How to prepare your hospo business for inflation
(Updated August 2022)
What is inflation?
Inflation is an economic term for a general increase in prices and fall in the purchasing value of money. Currently the price of goods in Australia is being impacted throughout the supply chain. Some of the current causes are:
- Fuel price increases due to the conflict in Europe and global oil output.
- Extreme weather events in various regions of Australia
- Worker shortages caused by the pandemic
- Increases in international shipping times and costs
This puts pressure on employers to increase wages to meet rising living costs, which in turn adds to the labour costs increasing and pushing prices for goods and services higher again, and the feedback loop continues.
When should you raise your prices?
There is never a single perfect time to raise your prices. In an ideal world they would rise and fall as your direct and labour costs do. This means that now more than ever, business owners need to know exactly where their profit margin is made and lost.
The only way to do this is a review of your cost of goods for each and every menu item. This can be a daunting process, but a good place to start is with your most popular menu items. Isolating your top 25 selling items by revenue on your POS system, and tackling 5 each week for 5 weeks might be a manageable way to get started.
Example
If an item was on the menu at $18.00 and your direct costs were $5.50, your COGS% would be 33.6%
Remove the GST element from your sell price ( $18 ÷ 1.1 to remove GST = $16.36)
Divide the cost price by the sell price (after GST) ($5.50 ÷ $16.36 = 0.336 = 33.6%)
Re-costing the menu item, finding an ingredient or portion saving of 50c and increasing the price by $1 to $19 would make an improvement of almost 5% to the profit margin. If this was enacted over every meu item, this could be the difference between profit and loss or doubling profits from 5% to 10%.
Remove the GST element from your sell price ( $19 ÷ 1.1 to remove GST = $17.27)
Divide the cost price by the sell price (after GST) ($5.00 ÷ $17.27 = 0.289 = 28.9%)
Smaller Increases
There used to be an idea in hospitality that it was a good idea to keep to whole or half dollar pricing so that staff and customers were not fiddling around with small change when paying with cash during peak service periods.
These days as contactless payment methods with integrated POS systems, there would be no such cause of delay. Would an increase of 25c on a coffee be a good place to begin to increase prices on a more regular basis?
Should your raise your wages?
Your industry award will set annual increases for every classification minimum rate, you may need to review any salaries to increase at the same rate. In a tight labour market, you may lose good employees if you do not keep your pay competitive.
* Note that fiarwork award increases are comiong soon, at the start of November 2022.
What about other fixed costs?
Depending on your business, you may be more affected than others by increases in utilities, travel expenses or other overheads.
Commercial leases will typically have set annual increases to allow for future increases in CPI / inflation. In recent years these would have been well above the actual increases and would disadvantage the tenants. However on current forecasts, if your annual rental increases are under 3.5% your rent would reduce in real-terms.
Summary
Don’t worry about what your neighbouring businesses are charging, after all you don’t know their costs and they will not necessarily be similar to yours. Your customers are probably not as price sensitive as you think, and now more than ever appreciate that costs are rising for everyone.
Small tweaks to recipes, portion sizes and wastage control can accumulate to a large improvement in your bottom line, especially when coupled with small price increases.
If your business is being affected by quickly increasing costs, give us a call to discuss how good bookkeeping and accounting practices can keep you one step ahead.