in Ukraine has delivered the same outcome for agri-chemicals, and exacerbated the feed issue further. Many intensive farmers have stock cover on these goods for the time being, but 2023 will see a crisis in intensive farming costs.
- for some operators their sustainability plans have increasingly taken a back seat in recent months, but others have spotted that the rising cost of intensive food production is narrowing the delta between intensive and regenerative/organic costs of production and are actively accelerating their migration to more traditional methods.
This last point is one which I will return to in the future. We are in the midst of a major reset within the food system where the global commoditisation of foodstuffs has been generating less than healthy food, at lower and lower prices, with increasingly harmful impacts upon society and the planet. Many are casting the recent surge in prices as a minor blip, arguing that feed and chemical costs will fall, and we will return to blissful normality in a year or so. Too many things have yet to become clear to predict the eventual outcome of this reset, but one thing I feel certain of – there will be no return to the past, blissful or not.
David Read established supply chain consultancy Prestige Purchasing in 1998, since when it has become recognised as the thought leader on procurement and distribution within Foodservice sector. David has spoken at World Travel Market, Food Ethics Council Business Forum, and several Propel M&C Report events
