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Caterers must adapt to a future of high prices

26 June 2008 by
Caterers must adapt to a future of high prices

Contract caterers believe the recent phenomenon of food inflation is one genie that's not going back in its bottle: the challenge now is impressing this view on to clients.

A Caterer investigation published last week found that contract caterers all thought the era of cheap food was over - most were taking steps to adapt their businesses to this new backdrop.

Communicating this shift is essential: although the high euro, poor harvests, rampant bio-crop cultivation and political instability with record oil prices have created the current spike in food prices, there's more bad news to come.

As Diana Spellman, managing director, of Partners in Purchasing, pointed out: "The EU has been working its way out of the £20b subsidy a year it pays to farmers since 1998. The deadline for removal of the subsidy is 2012 and it means we consumers will have to pay the true price of our food."

Partners in Purchasing manages £55m of buying power for a range of companies and institutions - including independent contract caterers, government departments and blue-chip financial firms - so Spellman sees the effect of shifting prices before most of us. "We have the lowest spend of our disposable income on food in the UK at 9%, compared with the rest of Europe at 14%," she said. "I see little prospect of food prices coming back to the base of 2007."

Unknowns?

A report published last month by the Organisation for Economic Co-operation and Development (OECD) titled Agricultural Outlook 2008 to 2017 also warned that while there were a number of unknowns affecting current food price predictions that might help reduce the rate of inflation, higher food prices would be with us for at least a decade.

The OECD said that, compared with the average for 1998 to 2007, prices projected for the period 2008 to 2017 would on average be about 20% higher for beef and pork, some 30% for raw and white sugar, 40% to 60% for wheat, maize and skim milk powder, more than 60% higher for butter and oilseeds and more than 80% higher for vegetable oils. The food price bubble isn't set to burst just yet.

Clive Hetherington, finance director at contract caterer Vacherin, said that "the worst is still to come over the next three to six months". It's a view of food prices that most caterers and analysts will agree with.

Wendy Bartlett, co-founder of caterer Bartlett Mitchell, said the firm was now increasingly working to change clients' mindsets based on this assumption. Bartlett and her team are doing the best to convince clients to sign off on small tariff increases while the issue is in the headlines and at the forefront of everyone's minds "rather than in a year's time when it's all forgotten".

However, one chief executive of an independent contract caterer that didn't wish to be named said they remained amazed at many clients' reaction to rising prices.

"It's in all the papers and we read every day about prices going up. Our clients take this in as well, but when we tell them we are going to have to put up our tariffs they ask us why? For some there seems to be a complete disconnect."

Spellman said dialogue with clients was essential. "Contract caterers appear to be buffered for the moment, particularly in cost-plus contracts," she said. "However, the forward-thinking ones who are close to the financial institutions are aware that prices are unlikely to come back to previous levels and are planning their strategies now."

Spellman gave an example of a telecoms company that had so far refused to increase tariffs in its staff restaurant because it was mitigating increasing food costs through purchasing. It was a practice, she said, that ultimately wouldn't wash in this new higher-price environment.

Bob Cotton, chief executive of the British Hospitality Association, was due to tell delegates at the industry body's annual luncheon yesterday (25 June) that the Government was ignoring caterers despite the significant effect of higher prices on their margins, suggesting caterers' struggles to communicate the situation to clients was part of a wider image problem the industry faced.

Cotton attacked the chancellor, Alistair Darling, for hosting a meeting recently with food retailers and the National Farmers Union to discuss food inflation without any hospitality industry representation.

Schools and hospitals

"Does the chancellor not realise that food-price inflation is affecting restaurants and hospitals, schools and business just as much as the consumer?" Cotton asked. Apparently not.

Still, even where the current reticence to increase tariffs in staff restaurants is overcome, putting up prices to match the exact rate of food inflation - 6% to 8% - would not wash with clients, according to food service consultant Chris Stern.

Stern said smaller increases with tighter cost management and other proactive steps to reduce costs were the actions clients were expecting to see, not whole-scale price hikes.

"I've been pleased to see that clients are having a sensible reaction to food inflation and accepting that it's something out of the caterer's control. But caterers need to be proactive."

www.caterersearch.com/foodcosts for the latest news and features on coping with escalating food prices.

How they tackled price increases…

  • Actively negotiated a better deal with suppliers
  • Changed menus, substituting ingredients or using cheaper cuts
  • Absorbed price increases
  • Passed costs on to client/customers

Source: Caterer investigation (19 June, page 7)

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