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Morning Briefing Strap Line
Fri 1st Jul 2022 - Friday Opinion
Subjects: Protecting gross profit, don’t write off leisure and hospitality just yet, economic long covid, the growing demand for chicken
Authors: David Read, Graham Blackwell, Paul Chase, Glynn Davis

Protecting gross profit by David Read

Just over ten years ago, I attended an excellent development programme at Cranfield University called BGP (Business Growth and Development Programme) designed for SME owners. Over the course of a few months, it delivered many useful insights and heavily influenced the future direction of my business. 

One of the most important insights from the programme was the criticality of gross profit (GP) to success in every business. The machine that delivers “revenues less cost of goods sold” is the heart of the enterprise, generating the cash that is the very lifeblood of business health. When GP is growing fast it’s liberating and exciting, but when it’s shrinking it slows down every move you make.  

I speak to a lot of operators right now who feel they are, or may soon be, in the latter camp. Even though sales are generally holding up well, the weight of large debts that must be serviced and repaid, rampant energy inflation, staffing challenges and high food inflation continually sap the bank account. Now a growing cost-of-living crisis is emerging that will likely choke off demand in the months ahead.

This is the reality of 2022, and there is no silver bullet. But in times of crisis, finding the fastest and most effective levers to pull is not always an easy decision to make. It’s widely acknowledged that staffing and energy are long term issues that won’t deliver improved results quickly. Most operators have pulled the trigger on price increases and watch nervously lest demand falters.

Which leaves supply chain. There is plenty of evidence that this is an exception. Food and drink supply markets are in turmoil currently, which is exactly why having high calibre, knowledgeable, skilled and professional people doing one’s buying is even more critical than usual. And quality data on supply market performance underpins this. When I ask operators what the level of food and drink inflation in their business is, the answer is all too often “I don’t know”, or even worse “it’s impossible to measure”. 

Getting a grip on managing inbound goods pricing is purchasing 101”at any time, let alone during times of high inflation. In last week’s Propel Friday Opinion Ann Elliott quoted an operator who had said food costs were incredibly difficult to forecast. In fact, they had told their finance team to stop forecasting because it was, increasingly, a total waste of time. He said that the choice was simple – hold margins or reduce margins – and each had its own pros and cons. They didn’t want to lower margins but feared it would be a strong possibility if spend-per-head were not to spiral out of control and destroy footfall.

This response appears to ignore the very real opportunity present for most operators to focus on managing supply chain, which will protect and enhance margin and/or protect consumers from unnecessary price increases. Managing and measuring (and forecasting) supply chain at times like these is complex and challenging, but it is far from impossible. Put simply, it needs resource, skills, market knowledge and data. 

If ever there were a time to invest in optimising supply chains, it is certainly now. We know from countless (like-for-like) benchmarking projects that the delta between average and good market purchase prices on a full basket of food and drink is typically 6-9%. That’s two to three percentage points of margin. In a business of, say, £10m revenues, that’s £200,000-£300,000 of much needed cash. Comparable opportunities are thin on the ground right now, particularly ones that have a reasonably fast payback and don’t impact the diner. Look again at supply chain now – it will reward you.
David Read is the founder and chairman of Prestige Purchasing

Don’t write off leisure and hospitality just yet by Graham Blackwell

All seems doom and gloom: the end of the world is nigh, and it certainly feels like there is no money to be made in any leisure or consumer facing businesses at the moment. God help anyone who tries to say otherwise. It’s all about survival, and everyone with a leisure business seems to be tarred with the same brush. Of course, there are many challenges out there, and it is clearly very difficult for some. However, as much as it is unwelcome to point out that some operators don’t have a model that will survive, it is worth highlighting that there are some operators that have a customer proposition that can and will thrive.
 
In some parts of the experiential leisure market, particularly the tenpin bowling market, revenues have recovered to well above 2019 levels, with footfall up strongly driven by customers’ need to spend time together.  People of all ages want to mix and have fun. Think grandparents and grandchildren; young adults and parents; and wider groups of family and friends. Separation has driven us closer together.
 
Value for money is the key in these straitened times.  Instead of businesses trying to recoup covid losses by increasing prices, the key to maintaining and growing the customer base is to work at keeping your product affordable. Since we reopened, the average customer spend per visit is broadly the same. We didn’t raise the price of an evening of entertainment with us. Customers are still able to afford spending mid-teens pounds per person, but now need to be absolutely convinced that they will get a good experience.  Since 17 May 2021, that is what we have strived to deliver, and we have been rewarded with like-for-like sales growth of more than 30%, driven by footfall and not price increases.   
 
Like everybody else, inflation is impacting all areas of the business, but the key is to have a clear focus on how to deal with it. It isn’t always the answer to make your customer pay more and get less. Food is a relatively small part of our cost base, so we are fortunate not to have experienced the same level of impact as perhaps in casual dining. Labour markets are tricky everywhere, but for us, the labour ratio is only half of what one would expect in a restaurant or pub, and so it is easier to manage. Utility cost increases, whilst painful, are a sub 3% of sales, and so even the drastic rises seen this year are manageable.  Our property costs are all tied into long-term leases, and we are seeing an opportunity borne out of the dislocation of retail. There are deals to be done with landlords with the right model.
 
If one applied the negative rhetoric that abounds freely across leisure proportionately, there would be no hope remaining. However, there are oases where the stars have now aligned, and the consumer is enjoying the proposition and the value it provides. In our industry that was not always the case, but we have learned our lessons from the last time around. During the hard times we worked at the model, fine tuning it to be able to react to cost pressures without passing everything on to the customer. 
 
This enabled us to prosper before covid and take advantage of the ever-strengthening trend of competitive socialising and experiential leisure. It is working again now in the post-covid world as we focus on giving our customers great value for money experiences. We trust that the strength of the proposition is enough for the increased footfall to do the work in offsetting the cost pressures. It’s not all doom and gloom out there, but you may just have to look a bit harder to find the opportunities.
Graham Blackwell is the chief executive of Ten Entertainment

Economic long covid by Paul Chase

In an article published in Propel Opinion in October 2020, I quoted an article written by Glen O’Hara, dated 20 March 2020 and published in the online blog CAPX: “Some crises overwhelm everything: they make each controversy that went before them seem very small indeed, and they draw a line in the calendar between ‘before’ and ‘after’. We could well be living through one of these fundamental historical breakpoints right now. So much in the future will be at least coloured by this spring and early summer: health care, housing, welfare systems, travel and tourism, economic policy. You name it, things are moving.”
 
He was referring to the covid crisis and his comment was prescient, coming as it did at the beginning of the first wave of infections. In October 2020 I, and many others, thought we were over the worst of it. And yet here we are, and the pandemic itself is far from over, although we seem to have collectively decided to pretend it is so we can get on with business as usual. I make this point not as a criticism of others, because I feel the same way myself, but whatever happens with covid as an illness and its ongoing medical effects, our sector is now suffering the effects of economic long-covid, and we are a long way from business as usual.
 
The squeeze on household budgets caused by the current high level of inflation is already impacting on hospitality and licensed retail, based, as it is, on discretionary spend. And how the Bank of England (BoE) is reacting to inflation will impact on investment decisions in our sector, which in turn will drive its future prosperity and all that it can contribute to our economy. All those people and businesses who received wages through the government’s furlough scheme, or grants and reduced VAT for their businesses, and who thought this was ‘free money’ are waking up to the realisation that it wasn’t after all. 
 
The government’s creation of £400 billion to keep people and businesses going during the various lockdowns and periods of restricted trading hugely boosted the quantity of money in the economy at a time when much of it was shut due to regulation. Given that the UK government, like many others around the world, opted for a lockdown policy to try to control the covid pandemic, they had little choice but to print money to keep everyone going in the meantime. But the inflationary consequences of this – predicted by monetarist economists at the time – are now coming home to roost with a vengeance.
 
The BoE has all the tools it needs to control inflation but is choosing not to use them. The two paltry quarter-point rises in bank base-rate in the face of double-digit inflation is a pathetic response. In any event, interest rate rises are the wrong tool. When the bank raises interest rates, the danger is they either over-estimate or under-estimate where the market would set rates. This distorts investment decisions and leads to the creation of asset bubbles. Those contemplating investing in our sector need to make investment decisions that are not distorted in this way, and which are, above all, made in the context of a stable price environment.
 
The BoE need to address the quantity of money, not the price of it. To do so requires them to increase the size of ‘base money’. This is comprised of cash – 3% of our stock of money, and the fractional reserve – the percentage of bank deposits the private banking sector is required by regulation to keep in reserve and not lend. This is currently set at 17% and is a requirement designed to stop banks from over-lending, and to offer protection in the event of bank runs. 
 
The BoE should raise the fractional reserve percentage, and thereby reduce the amount of money available for lending. At the same time, they should leave it to the market to determine interest rates. This approach could rapidly reduce inflation, because most money is created by private bank deposits driven by lending/borrowing. Reduce the amount banks can lend and you reduce the rate of monetary growth, which in turn dials down inflation.
 
So, why doesn’t the BoE do this? I suggest it’s because, despite their nominal independence from government, they have been prevailed upon to run the economy hot for the next two years. This creates benefits for government in that high inflation raises nominal GDP and tax revenues. This in turn reduces government borrowing as a percentage of nominal GDP, and higher tax revenues enable them to reduce the current account deficit – creating room for a tax giveaway just before the next election. Meanwhile, government and the BoE use the old excuses that inflation is nothing to do with them – its oil price shocks, the war in Ukraine, excessive wage demands – anything but admit that our inflation, and that of countries that followed similar policies around the world, are the direct consequence of economically disastrous lockdown policies and the money printing scam that solved our problems only in the short term.
 
Large pay increases do not cause inflation – they are caused by it. At the level of the firm, wages are an input cost, and if that rises, employers must make economies or pass this increased cost on. But at the macro-economic level, wages are just the price of labour, and excessive wage increases feed unemployment, not inflation. But blaming a bunch of commie strikers for inflation is an easy distraction from the real reason for it – BoE mismanagement of monetary demand.
 
The current governor of the BoE, Andrew Bailey, is a classic example of someone promoted to the level of his own incompetence, and Rishi Sunak should replace him and the whole nest of Keynesian dinosaurs that are entrenched around him. Then we might get some proper conservative economic policies and create the stable price environment our sector desperately needs to promote investment and growth. 
Paul Chase is director of Chase Consultancy and a leading industry commentator on alcohol and health

The growing demand for chicken by Glynn Davis

On the fourth of July, we will see four new Slim Chickens restaurants open around the UK to not only celebrates US Independence Day, but also the insatiable appetite for fried chicken. The chief executive of the UK Slim Chickens’ franchise partner, Boparan Restaurant Group, stated there is “overwhelming demand” for the concept and its much-loved product.
 
This love is certainly universal and seems to cut across all types of people in the food sector, because only this week Alex Bond, chef patron of Michelin star Alchemilla in Nottingham, announced that his second outlet will shun tasting menus and instead involve a fried chicken restaurant. He’d shown his affection for fried poultry with his launch of a take-away Wing Box during the pandemic, and when featured on the TV series Snackmasters, he chose to recreate a KFC Zinger Burger.
 
He is obviously following in the footsteps of KFC with his chicken journey, and he is certainly not alone as there has been an explosion in the number of fried chicken restaurants and take-away brands in the UK over recent years that now sit alongside KFC.
 
To pluck some names out of the air from the growing chains in the marketplace, we have Chicken Shop, Chick N’ Sours, Wingstop, Butchies, Thunderbird and delivery-only operator Mother Clucker. I know I will have missed many others, and there are also the army of KFC-lookalikes that litter the high street (although their waste packaging left on the streets is another story, of course).  
 
This battery of brands expanding across the UK includes a number that have crossed the Atlantic from the US, which has the biggest appetite for the protein – with more than 50kg consumed annually per capita, according to the Organisation for Economic Co-operation and Development (OECD). But it is not just Americans that now have an insatiable taste for chicken, because consumption is growing at a phenomenal rate globally. 
 
Almost 100 million metric tons will be eaten this year, which is double the amount consumed in 1999 and represents an incredible growth rate of ten times that of beef, and triple that of pork, according to US government data. In less than a decade from now, more chicken will be consumed than any other kind of protein.
 
There are many upsides to the restaurant industry from this global trend in consumption. This includes the healthier nature of poultry compared with other meats (although maybe not when deep fried), and it is more cheaply priced as the cost of production has fallen to a third of what it was 30 years ago, according to PE firm Proterra Asia. This makes it a much more affordable option than other proteins, which is especially relevant during inflationary periods.
 
There is also the fact chicken is so much more environmentally friendly than cattle with their damaging greenhouse gas emissions – although the intensive industrial production of chickens does itself require mountains of soyabeans, which is a contributor to deforestation. 
 
All of this sounds largely positive for the foodservice sector – but there are some warning signs. In the US, there are increasing shortages occurring to the extent that Wingstop is considering buying a processing plant. As well as securing supplies, this move would also enable it to adopt healthier breeding standards, which is something that companies like Popeyes and Chipotle Mexican Grill are moving towards.
 
They clearly see the downsides to the ongoing chicken boom and the environmentally and ethically questionable practices involved. In addition, these methods invariably strip out taste from the meat. We’ve seen Honest Burgers take a stance towards better welfare, and no doubt ultimately taste, with its new routes to sourcing beef. It is no longer happy with the established supply chains it has been using and is now starting to buy its beef direct from regenerative farms.
 
It is arguably a step ahead of the customer with its actions, but it clearly recognises the direction of travel, especially among younger consumers, with increasing demands for companies to do the right thing. It’s clearly happening with beef, and so for all those chicken brands currently riding high on the incredible wave of demand, they should be at least considering where they stand on the type of chicken they choose to put into their fryers. A growing number of their customers are starting to do just that.
Glynn Davis is a leading commentator on retail trends

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