Feeling the pinch: How contract caterers are dealing with the credit crunch
In the first of our credit crunch insights, Emma Allen looks at how contract caterers are coping with the economic downturn
When asked how the current credit squeeze is affecting the contract catering market, William Baxter, deputy chief executive of BaxterStorey, takes a firmly philosophical stance.
"The climate prior to the recent doom and gloom was all about people driving a hard bargain," he points out. "Clients have wanted more for less for a long time, and the days of fat budgets were over well before the current downturn."
Baxter's view is seemingly shared by other operators too. Margins are notoriously tight across the contract catering sector - and have been for some time - and despite newspaper predictions of economic meltdown, the current uncertainty is unlikely to faze operators familiar with the pressure to add value and minimise expenditure.
That's not to say, however, that caterers aren't finding it tough. There is little doubt that rocketing food costs, fuel price hikes and sluggish consumer spending all mean tougher times, and with experts warning that there may be no pick-up in the economy until at least 2010, the outlook is hardly cheery. So exactly how far is the credit crunch affecting the contract catering market?
Unsurprisingly, perhaps, it is largely business and industry contracts that have taken the brunt up to now. Dean Lindsay, UK business and industry managing director at Aramark, says the financial sector has been feeling the effects of the credit crunch for some time, and there has been a marked downturn in spend.
"The number of transactions through the till is still fairly constant, but the average spend is significantly down, by as much as 20%," he says, adding that other factors are also affecting trade.
"You've got site population pressures, because not so many agency staff are being employed, and a growing number of City firms are making redundancies. You do wonder how far this could all go," he says.
For most operators, however, the key issue at the moment is food inflation - currently running between 8% and 10% - which is pushing up prices and squeezing margins ever further.
For the majority, this means passing increased costs on through price rises - no easy ask, but as the effects of the credit crunch have spread, many caterers feel that negotiations with clients have become easier.
"Four to six months ago it was a much tougher negotiation," explains Andrew Norrie, co-founder of Olive Catering, which has 65 contracts in both the independent education and business and industry sectors.
"As people are feeling the pinch in their own shopping baskets in the supermarket, the realisation is beginning to sink in."
Tim Jones, co-founder and chairman of Charlton House, agrees and says that the current uncertainty means that constant communication and negotiation with clients is the key to staying on top of the situation.
"We're not trying to put in long-term deals at the moment," he says. "There's no point asking for a 10% levy for two years, because it's difficult to predict where things are going, so we're trying to work with clients and constantly review tariffs as we go along."
One interesting upside of rising prices in the wider marketplace, however, is higher perceived value by customers.
"Because people are spending less when they go out - they might go without that £6 dessert, for instance, or an extra bottle of wine - they see a dessert for £1.50 when they come into the staff restaurant as great value," says Jones.
But he admits that any upsurge in sales this way is unlikely to offset losses elsewhere. "You'd be kidding yourself to say it isn't tighter now. We might sell a few more desserts, but watching 100 people being made redundant is much more serious for our business."
Equally, corporate belt-tightening is taking its toll on hospitality budgets, and the days of lavish entertaining are long gone for most.
For Jones, it's a question of being adaptable. "You just have to work harder. People have still got money to spend but you can't afford to be rigid. If the client wants a function and pays £40 a head, not the usual £50, you have to make that work."
So how else are caterers mitigating the effects of the crunch? For many, the key is to be proactive, whether it involves redesigning menus to include cheaper ingredients, securing better deals with suppliers or reviewing service levels.
Survival is also about staying ahead of trends, according to Lindsay. "You've got to be more creative, because clients want much better value for money.
"We've seen a move away from traditional-style staff restaurants in the past few years, so we might look at reducing the number of menu choices in the restaurant and boosting deli and take-away options instead," he explains, adding that it isn't just about taking out costs.
"You'll only get unhappy clients if you do that. It's more about intelligent reprogramming to add value."
Echoing the ethos that cutting back on quality doesn't pay, Geoffrey Harrison, managing director of Harrison's Catering, which operates mainly in the state education and business and industry sectors, says that service levels need to remain as high as possible in a difficult market.
"Clients are thinking ‘Where are they going to cut,' but once you start - whether it's taking the midweek roast off, or thickening up the spaghetti bolognaise - you're found out," he says.
"We might be pressurised on margins this year, but we have to take the long-term view if we want to retain clients."
Similarly, while staff training and development is one area that tends to get pruned in a downturn, the feeling among certain operators is that careful investment can be cost-effective.
At BaxterStorey, training and development budgets have increased by 25% on two years ago, widening the choice of training on offer, and a new director of training was appointed in June.
"When you're trying to get more out of staff, they need a higher degree of support," explains deputy chief executive William Baxter.
"Training staff in areas like cost control, legislation and procurement, for example, will have direct benefits, particularly in a tough climate."
When it comes to winning new business, most operators seem to feel that although things are quieter than this time last year, there are still positives.
"Although certain sectors are having a harder time, not every company is struggling, and there are definitely opportunities out there," says Baxter.
"Clients are looking for added value, although people still need a reason to change, and money is only part of that process."
Tips for surviving the credit crunch
1. Communicate with clients: Constantly review prices and avoid fixing long-term tariff deals, which could end up costing you more.
2. Negotiate with suppliers: Pass on supplier information to clients so they can understand the impact of rising food costs on your business.
3. Add value rather than cut back on quality: If necessary, look at modifying service levels, whether that's redesigning menus to include less-expensive items, or increasing the number of take-away or deli options to reduce pressure on staffing.
4. Ensure production controls are as efficient as possible: To streamline costs, make sure that chefs are fully up to speed on waste control and portion sizes.
5. Would chefs benefit from extra training on purchasing or cost controls, for example? Could sales training for telesales teams generate more income?
The consultant's view
There's no doubt that more of our clients are saying they need better value for money at the moment.
Some clients are sticking their heads in the sand over food prices - they don't want a tariff increase, but they don't want to increase subsidy levels either - but something has to give. If they're getting asked for a 5% tariff increase, we're recommending that they accept that.
We're also seeing more clients reviewing their contracts. Everyone's asking, "Am I getting the best deal?" But it's not necessarily a bad thing. There's a lot of movement, and that means there are opportunities.
I think that the more progressive caterers can do well in this market.
Chris Stern, managing director of Stern Consultancy