Petrol prices pump up the agony for catering firms

11 August 2005
Petrol prices pump up the agony for catering firms

On the face of it, the death of Saudi Arabian ruler King Fahd last week had no relevance to the UK catering industry.

However, the international money markets' reaction to the news and the consequent increase in petrol pump prices - the AA Motoring Trust has reported some garages now selling petrol for more than 1 a litre - has implications for all industries that rely on a supply chain of delivery vans and lorries.

Last week's price rise was not an isolated incident but rather just the latest jump in a series that started with the second Iraq war. Economists blamed massive surges in demand from developing nations such as China and worries about political instability in some of the major oil-producing nations, such as Saudi Arabia and Nigeria.

Feeling the pinch Regardless of the causes, the UK now has the highest fuel prices in Europe, according to research company Analytiqa, and British distributors are feeling the pinch.

"The truth of the matter is some distribution companies are going bust," said Jon Brooke Langham, head of business development at fuel consultancy CH Fuels. "It's an industry where margins are low and there's not a lot of room to manoeuvre. Any rise in costs can force companies into the red."

This situation, said purchasing consultant Michael Weaving, could mean the price of deliveries going up, as distributors look to pass some of these extra costs on to operators.

At food service company 3663, director of marketing Des Bell admitted that fuel price rises, combined with other factors such as the Working Time Directive and the minimum wage, were squeezing the business. However, he said the company was working hard not to raise its prices.

Bell maintained that, as a large national distributor of fresh produce and catering equipment, with annual sales exceeding 1b, the company was able to negate many of these extra costs through economies of scale. "We have a lot of buying power, which minimises any cost increases," he said.

According to Bell, the companies most at risk were smaller food distributors which had less clout and were unable to assimilate extra fuel costs.

This claim was confirmed by Cornish firm Falmouth Bay Oysters. "Fuel prices are crippling us," said Valerie Thomson, head of sales and marketing. "Diesel has gone up 10% this year."

Much of the company's produce is sold in London, a 360-mile round-trip from Falmouth in fuel-hungry refrigerated trucks. It's a journey that is becoming increasingly expensive.

The company is investing in new vehicles in the hope that they will be more fuel-efficient and thus cost-effective, but Thomson admitted that the company may be forced to put a small increase on the price of its oysters when the season starts again in October.

"We're loath to put prices up, because competition with other producers is tight and customer loyalty is determined mostly by cost," said Thomson. "Fuel costs are really hitting our profits."

At Moorfresh, a company that sources and distributes premium food around Yorkshire, operations director Colin Pepler said the company was feeling the effect of high fuel prices. If they stay high, he said, food prices may have to be increased when the firm's new catalogue is produced.

"We do feel fuel prices, and are trying to absorb them by generating more sales," said Pepler. "But if they keep upping the prices over time, we may not have any choice but to change our pricing. Customers won't be happy."

With demand for fuel so high, there is little chance of fuel costs coming down in the short term, so distributors are looking at other factors that may help them keep costs down.

The Road Haulage Association is already lobbying the Government to come up with fiscal answers to the problems fuel prices now pose for businesses, particularly small and medium enterprises. The body has put forward several ideas, including fuel rebates for commercial users of petrol and diesel, and an increase in VAT on fuel (rather than tax) that would allow distributors to claim more of their expenses back.

So far, such attempts have been frustrated by the Government's inability to find a solution that sits comfortably with its long-term aim of reducing traffic congestion.

Alternative fuels Another solution may come from technological advances in alternative fuels, such as liquefied natural gas and biodiesel. The UK's leading distributor to the catering industry, Brakes, is rumoured to be starting trials in this area soon.

In the meantime, operators are advised to brace themselves for price increases from distributors.

Consultant Weaving recommended that purchasing managers keep abreast of the situation and stay in regular dialogue with their suppliers, to ensure they are prepared for any extra costs that may be heading their way.

"Oil prices have been rising for a number of years and buyers need to be aware of the commercial realities," he said. "They are having an impact on delivery costs and could cause supplier costs to rise. Don't let it catch you unawares."

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