“Supermarket prices rise at fastest rate for four years” (Grocer magazine 12.08.17)
Since the UK’s referendum vote to leave the EU in June 2017, increasing food prices have been a constant challenge for contract caterers and their clients. As this situation looks set to continue, bartlett mitchell’s operations and procurement team have produced this Food Inflation expert guide. The guide outlines the issues, influencing factors and ways we can all work together to mitigate the lack of stability in food pricing.
FPI, CPI and RPI
The rate of increase in prices for food are tracked on three indices;
- Foodservice Price Index (FPI)
- Consumer Price Index (CPI)
- Retail Price index (RPI)
The FPI is the independently developed alternative to the CPI and RPI. It contains data drawn from over 50% of the foodservice market and around 7.8m transactions per month. It is the only inflation report focused on the Hospitality and Leisure sector. The FPI provides a more accurate and relevant figure to the foodservice industry than the government’s CPI.
The CPI is similar to the RPI but does not include the costs of housing. Therefore, the CPI is more aligned to the FPI in terms of the products it is measuring.
The RPI is a list of prices of goods and services that show how much prices have changed in a given period of time. This index includes the costs of housing (rents, mortgage interest costs and council tax for example).
The FPI latest data reports food inflation is currently tracking at 9.3% (August 17 data) the CPI is tracking at 2.9% and the RPI is at 3.9%. The discrepancy between the indices shows that the foodservice industry is more exposed to inflationary pressures than consumer-side sectors.
Why are the three price indices not reporting the same number?
The CPI and RPI are calculated using supermarket’s selling prices instead of foodservice wholesale prices; these markets’ movements are distinctively different. It should be noted that these indices are experiencing the highest increases in 4 years. Because there is intense competition between the ‘Big Four’ supermarkets (Tesco, Sainsburys, Morrisons and Asda), these businesses are (for the moment) absorbing food inflation costs and therefore reducing the inflationary impact to the consumer, which in turn converts to a lower rate for the CPI/RPI.
The RPI tracker is higher due to the increase in housing costs over the past 12 months.
Foodservice inflationary trends and insights per category (July 17 v July 16)
- Bread & cereal 1.4%
- Coffee tea & cocoa 3.6%
- Fish 5%
- Fruit 8.9%
- Vegetables 9%
- Meat 11.4%
- Milk cheese and Eggs 10.6%
- Soft Drinks and Juices 8.7%
Negative pressures and their impact on inflation
The Brexit vote has led to a sharp fall in the value of the Pound, at its lowest £1 to $1.22/ Euro 1.10 (a fall of over 15%). This has a significant impact and means that imported food will cost more. About 50% of the UK’s food is imported. It’s impossible to foresee the future position of the Pound, but we do know that its fall in value will have long-term impacts.
We cannot predict food inflation with absolute certainty because of the nature of the influencers which include;
- The unpredictable world weather, which will often lead to short term fluctuations.
- Market forces (such as the drive to use more green transportation, higher minimum wage levels and pressure to remove zero-hours contracts). These forces will continue, and more will be added. They will have an impact on inflation, even if the weather was stable and the Pound remained strong.
- Increases in energy and transportation costs.
- The drop in value of the Pound makes our exports competitively priced overseas which creates shortages in the UK.
- No member country has ever left the EU before. No one knows what trade deals will be struck.
- Increase in cost of labour.
With more suppliers paying London Living Wage and the increasing minimum wage and workplace pension contributions, supplier’s payroll costs are increasing. These can increase payroll costs by up to 9%, taking in to account the planned legislative increases up to 2020. This will also have a direct impact on the supply chain as suppliers attempt to recover their overheads by increasing the cost of their products.
Strong economic data from Europe is part of the reason for the drop in the Pound’s value. The pound has underperformed against most other major currencies this year, due to the reduction in its value after the UK’s referendum decision to leave the EU last year.
Regardless of personal views, the decision to leave the EU has created uncertainty in the short to mid-term, this affects the markets and confidence in the Pound. This uncertainty is compounded by a weaker UK government, a possible election within the next few years and a lack of clarity around transition and trading arrangements.
The Office for National statistics reported in August 2017 that following the referendum decision, EU nationals are leaving Britain. One of the reasons is that a weak sterling makes the UK unattractive for EU workers because their wages are subject to exchange losses. The outflow was most pronounced among citizens from Poland, Hungary and the Czech Republic. Similarly the number of people choosing to come to Britain has declined. It’s widely recognised that this is already leading to skills shortages in hospitality and food production (like butchery) and seasonal farm workers for fruit picking etc. These factors will ultimately drive foodservice costs up.
What the bartlett mitchell procurement team are doing
To ensure our purchasing delivers value for money we independently benchmark our prices against our competitors. To do this, we engage the services of Quenelles who monitor food prices for the catering industry. https://www.quenelles.co.uk/what-we-do The last benchmark was undertaken in April 17 (next benchmark due October 2017), the result showed that our shopping basket of prices (1,000 core lines) was 8.58% better than average for contract caterers.
- Our Purchasing Director conducts monthly briefing sessions providing inflationary updates to keep our managers and clients informed.
- Our procurement policy is not to enter into long term contracts, ensuring our suppliers stay sharp and focused.
- bartlett mitchell has a “good to do business with” reputation amongst our foodservice partners. Suppliers actively seek the opportunity to trade with us. This allows us to negotiate tenaciously (and fairly) ensuring we always get a good deal.
- We engage multiple suppliers in our fresh food categories to ensure suppliers are in a competitive environment to gain market share. In line with our ethical business practices, this also ensures we don’t allow a supplier to be overly-reliant on our business.
- We negotiate our fresh food prices on a monthly basis (fruit, vegetables, meat and fish) which enables us to negotiate effectively by tracking market trends.
- Our chefs and managers have the autonomy to decide which suppliers they engage (from our approved supplier listing) which reinforces the competitive environment suppliers are trading within.
What our catering teams are doing
This is how our teams are taking a proactive approach to mitigate the effects of inflation.
- All Managers and head chefs attend mandatory Gross Profit training workshops with quarterly top-up forums.
- We target sales first; by improving sales the inflationary impact of increasing food costs can often be offset. Tariff increases are always a last resort.
- Teams are trained to monitor costs and adapt their menu and offer to maximise margin. For example, planning menus that use seasonal ingredients.
- High margin items are placed in the most prominent places and teams are encouraged to upsell the high margin items.
- Menu balance. It’s okay to give a little margin on one day, as long as chefs make it up on another. For example, chef might target a 40% margin. One day he will sell salmon (which has gone up drastically in price) knowing that he will sell Lasagne on the following day and make up the margin. Our belief is it’s a marathon, not a sprint.
- Create meal deals and loyalty schemes to drive customers away from low margin options and remove low margin items altogether if they are not selling.
- Ensure portion sizes are consistent and strictly controlled.
- Focus on food waste. Pete Redman, Chef Director, holds quarterly ‘Wast-ed’ masterclasses as part of the Chef Academy. Pete introduces the teams to innovative ways of recycling food without simply using ‘leftovers’. This includes potato jam, herb stalk pesto, caramelised celery tarte tatin and watermelon rind relish. All of which are popular recipes in our restaurants.
- Evaluate if we can, make cheaper than we can buy? Drive customers to buy food we make, rather than items we buy in.
- Provide sales-mix analysis and cost information to our clients, along with regular benchmarking against the high street, so the best decisions on tariffs can be made.
Recommend – A- tions for clients
Be agile with price reviews to enable us to respond to big shifts – we’ll absorb the temporary blips.
We recommend a minimum of one tariff review every year so customers are psychologically prepared for it. It becomes very hard to do a catch-up tariff increase after several years of no price reviews. In periods of high inflation, one annualised tariff review is not sufficient. In the current, volatile environment, we recommend doing an overall annual price adjustment, but making small incremental monthly adjustments, if it’s required, focusing on non-sensitive items first. If a particular commodity increases by say 30%, you have to act quickly by either increasing the price immediately or removing the item.
It’s important to be able to adjust the sales mix and not be afraid to lose certain lines if they don’t work. There is no rule that says you have to sell jacket potatoes every day!
Regular communication with customers. It is imperative that customers are educated throughout the year about inflation, even if you haven’t increased the tariff. Letting customers know that the price of coffee, for instance, has gone up 10%, but that you are holding the current price as part of your commitment to them shows them you are trying to avoid tariff increases and also mentally prepares them for an increase if and when it happens.
Understanding whether the catering is a staff benefit, or a business stream. In some organisations, they may have to make cut backs, or are unable to award bonuses or pay rises. Offering a subsidised catering service and being willing to absorb the inflation rises so customers do not feel the impact of all or part of it, is a positive message.
History shows the UK is a resilient nation and economy and while there may be short term uncertainty and price increases, in the long term we will recover more quickly than many expect. Increasing prices and a shortage of lower paid labour will drive the need for innovation, both technologically and creatively.
It is not the first time the UK has been through challenging times. During the three years following the 2008 recession food prices increased by more than 15%, but the economy recovered and we saw very little inflation for nearly three years from 2012.
Download our guide to understanding food inflation in contract catering here
To share best practice, we have developed bartlett mitchell’s expert guides for workplace and contract catering. Download the pdf guide to Mitigating the effects on foodservice inflation or read our expert guide on how to develop a contract catering strategy. Our team are continually focused on coming up with solutions to mitigate food inflation, please talk to your Area Business Manager to discuss other ways we can support you.