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Fri 16th Nov 2018 - Friday Opinion
Subjects: Sustainability makes sense, MUP is a policy in trouble and make every bean count
Authors: Glynn Davis, Paul Chase and Helen McMillan

Sustainability makes sense by Glynn Davis 

Airbnb is a phenomenal company that continues to disrupt the hotel industry. It’s a beast of a competitor with about five million listings on its website while 3.5 million people stayed at an Airbnb property on its best night in August this year. 

This has helped it gain a valuation of more than $30bn but its co-founders are concerned. It earned only a modest $100m on its impressive $2.6bn of revenues – equating to a return of only 4%. This is nothing like the margin levels many of its traditional rivals such as Hilton or Expedia achieve.

Airbnb has no obvious opportunities at this stage for extensions into other lucrative areas, unlike many of its Silicon Valley compatriots. Amazon, for instance, is profitably extending its tentacles all over the place and it’s a similar situation with Uber and Google, which are moving well beyond their initial profitable core businesses. 

While Airbnb mulls over potential areas of growth to help deliver the massive (ten times being an expectation) returns its many venture capital backers are now demanding, its founders have another pressing, and possibly conflicting, issue. They are looking at positioning the business as an entity that isn’t wholly beholden to delivering financial results.

They have recognised the company needs to work on what is best for the broader Airbnb “community”, which includes its guests, property hosts, employees and cities in which it trades. Managing this array of parties, not just shareholders, has also been increasingly on the mind of Deliveroo, whose “community” consists of food-buyers, riders, restaurants and cities.

There is growing recognition that consumers are increasingly unwilling to spend money with companies that solely focus on short-term financial returns and fail to take into account broader responsibilities such as sustainable practices. Those businesses that fail to be socially conscious are being shunned by a growing number of young people. 

This new way of thinking and operating is starting to permeate the fashion industry, which is being called out by consumers for unsavoury practices such as waste, animal welfare and child labour.

Kresse Wesling, co-founder of sustainable luxury brand Elvis & Kresse, has called the wasteful actions of many companies “unacceptable” and is vehement about unshackling what we regard as success – purely sales and profits. She prefers a situation where the planet and people are equal to shareholders.

Elvis & Kresse’s model is about operating with different metrics. Wesling says while traditional company models are inextricably linked to revenues and profits, her business success is based on the level of donations it gives to charities and renewable energy projects, and the amount of materials it reclaims from waste and landfill.

The company converts this material into luxury products, including belts and bags, many of them created from end-of-life hoses sourced from the fire brigade. These narrative-driven or action-oriented products represent the future, according to Wesling. This approach has caught the attention of big fashion brands and Elvis & Kresse now works with the likes of Burberry, from which it buys significant amounts of leather off-cuts.

Elvis & Kresse is proving a successful agitator and has helped push adoption of sustainable practices up the agenda of large fashion brands. More than half (52%) of fashion industry executives have said sustainability targets act as a guiding principle for almost every strategic decision they make, according to the Pulse Of The Fashion Industry report by the Global Fashion Agenda and Boston Consulting Group, up 18 percentage points on last year. 

At a time when many leisure and hospitality businesses are finding it tough to justify their existence based on old practices, it’s time they took a long hard look at the “story” they are trying to tell and ponder whether the tried-and-trusted metrics they have been beholden to are no longer fit for purpose. 
Glynn Davis is a leading commentator on retail trends 

MUP is a policy in trouble by Paul Chase

A minimum price of 50p per unit of alcohol was introduced in Scotland in May and the early results are bad news for the policy’s supporters. Let me remind readers what minimum unit pricing (MUP) in Scotland was predicted to achieve in its first year – a 3.5% reduction in alcohol consumption per head and a 7% reduction in consumption among harmful drinkers. 

These reductions in consumption are supposed to lead to 60 fewer alcohol-related deaths, 1,300 fewer hospital admissions, and 3,500 fewer crimes. These predictions come from the Sheffield Alcohol Pricing Model (SAPM), which is the Scottish government’s bible on how to tackle alcohol-related harm.

SAPM proposes a simple, linear relationship between price, consumption and harm. As price goes up, consumption will fall and alcohol harms associated with consumption will also fall. The whole model falls apart if the price rises brought about by MUP fail to deliver the fall in consumption – and so far they have. There have been several market analyses since May, most notably by global analytics company Nielsen. This is what was found.

The price of alcohol rose 11% during the summer in Scotland but this hasn’t led to a reduction in consumption. On the contrary, consumption has risen. There are two ways to measure alcohol consumption – by value and by volume. The value of alcohol sales – the amount of money consumers are spending on it – rose 15%. So when value inflation exceeds price inflation we can assume volume consumed is also increasing. In the off-trade, the volume of pure ethyl alcohol consumed rose 4% – so consumers are spending 11% more on beverage alcohol products in return for only 4% more alcohol.
 
There are winners and losers. Sales of strong white cider have fallen off a cliff because it has almost trebled in price. Conversely, sales of white wine, fortified wine and spirits have increased. However, the most spectacular example of a sales increase is Buckfast. Known as “Buckie”, it is a fortified wine made by monks in Devon and is a favourite tipple of street drinkers because it’s 15% ABV. 

Sales of Buckfast have risen 15%, while an extra two million bottles of white wine were also sold during the summer. This contributed to an increase of 17 million units of alcohol consumed in Scotland during the first six months of MUP compared with the same period last year, of which increased sales of Buckfast alone contributed seven million units.
 
This wasn’t meant to happen – it wasn’t in the model! It appears drinkers in Scotland have decided if the amount they want to drink is going to cost more, they might as well trade up to better products rather than cut consumption. Economists call this “product substitution” and it’s a well-attested response consumers often make to price rises. However, the Sheffield researchers never modelled it!

The other substitution effect economists have identified is “market substitution”. This is what happens when consumers wake up one morning and find a product they regularly buy has rocketed in price and they can no longer afford it. Instead of buying less, consumers buy from the black market, where it’s cheaper. 

This happened in Russia in 2010, when the government imposed a minimum price of 220 roubles on a half-litre bottle of vodka. Legal sales fell and consumers entered the black market and bought moonshine – cheap industrial alcohol fortified with embalming fluid. People started dropping like flies. In 2012, the Russian government relented and reduced the minimum price to 185 roubles – roughly what it was before they intervened. Market substitution completely undermined the policy.

In the UK, illicit sales of alcohol are already denying HMRC almost £2bn a year in lost alcohol duty, which is why the government introduced the Alcohol Wholesalers’ Registration Scheme, and MUP can only increase the size of this black market. 

We are already seeing attempts in Scotland to evade MUP. The Scottish press is full of stories about people using cash and carry cards to buy alcohol at wholesale prices before rocking up on council estates in Glasgow and selling it out the back of a van. Reportedly the car park of Tesco in Carlisle is regularly full of cars with Scottish number plates!

It has been put to me the increase in alcohol consumption in Scotland is down to the hot summer, the World Cup and Harry marrying Megan! Have you ever heard such a lame excuse for a policy failure? If MUP only works when it’s raining, there’s no football on television and no new episode in the Royal soap opera – that sounds like a policy in trouble to me.
Paul Chase is director of CPL Training and a leading commentator on alcohol and health policy 

Make every bean count by Helen McMillan

Recent news that Ebitda as a percentage of turnover is holding up for hospitality and leisure operators in an extremely “stressed” market is something to raise a glass to.

The haysmacintyre survey, the biggest benchmarking survey of its kind and produced in association with Propel, is a welcome ray of sunlight in an otherwise gloomy forecast, where all we hear about is struggling brands, rising costs and, of course, Brexit. 

As Zonal’s director of online commerce, I have to admit the results don’t come as a surprise. As the largest provider of technology solutions to the hospitality sector, Zonal has been working closely with many leading high-street brands to find innovative ways to manage overheads and food and drink costs.

For operators, success today is not just about delivering an outstanding customer experience – prudency and strong management are key for survival and having a tight grip on costs and margins is critical. 

According to operators that responded to the survey, average wet-led turnover per site increased 9.4% in the past year, while food-led venues saw a 9.7% fall. However, food-led businesses saw an increase in gross profit margin (2.8% on food; 2.9% on drinks), while there was a decrease for wet-led (minus 1.3% food; minus 0.8% drinks).

I find this surprising. Managing the procurement, stock and order of drinks is generally regarded as way more straightforward than food. Products aren’t affected by seasonal variation, are consistent in terms of quality, ingredients and shelf life regardless of where they are sourced, and are far easier to count and control. 

It could be operators have a greater number and wider variety of suppliers to leverage but to me this is a clear indicator that a fairly drastic drop in turnover is forcing food-led businesses to work harder at managing costs. However, the improved margins indicate they are reaping the benefits and achieving some real success. It’s a great example of operators making incremental improvements in the purchasing process to make significant gains when pieced together. 

Having access to real-time data on purchase volumes, stock levels, and pricing and margins – together with full visibility of supplier activity and an ability to control the purchasing of every outlet – is what gives operators the ability to make incisive decisions that achieve these cumulative gains. When consistently implemented, I have seen improvements of up to 8% on margins. 

A great example of this is fast-growing cafe bar brand Loungers. Having adopted our Aztec EPoS, Loungers also opted for our purchasing management system, Acquire, which fully integrates with our stock solution, giving powerful real-time stock information at the point of order. We worked closely with the Loungers team to make sure it put in the groundwork by covering all aspects of the food business, from yield to recipes. I won’t lie, it’s a painstaking task but well worth the effort.

It quickly became obvious high-value ingredients such as steak were respected and not wasted but basics such as baked beans were costing Loungers thousands of pounds in terms of waste. They were literally throwing the equivalent of 500 tins of beans away each week, giving a mere 60% yield.

Baked beans can seem insignificant and something chefs could be forgiven for taking for granted but, as Loungers discovered, the small things, if unchecked, can accumulate to represent a big cost. To resolve the baked bean issue and address other consistent yield issues, Loungers pointed out the problem to relevant teams, offered retraining, and redesigned product sheets for every outlet with detailed instructions on how to manage waste through solid operational controls.

The results speak for themselves. Loungers has seen a 0.6% improvement in actual gross profit across the group since the introduction of integrated food stocks – the equivalent of £60,000 savings every four weeks. Who in this climate can afford to ignore Loungers’ example to seek every marginal gain?

It doesn’t need to be difficult or costly – every improvement, no matter how small, contributes. It’s about using the tools you have at your disposal to give you the right information to make informed choices. 

Implementing a comprehensive supply chain system can unlock the real potential of your business and protect against external cost pressures. In our brave new world, it’s about having the right level of detail to watch the pennies and make sure every bean counts!
Helen McMillan is director of online commerce at Zonal

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