Count the cost: how to manage ever-increasing business costs

The hospitality industry faces a challenge in educating consumers that such price increases are necessary. The Consumer Prices Index (CPI) measures inflation, which is currently at 5.4% and is forecast to reach 7% this year. It is based on a shopping basket of goods and services that consumers typically spend their money on. But the CPI cannot be considered an accurate measurement of rising business operating costs, which are significantly higher.

With hospitality businesses reporting average rises of 41% in energy bills, 19% in labour costs, 17% in food prices, 14% for drinks and 21% for insurance, consumers may perceive price increases made by operators as ‘above inflation', when this is far from the truth.

Why are we in this situation?

Broadly speaking, rising business costs have been caused by a sudden ramp-up of economic activity after long periods of lockdown. Like trying to jump straight back on a rusty old bike, global trading routes are taking time to run smoothly again.

The UK imports around 40% of its food and drink, so sudden spikes in demand have been followed by transportation and shipping difficulties that result in supply shortages. All of these factors push up prices. In addition to the general strains on international commerce, the full impact of Brexit has only been felt since the 1 January with the introduction of custom checks for the first time. The result has been congestion at the channel ports, Felixstowe in particular, and queues of lorries on the M20. Lorry drivers sitting in traffic still have to be paid so delays and additional paperwork mean higher prices.

Brexit has also affected the supply of goods because a number of EU manufacturers and producers have decided that trading with the UK is unviable under the new rules. This has pushed up demand for domestic suppliers and products, leading to higher prices.

Another cause of inflation is labour shortages, a well-documented consequence of both Covid and Brexit, not just in the hospitality industry but throughout the entire supply chain.

"In the second half of 2021 we had chronic labour shortages at every point in the supply chain," says David Read, founder and chairman of Prestige Purchasing. "They have since eased to a degree because everyone has put wages up. So HGV drivers who were earning £45,000 a year are now earning £60,000, £70,000 or even £90,000. Is it a good thing? Yes, but it drives inflation."

Tim Adams, director of sales and marketing, Bidfood UK, adds: "Hospitality, HGV drivers, care home workers… these have been unloved people. They are now beginning to be valued as they should be and their wages are reflecting their value, which I think is absolutely a positive thing. The consumer ultimately needs to recognise that this means they are going to have to pay more."

Operator options

For around two years, prices of wholesale food and drink were stable or even decreasing because demand was limited during the pandemic. Then, in the last quarter of 2021 prices started to rise steadily across the board.

The wholesale prices of food and non-alcoholic beverages are forecast to continue rising to a high of 5%-8% in November 2022 compared to the same month a year earlier. At this point, the increases are expected to plateau and stay where they are, according to the CGA Prestige Foodservice Index.

Hotels need to be able to use their own autonomy, but choice is taken from them when they need it the most

Writing on Twitter, Andrew O'Connor, chef at the Full Moon in Hawbridge, Buckinghamshre, noted a 61% increase in the price of rapeseed oil. Caterers at Darwin College, Cambridge, said that coffee was up 10%. In an inflationary environment, it is easy for suppliers to ask for more money automatically, but wholesalers and operators need to ask for details and transparency and understand the real impact on price.

Naz Haq, head of corporate procurement at Bidfood UK, says: "We take a robust approach with our suppliers to delay, reduce or minimise price rises or certainly get concrete justification so we're not putting up prices where there is no reason. If a kilo of carrots rises in price by 10% for a wholesaler it definitely doesn't mean the price should go up 10% for the operator," adds Read.

"Operators need to understand the costs that sit inside their supply chains. Challenge, push back and make sure that if you agree to increases that they are valid. You need to question and expose."

But who has the time to haggle over the prices of individual items? It's a question of either having purchasing resources in-house or outsourcing. Large businesses will have dedicated purchasing departments. Over the years, several contract catering companies have acquired specialist food and drink procurement firms and integrated them into their operations. For smaller businesses, effective procurement might be more of a challenge. "I've seen businesses telling their chefs to just negotiate harder when the chef isn't trained in negotiation," comments Read.

One solution for SMEs is to join a purchasing consortium that offers the lower prices usually only achieved with large volume orders. Working with a purchasing consortium, like that run by Prestige Purchasing, does not necessarily mean a business has to change its current suppliers either.

Some believe independent businesses have an advantage in that they can make their own decisions on procurement. Tom Magnuson, chief executive of Magnuson Hotels, says: "Owners need to be able to make their own decisions about where to buy at the best price, drawing on their local, more sustainable networks. What are guests having for breakfast? What kind of sheets are on the beds? What kind of soap is in the bathroom? But many hotels are still being forced to buy through brand-approved channels which are not always the best price. Hotels need to be able to use their own autonomy, but choice is taken from them when they need it the most."

In any event, inflation or no inflation, Read argues there are several steps that hospitality businesses can take to mitigate costs and optimise their supply chains.

He says: "These are things to make sure you are set up internally to be really efficient. When we engage with new clients they are typically overpaying by 5%-12%. We often see organisations with two or three times as many ingredients as they really need to satisfy the customer. Ten different pack sizes of mayonnaise – why? We also look at frequency of delivery and whether you can consolidate suppliers. Most now carry milk, but people still have a dairy delivering their milk."

For larger businesses, this process takes about six months because of the large number of embedded decisions and processes that need to be looked at.

Rising energy costs

In comparison to food and drink, many expect the recent spike in energy costs to play out over a longer timescale. The reasons behind higher energy bills are, again, down to the laws of supply and demand.

A worldwide shortage of liquefied natural gas has pushed up gas prices; a cold winter in Europe in 2020/21 put pressure on supplies and reduced the amount of gas stored; and a summer with little wind in 2021 made it hard to generate wind energy. The UK has been relatively hard-hit because natural gas provides 84% of heating and 40% of electricity.

Total utility costs per available room at UK hotels almost doubled from £3.34 to £6.52 when comparing the month of December in 2020 and 2021, says Hotstats, with UK hoteliers either paying or consuming more than their north European counterparts. The data reveals a 47.5% jump in electricity costs and a 56.7% increase in the price of gas

What can operators do about the increase in energy bills? Businesses can partner with energy brokers and consultants to obtain the best contracts, although these services tend to be only available to operators of a certain size. It is important to choose partnerships carefully says Kayte Smith, head of finance at Resident Hotels.

"We have sought to protect ourselves from volatility through a number of hedging strategies, as well as moving towards being carbon neutral by 2050. We have partnered with an energy solutions business to stay informed about movement in the market, allowing us to act swiftly, but have found that, as with any supplier, it is important to look at reputation when choosing a partner," she says.

Another step is to look at generating your own energy. "If there ever was a time to make a long-term investment in renewables, it's now," comments Read.

Whitbread, for example, already powers 20% of its hotels with solar panels, which have proven to be a more reliable energy source than wind in recent months, and has 100% renewable electricity contracts.

Dominic Burbridge, associate director at the Carbon Trust, says that solar power is a good investment: "You're looking at payback in less than seven years. You have an asset with a design-life of 60 years, it's a really good return. There are lots of options to have these projects financed by third parties. Someone else will pay to have it installed and give you cheap electricity."

At the risk of stating the obvious, the energy you do not use is always going to be the least expensive. Most hospitality businesses could reduce their energy consumption by 10%-14%, says the Carbon Trust. Many embarked on energy-efficiency drives several years ago, taking steps such as switching to LED lights and installing occupancy sensors. Since then, technology has advanced greatly and there are new systems readily available to further streamline operations and increase efficiencies.

Tristan Gadsby, chief executive of hotel technology consultant Alliants, says: "Even with older buildings, there are a number of solutions to retro-fit to ensure the building is as energy efficient as possible. Automating and optimising processes such as the allocation of rooms is also key to achieving energy efficiency."

A Whitbread spokesperson says: "We continue to trial cutting-edge technologies that will form the investment programmes of future years. For example, we have installed smart controllers to improve the efficiency of our space heating and cooling and air source heat pumps for efficient hot water generation and to reduce gas usage."

What is going to happen now?

The British Chamber of Commerce is calling for an energy price cap for smaller businesses, similar to the one applied to households, and the government is under pressure to delay the planned rise in national insurance.

Hospitality and leisure business leaders have written to the chancellor Rishi Sunak to urge the government to keep VAT at 12.5% beyond March 2022 in a bid to protect jobs and stave off inflationary pressures.

Returning to food and drink prices, Adams says he is confident that Bidfood clients will see more stability in the months to come.

"A lot of our customers have fixed tariffs and printed menus that can't be changed constantly so, as an industry, we need to provide greater levels of stability and give assurances around the prices they are going to pay for the next six months. I think it will happen now. I think there's been a correction that was required."

He continues: "Some products are worse hit than others, so we are working with the industry on developing menus that are more agile, where you can pick and choose proteins depending on availability and price, but also removing certain products. The sourcing decisions of old may have now fundamentally changed."

Rachel Dobson, managing director at Lynx Purchasing adds: "Every operator faces similar challenges, so those that can take a disciplined approach to menu planning and purchasing will have an advantage. "With inflation as much of a concern for consumers, even a small advantage in terms of menu pricing can make the difference to where they choose to eat out."

We often see organisations with two or three times as many ingredients as they really need to satisfy the customer

Cost controls

Lynx Purchasing gives its advice for controlling costs and planning menus:

• Plan your orders. With transport and delivery costs high, fewer and bigger deliveries are far better value than frequent small ones, and some suppliers have raised their minimum order level.
• Talk frequently to your fish, meat and fresh produce suppliers to get the best value from the products available, which can change frequently. Be ready to use less popular cuts or less familiar fish species, which can be better value.
• Keep menu descriptions flexible, eg ‘catch of the day', ‘home-made pie of the week', or ‘served with seasonal veg.'
• With staffing costs rising, consider the benefits of asking suppliers to do some of the prep, such as filleting fish or trimming steaks to size before delivery. This will cost more, but also cuts kitchen staff costs and helps reduce food waste.
• Feature better value products such as burgers, meatballs and fishcakes on menus. These can be made with the offcuts and trim from premium cuts, are popular with customers and generate good margins.
• Be aware the challenges go beyond food, with everything from glassware and crockery to kitchen equipment costing more and taking longer to deliver. By speaking to suppliers about availability and planning orders, it's possible to get better value.

The wholesale price of an Easter meal (2019 versus 2022)

Honey-glazed ham hock terrine with spiced fruit chutney, red lettuce and banquet rolls sees an overall 5.9% increase in cost per portion compared with the 2019 price, with the banquet rolls alone seeing a 20% increase driven by high wheat prices, and the ham hock terrine at 5.2%.

A main roast lamb dish is now 36% more expensive than in 2019, driven by increases in the price of a leg of lamb (33%), roast potatoes and frozen vegetables (47%).

An Easter dessert of chocolate and hazelnut-filled churros with double chocolate cookie crumb, Belgian chocolate ice-cream and Belgian chocolate drizzle is 10.7% more expensive. While the churros are a large part of the dish, with increases of around 9%, caster sugar and Belgian chocolate drizzle, although a small part of the dish, are seeing inflation at a much higher rates (100% and 33% respectively).

Source: Bidfood UK