Maintaining margins

Suppliers' costs might be going up across the board, but contract caterers can't afford to pass that on to protect their margins. Elly Earls finds out why innovation is the only way to maintain profitability and ensure customers are receiving the value for money they demand

Increases in food, energy, employment and transport costs have led to suppliers hiking their prices, sometimes by up to 10%. These hefty rises mean that even the most purchasing-savvy contract caterers are having to rethink strategies across the board.

In an industry where pricing sovereignty lies with the client rather than the contractor, and raising tariffs is, therefore, not an option, innovation is the only real way caterers can protect their all-important margins and ensure that their increasingly cash-strapped customers feel they are still getting value for money.

Enlisting the help of established purchasing organisations has become an increasingly attractive option for many contract caterers. Not only can food purchasing consultancies, such as Acquire Services, which has a volume of more than £500m at its disposal, reduce costs for new clients, they can also maintain competitive rates over a long period of time.

"Most wholesalers we deal with are planning and contracting ahead with their key suppliers to ensure availability as well as price stability for a given period," says the company's purchasing director, Dave Anderson. "As most commodities and their pricing are mainly impacted by the weather and harvests, this is known and negotiated when the pricing is agreed. We get indications of how commodities might be impacted and have a level of understanding of where pricing should be, come contract renewal."

Purchasing consultancies generally have monthly processes in place for reviewing and comparing suppliers within the same supply areas against each other. "This is also compared against the wider market using sources such as Defra and consumer-price-index and retail-price-index government statistics," Anderson adds.

For Wendy Bartlett, managing director of contract caterer Bartlett Mitchell, working with a purchasing consortium has been invaluable. "We have set contracts for set periods of time and because they are professionally managed, we've been able to manage and control the cost increases much better than most," she says.

Yet, despite the excellent deals that can be achieved through working with purchasing professionals, there is no way around the fact that prices are rising, and rising fast. "We tend to fix prices for a period, but when those come to an end, we've had suppliers coming back to us looking for nearly 10% increases, citing higher energy and raw material costs," says Mark Nelson, catering director of OCS.

In the contract catering industry, simply raising prices is not an option. "Clients don't want to increase prices because their customers want value for money," Bartlett explains. "They're not getting wage increases and, therefore, they're stuck. We just have to be smarter about what we do."

For Nelson, this means rethinking strategies across the entire business. "You've got to start at the global buying stage and go right through to the end customer," he says. At OCS this has ranged from looking at how suppliers' products are packaged to making the decision to stop fixing meat prices for the next three months. At Bartlett Mitchell, reducing delivery frequency has been the company's key focus.

Indeed, one of the caterer's most successful initiatives has been "free-wheeling Wednesdays", a partnership with its suppliers that encourages them to entirely halt deliveries every Wednesday, and has resulted in a 26% reduction in the number of deliveries Bartlett Mitchell receives across the board.

Many caterers have also opted to go back to basics and make much more food in-house. Aspire Group, for example, has created its own retail range called Bite, which includes sandwiches, yogurts, fruit pots and tray bakes, as well as impulse buys such as muffins, flapjacks and brownies.

"At Silverstone, we have a 10,000sq ft production kitchen so we thought it was a great opportunity to make our own and make it much more bespoke for the client," managing director Sean Valentine notes. "By utilising the kitchen to its fullest extent, we've been able to shave about 42% off the cost of our goods."

Flexibility is also key for contract caterers during this difficult time. "When talking to suppliers, caterers should be looking at products or product groups where perhaps prices haven't risen quite so sharply," Nigel Forbes, managing partner at the Litmus Partnership, advises. "If you plan your menus on a slightly shorter-term basis, you can also take advantage of any special offers or deals suppliers might have."

This is another area in which a professional purchasing organisation can help. "Our market metrics reports give indications of what we see coming round the corner," Anderson says. "This allows our clients to steer away from those areas that we can see are going to be problematic in the near future."

Across the board, Forbes, too, has seen a greater emphasis on tighter controls. "There's been more effort going into recipe costings, menu planning and controlling waste," he says. "Caterers are looking at what's selling and how much is left at the end of service, and then using that information to make sure that next time their mix of dishes is much more precise."

For Bartlett, this is absolutely crucial to success. "It's not always about reducing cost; it's primarily about increasing sales," she adds. "It's really important that you don't reduce the service to a threadbare offer because people simply won't use it. It's about value for money and quality; people will pay slightly more if they think that's what they're getting."

leverage technology

Andy Chappell, managing director, ISS Food and Hospitality At ISS Food and Hospitality, auditing has become a monthly event. "We audit a number of our clients, to find out what managers and chefs are purchasing on a site-by-site basis," managing director Andy Chappell says. "This allows us to look at what they could have purchased more effectively. For example, they might be buying a branded product rather than a non-branded product and we can advise them to switch."

The company has also started using the intelligence from its electronic point of sale (EPoS) systems much more extensively. "We've spent an awful lot of time looking at exactly what we're selling, what hour of the day we're selling it, whether the right product is on offer, and so on," Chappell says. "It means we can very easily understand our top 10 sellers, as well as the bottom 10, and engineer the menu accordingly."

EPoS systems can also help caterers improve labour productivity. "It tells us whether we need labour resources at a particular time," Chappell explains. "We're now condensing hours where we can by using more flexible, part-time staffing, as well as looking at ways we can reduce labour through IT."

DO IT YOURSELF

Mark Nelson, catering director, OCS For Mark Nelson, catering director of OCS, the most effective way to counter the significant cost increases that have been seen across the hospitality industry is to improve your operation's value for money.

The company has, therefore, created a range of impulse-buy cakes that can be made on site. "If you buy a frozen double-chocolate muffin from one of the large wholesalers, you'll be paying £1.09," Nelson says. "But we can now make the equivalent in-house for less than half of that price."

Labour costs obviously need to be taken into account when considering this strategy, but, for Nelson, if you can make items in-house that you know will sell in large volumes, such as muffins, shortbread, flapjacks and coconut slices, it's more than realistic that you'll be able to halve your buying-in cost. "Even when you've implemented a strategy like this, you can't stay still," Nelson adds. "Last week, we reviewed all our recipes and have replaced butter with flora, which is about 30% cheaper."

Moreover, not only has OCS launched its own sandwich range, which can be made in-house, the contract caterer has gone to the extent of revamping its sandwich fillings. "Rather than buying in a coronation chicken filling, for example, we've created our own recipe," Nelson explains. "We can probably save about 40% on the cost of buying it in."

work together

Sean Valentine, managing director and owner, Aspire Group At Aspire Group, which provides contract catering services at high-quality venues and events, including Silverstone, menus are generally pre-agreed many months in advance with both the client and the event's major customers. "We've therefore got to be very smart with our suppliers," says managing director Sean Valentine. "We have to ensure we have reasonably long-term negotiations, such as three- to six-month price freezes on key items including fish and meat."

Yet, for Valentine, the word "negotiation" is a bit too strong. "We work in partnership with our suppliers," he explains. "We have some fairly detailed dialogues going on with our suppliers and I think that really helps. If you have a relationship and a mutual understanding between the caterer and the supplier, it helps to ensure you can control costs and maintain quality."

Indeed, quality always comes first at Aspire. "We measure our business very much on client and customer satisfaction; last year we achieved a rate of 96% customer satisfaction," Valentine adds. "In austere times, you need to be looking at how you can develop added value, how you can make it more exciting for them and how you can engage with them."

the upward trend is set to continue

The soaring costs of energy and food have already put contract caterers under immense pressure as they struggle to maintain margins and offer their customers value for money; unfortunately, the increases show no sign of slowing.

Last year, utility providers including npower, British Gas, Scottish Power and E.ON raised their tariffs by staggering amounts. But industry analysts say this is only the beginning, predicting that energy bills could rise by as much as 60% over the next 10 years.

Although food prices depend very much on factors such as weather and harvests, there has certainly been an upward trend in the past year. According to Acquire Services' January 2012 Market Metrics report, the overall meat and poultry basket has increased 8.8% over the past year, while dairy prices have increased by 10.3%. Prices for raw materials in the bakery market have also seen unprecedented increases, with sugar up 42% and flour 23% on this time last year.

How to tackle rising costs

1Make your own
Replace pre-packaged grab-and-go items with products made in-house. Make sure your in-house range comprises goods that can be sold in large volumes, such as muffins, brownies, flapjacks and shortbread.

2Box clever
As well as looking at your suppliers' packaging to see if you can buy a bigger case using less overall packaging, try to make your take-away containers more efficient, for example, by replacing a coffee cup and sleeve for a double-walled cup.

3Consolidate suppliers
Aggregate as much of your purchasing as possible through one wholesaler and try to use one logistics company to deliver. Vehicles can now transport a mix of frozen, chilled and ambient goods, so take one delivery rather than several.

4Improve energy efficiency
An increasing number of clients are separately metering kitchens and catering facilities, creating additional pressure for caterers to reduce energy costs. Think about how you can work more efficiently.

5Know your market
It's essential to know the benchmark market prices. Think about using a consortium to do your purchasing; working with a professionally managed organisation means you'll be able to manage and control food costs much more effectively.

6Adapt your menus
Think about using turkey instead of chicken, for example, explaining to the customer that this is a healthier, lower fat option, and always be flexible so you can take advantage of special deals suppliers are offering.

7Engage with your customers
As well as trying to find new customers, engage with those you already have. Speak to your customers in your café or canteen, rather than sending out an impersonal survey, and act on what they tell you.

8Make the most of the latest technology
Electronic point of sale (EPoS) systems are invaluable for keeping you informed on what you're selling, when you're selling it and how much of it you're selling. This can help reduce waste, improve labour productivity and boost sales.

9Provide meal deals
The only way to compete with large retailers like Tesco is to offer good-value meal deals. But balance budget options with clever marketing so that you can guide your more solvent customers towards the dishes and products with better margins.