As hospitality businesses across the UK experience a dramatic rise in costs across the board, it is critical that managers and food and beverage controllers closely monitor and manage their operating costs.
In October 2021, Ian Wright, Chief Executive of the Food and Drink Federation, warned MPs that inflation was between 14% and 18% for hospitality businesses. Fast forward to February 2022 and the financial pressure on hospitality businesses shows no sign of slowing. In a recently published UKHospitality survey of over 340 businesses, which represents 8,200 sites, operators reported ‘an average energy increase of 41%, a labour cost increase of 19%, a 17% rise in food prices, 15% hike in drinks prices as well as a 21% increase in insurance costs’.
To add to this pressure, on the 31st March the VAT rate for the hospitality industry reverts to 20% having been set at 12.5% for the period from 1st October 2021 to assist businesses during the pandemic.
To illustrate the impact of this change on gross profit let’s assume that the current selling price for a menu item is £10.00 including VAT at 12.5%. This means that the net selling price is currently £8.89 and so with a food cost of say £2.30 per portion the gross profit per menu item is £6.59 which is 74% of the net selling price. This gross profit then makes a contribution to all the other costs in the business – salaries, energy costs and overheads to name but a few.
If we take this same menu item and change the VAT rate to 20% but keep the selling price the same at £10.00 this means that the net selling price falls to £8.33 leaving a gross profit per menu item of £6.03 with a revised gross profit percentage of 72%. In order to maintain the GP% of 74% this menu item will now need to be sold at £10.62 representing a price increase of 6.2% for the customer.
If the 20% rate increase goes ahead, will you increase your selling prices or face the reduction in the gross profit per item sold? Both options are challenging especially when consumer discretionary spending is falling and so many costs in the business are rising including food, wages and energy costs. The gross profit achieved needs to cover all the other costs in the business …and ideally contribute to the surplus needed to reinvest in the business for the future.
To learn more, why not join us for our online course ‘Food and Beverage Cost Control’ which is designed to help all those in catering businesses who need to manage food and beverage costs from purchasing through to selling products.
The course is delivered over two half days and the sessions have been designed to help participants understand pricing methods and the control of gross profit as well as assisting with the effective execution of daily tasks such as ordering, storage and issuing stock.
The course is supported by Kafoodle, an award-winning food technology company, that have developed innovative software to help the foodservice industry create and manage recipes and meal plans, calculate nutrition, manage and communicate allergens, monitor stock, control costs and record waste.
To find out more information and to look at our next course dates, please go to Arena 4 Finance - Events or send us an email at hello@arena4finance.co.uk to find out how we can help support your organisation.
Photo courtesy of Jay Wennington - Unsplash
About arena4finance
arena4finance regularly provide training support for recognised industry bodies including the Institute of Hospitality, the MasterInnholders, TUCO and the European Clubs Association. Debra Adams, founder of arena4finance and a qualified accountant, has been involved with the hospitality industry for almost 30 years and has delivered courses and training to numerous organisations in the hotel and restaurant sector including world renowned hotel schools such as Ecole Hotelier Lausanne and Glion Institute in Switzerland. She is the author of the highly acclaimed textbook 'Strategic Management Accounting for the Hospitality, Tourism and Leisure Industries'. She is also a regular speaker at hotel conferences and business seminars. Debra leads the team at arena4finance, who have had many years of experience developing and delivering one day, online and more extensive courses in hospitality finance for both finance professionals and operational heads of department in hotels, restaurants and leisure facilities. Our courses are powered by our online learning community resources at www.finance4hospitality.co.uk. For more information about arena4finance, email hello@arena4finance.co.uk or visit our website www.finance4hospitality.co.uk.