Inflation in Foodservice
- and what it means for operators
An article from Horizons

Introduction

The foodservice sector has seen inflation eat into its growth over many years. According to figures published by ONS (the Government's Office for National Statistics) the sector's apparent growth since 2001 should be reduced by 16% to take account of inflation.

Horizons calculates that food purchases (by consumers) in the foodservice sector grew from £24.3 billion in 2001 to £26.6 billion in 2005 – an increase of £2.3 billion. Once inflation has been accounted for though, this increase is reduced to £600 million. Of course, this understates the true figure of foodservice sales because drink sales are not included, but even if they are the increase is probably about £850 billion.

Saying the foodservice sector has grown by this amount – equivalent to a total uplift of only 2.5% over 5 years - is one thing, but how has the industry fared against some of its competing segments in terms of inflation and expenditure?

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How has inflation worked in foodservice?

Overall inflation, as measured by the CPI (Consumer Price Index), has increased in the range 1.2% to 2.1% annually since 2001; and in total, prices have increased by 6% over the period. In other words, foodservice inflation at 16% means that the sector's costs have increased by 10% more than the economy as a whole.

This is unlikely to be the full story because consumers may not have merely paid any increased prices posted by foodservice operators – indeed it is likely that they haven't. Instead they will have taken advantage of the special deals offered or they may have downgraded their meal spend by leaving out one course, for example.

Whatever, has happened in detail though, it looks as though the foodservice sector is prone to increasing its “topline” menu prices faster than overall inflation.

Not only is this possibly unwise on its own, it also means that foodservice prices have risen faster than food costs - which grew by 7% between 2001 and 2005. In other words, the consumer, faced with a choice between eating out or eating at home, has found that prices for eating out have grown twice as fast as food prices in the shops.

Perhaps the only bright spot in this picture is the fact that inflation in what the ONS calls “recreation and culture” has grown slightly faster – at 18% since 2001 – than prices in foodservice.

Why should this be a cause for some, albeit limited, optimism? The answer is that eating out competes with recreation and leisure for the consumer's time and money; and if the prices of the competition's services are increasing faster, the consumer may feel more inclined to eat out.

Unfortunately, it is not as clear cut as that. The ONS also shows (in its annual Family Spending Surveys) that consumers are not changing their purchase patterns all that much when it comes to eating out and recreation. The share of the consumer's £ spent on eating out (according to the ONS) was 8.4% in 2001/2; despite an increase the next year, the figure now seems to have settled at 8.3% for the timing being.

Recreation took 13.6% of consumer's expenditure in 2001/2 and is unchanged in the latest figures (for 2004/5). So eating out and recreation are almost level pegging not only in terms of inflation but also in consumer spending.

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Summary of the impact of foodservice inflation in the UK

In summary, what we have seen is:

• Inflation in eating out prices has shown an aggregate growth of 16% since the start of 2001
• This compares poorly with overall inflation of 6% and food price inflation of 7%
• Recreation and culture, a close competitor to eating out, has seen its prices increasing slightly faster – 18% - than foodservice
• But despite that, its share of the consumer's expenditure has remained stable over the last five years

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How does this compare with other countries?

Total figures for the 12 countries in the Eurozone show that spending in the foodservice sector increased by 2.3% over the twelve months to November 2005. This means that over the last five years, foodservice inflation in this region has grown by 1% - very slightly faster than in the UK.

However, over the same period, overall inflation increased by 12%. Thus the difference between eating out and total inflation in the Eurozone was 5% whereas the UK figure was twice as high at almost 10%. It would appear that foodservice operators on the continent are better, than their UK counterparts, at containing their posted price increases.

Despite that however, over the last couple of years the UK foodservice sector, has grown twice as fast as the Eurozone market according to the latest figures from Horizons. The market in the Eurozone grew by an inflation-adjusted 1.1% in 2004 and a further 0.7% 2005; in the UK, the comparable figures were higher at 2.1% in 2004 and then 1.3% last year.

The foodservice sector in the Eurozone has faced some stiff price competition from the competing recreation and culture market where inflation grew by only 3% over 2001 to 2005 – in fact, prices fell in 2003 and 2004 and barely moved in 2005.

It would seem, therefore, that the UK foodservice sector was able to cope with recent price increases partly because prices grew even more in competing segments; in the Eurozone, on the other hand, the foodservice sector saw its prices grow five times as fast as those in the recreation sector.

While the link between these comparative price changes and overall market performance is not proven by any means, the fact that the Eurozone foodservice sector grew less than the UK market while its prices grew very rapidly compared to competing sectors, would suggest that it is hugely important to keep foodservice prices in check.

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Conclusions

In summary:

• The UK foodservice sector has outperformed the Eurozone sector over the last couple of years
• Foodservice price inflation in the Eurozone has been broadly the same as in the UK
• But Eurozone foodservice price inflation has been much higher than in directly competing segments leading to the suggestion that the comparative rate of price rises has an important influence on the state of the foodservice sector.

Operators would do well to take a long hard look at how prices are moving in other markets before increasing their own prices.

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Appendix 1: Definitions

Eurozone:

• Austria
• Belgium
• Finland
• France
• Germany
• Greece
• Italy
• Luxembourg
• Ireland
• Netherlands
• Portugal
• Spain

Foodservice Food:

• The value of food sold by foodservice outlets

Foodservice Sales:

• The total value of food plus drinks served by foodservice outlets

Foodservice:

• Restaurants
• Quick Service
• Drinking places
• Hotels
• Leisure
• Staff feeding
• Health care
• Education
• Services

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Appendix 2: Summary tables

Download Summary tables comparing inflation in Eurozone and UK (pdf, 20kb)

Note: further details are available from Horizons