Last week I spoke at several events about the current surge in food and drink inflation. It has been running at a double-figure percentage for four consecutive months, a rate that will certainly get worse before it starts to fall early next year. This fall will only be inflation though. Actual prices will not reduce for some time, if ever.
Until the end of last year inflation had been running at very low levels for some considerable time, with supplier management emphasis in our sector being placed much more on quality, availability, innovation and above all service. Levels of skills and resources within operator supply chain resources have been allowed to shrink in the face of other business priorities.
When I chat to operators right now, they tell me of numerous sudden increases in price where they feel they are left with no option but to accept. One told me of a one-off assessment of inflation that showed their whole basket had moved by over 30% in six months. Another told me that they measure only their top 50 lines, taking comfort from the 8% inflation they had measured.
Thirty percent is, of course, over market level by a multiple of three. And whilst the top 50 lines may represent 70%+ of spend, the remaining 30% can often be cripplingly expensive. The hard reality in my view is that purchasing and supply, under-resourced as it has been in our sector for years, is now all too frequently out of its depth.
It’s my view that our sector has generally been caught flatfooted by the increased demands of inflationary times. The basics of good procurement are to measure baskets of goods (categories) then use best in class skills and resources to deliver better outcomes – on cost, quality, availability, innovation and end-to-end operational performance.
Our research has shown that the delta between average market pricing and optimised best in market pricing has grown in recent months to around 9.5%. Not only is this close to the current rate of inflation, but it’s also equivalent to around 3% points of margin. For a ten million turnover business £300k additional gross profit is potentially available.
It is easy in these challenging times to be tempted to hold onto cash. But investing in purchasing and supply can and will bring fast returns.
