Key points
- Businesses must assess pricing changes within broader operational impacts, not in isolation.
- Renegotiating supplier contracts is a strategic alternative to absorbing or passing on cost increases.
- Small price hikes, like CPI-linked beer costs, can erode margins if not managed proactively.
Why it pays to consider the bigger picture on pricing increases
When the price of supplies goes up, there’s three options.
Either pass the price increase onto customers to protect your profitability but reduce your margins, and hope sales don’t go down – or wear the increase to keep customers happy but erode your profitability. But does it need to be an all or nothing approach? The third approach is more complex but can yield sustainable results.
Staying competitive and profitable as a hospitality business requires closely monitoring expenses, optimising operations, and strategically managing supplier price increases. This may involve absorbing costs, adjusting pricing, or implementing other strategies to enhance customer value, but always framed by minimising disruption and maintaining long-term sustainability.
Don’t fall into the trap of simply passing on cost increases to customers or absorbing them without first looking for opportunities to improve operational efficiency. Neither option in isolation is effective across the long term, but considering the bigger picture can help to identify more sustainable solutions to tackle fluctuations in pricing.
One solution that 35% of businesses turned to in 2024, instead of absorbing or passing on price increases, was changing or renegotiating with suppliers. Even in a tough economic environment, it still pays to shop around. From ingredients and alcohol to utility bills and transportation, hospitality businesses should regularly review all supplier contracts across their operations to identify potential cost savings.
Sourcing comparative quotes from long-standing suppliers alongside new ones can provide a useful sense-check that the business is still receiving competitive rates. For businesses with long-standing partnerships, it may also be possible to leverage customer loyalty to negotiate better rates.
It’s not just the big price jumps that matter; small increases can accumulate over time too, eating away at your profit margins if you’re not vigilant. Take for example, the cost of draught beer, which recently increased in line with the Consumer Price Index (CPI) rises. As highlighted in our Bi-Annual February Consumer Price Index and Brewery Cost Increase report, hospitality businesses need to increase their prices by 30 cents per beer to preserve a comparable gross profit margin, partly due to CPI Increases and higher brewery costs.
Viewing pricing changes in isolation – at a time when so many suppliers are increasing their prices to cope with inflation and rising costs – can make it difficult to keep track of the true impact on a business’ balance sheet.
It is important to consider and assess the impact of these changes in the context of overall business operations. Understanding the bigger picture can provide clarity about the options available and the strategic decisions to be made. Thinking outside the box can also be a useful tactic to generate cost savings in other ways such as consolidating suppliers or switching to a local provider to save on transportation costs.
The primary goal is to watch where your money goes when it comes to supplier costs across your business and take action to stem the flow if you’re spending or absorbing more than you need to.
The decision to absorb increased costs or pass them on should be strategic, backed by analysis of financial data, and considered in the context of other increasing business costs. Without assessing the financial impact of each increase, businesses can lose sight of where the money is going and end up absorbing multiple unnecessary price rises they can no longer afford.
Specialist accounting and business advice for your hotel, pub or club?
Pitcher Partners Newcastle and Hunter has a diverse team of business advisors, accountants and tax professionals, and auditors specialising in the hospitality industry. This article is part of our commitment to providing the latest insights into the issues that matter to the hospitality industry.
If you want expert support to improve operational efficiency and profitability, please contact us today for a free, no obligation consultation.
