Price rises on the menu in 2017

Suppliers face rising costs as sterling falls in the wake of the Brexit vote – but clever tactics can keep things under control, says Prestige Purchasing CEO David Read.

As we begin 2017 the media is overflowing with commentary about impending inflation. Purchasing offices throughout the country are packed with queues of suppliers asking for double-digit percentage increases. Yet food prices as measured by the consumer price index (CPI) are still falling, albeit more slowly than in the recent past.

How can this be? What is going on? And how can operators protect themselves from cost increases that will be difficult to pass on to the consumer in the current low-inflation environment?

The good news is that the fall in the sterling exchange rate triggered by the leave vote in the EU referendum has caused the resultant inflationary pressures to be the most heralded in recent memory. As recently as quarter three of 2008 we had food inflation of almost 5%, and we survived for the whole of 2011 at above 4% with remarkably little of the political hype we are now seeing.

There’s little doubt that prices are already increasing, and will continue to do in 2017. However, a careful examination of the facts will help minimise the impacts while ensuring that suppliers are still treated with respect and critical relationships are maintained.

The first clue is in the difference between CPI and what is happening with the price of food delivered to caterers. In the retail market an aggressive price war is going on, with the major supermarkets going toe-to-toe with the discounters. By contrast there is no similar competitive pressure in the foodservice supply market. When we compare CPI with our CGA/Prestige foodservice price index (FPI) there is now a four-point gap between them – with CPI at -2% and FPI at +2%. So for caterers inflation is already a reality.

There are two reasons why exchange rates are affecting food prices. The first is that imported products now cost more as the pound buys less. The second, albeit less significant for now at least, is that in some categories UK products are now extremely competitive overseas, making less available for UK consumption, which in turn drives up prices. It’s sensible therefore for buyers to have all the facts at their fingertips about the origin of products, recent changes to market pricing and suppliers’ hedging strategies – and to be prepared to examine UK sources as an alternative if the product is imported.

In addition to the exchange rate challenges there are a number of major product categories in which prices are rising exceptionally fast – and for a variety of reasons. These include coffee, chocolate, salmon and British lamb (see box).

There are of course a number of other potentially much larger factors that could affect food pricing in the mid-term, such as the introduction of new tariffs and the enforced changes to farmer support after Brexit, but as these are at least two years away I shall ignore them for now. The market is still a rising one, though, and as well as the pointers above buyers should definitely use the following tactics:

  • If you see a good price then take it.
  • Don’t hang on hoping for the price to improve – it won’t.
  • Negotiate longer price holds if you can because they will almost always pay off.
  • Contract with the supplier and quickly, before the price increases.

It’s also worth accepting that some prices will inevitably have to rise, and to start seeking other ways of driving value. The simple ones are rationalising the number of products that you buy, reviewing delivery frequency and time of day, and consolidating deliveries.

Reviewing the specification of products is another option. Say a supplier is asking for 7% increase on a steak costing £5; then the price will be £5.35. Negotiation may make a higher-spec steak come in at £5.50, but then there is a story for you to tell the customer about why the price has increased.

But in this kind of market a good tactic is also to look for ways to add value to the product so that it justifies a cost increase to the customer. This can be done by increasing the specification, or by introducing environmental standards or certifications that can be promoted to customers. For more than five years we have been in a stable or falling market on food and drink pricing, and buyers have found it easy to apply the simple logic of the market to keep pricing under control. The inflationary market that is with us now necessitates a more intelligent and creative approach to the delivery of value and an even heavier reliance on good market data to drive decision-making.

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