The inevitable rise in food costs will mean that only optimists will survive the market, says David Read, chairman, Prestige Purchasing
Since around October last year, there have been a large amount of proposed supplier increases hitting buying offices throughout the country. We’ve been seeing requests on a full basket of products as high as 20%, and many individual products proposed at double or even treble the price compared to a year ago. Of course, some increases are legitimate, but some are simply the supplier taking advantage of the opportunity to margin up.
I believe it was Winston Churchill who said: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
For suppliers, this is a moment of opportunity. We know from the recently introduced Foodservice Price Index (FPI) that for at least two years prices in food- service have been increasing above the rate of inflation, as measured by the government’s CPI index. The main reasons have been the huge buying power exercised by the major supermarkets, and the price war that has been raging in retail because of the influence of the new German discounters Aldi and Lidl. This has kept CPI tracking well below the level of increases we have seen passed through to the catering sector. In the past year this gap has widened to four percentage points.
The fact that inflation is in the news so much is mainly because of Brexit’s impact upon the sterling exchange rate. Until December we were seeing no upward movement in the CPI, but after two years of deflation even that is now tracking upwards. The door is opening for more price rises to caterers unless they are vigilant and well informed. Winston’s optimists on the supply side will feel that the time has come to fatten their margins.
But seeing opportunity in difficulty is a path available to caterers, too. Many caterers have been complacent around supplier price management, and most businesses have huge opportunities to mitigate all the increases coming their way – at least during 2017. Last time we saw significant inflation (which, apart from a couple of blips, was more than 20 years ago) best practice in buying amounted to getting a few quotes and giving some stern persuasion. Now we understand the hidden value in managing ranging, paying attention to specification, optimising distribution and creating stable long-term relationships. I’ve not seen a single business in recent years that has had zero opportunity in these areas.
But the opportunity is not just to hold or reduce supplier prices in an inflationary market, but to increase selling prices and take more margin. It’s certainly true that operators are now in a mature market, where the consumer will be relentless in seeking out value, but I would argue that in my lifetime the consumer has never been more conditioned to be ready for increases in price. This is a time for optimists – ones that optimise their supply chains, and maximise their pricing in an inflationary environment. Those who see just difficulty will struggle to survive the difficult years ahead.