Margin erosion is a symptom, but could your procurement function be a treatment or a cure?

You don’t have to look too far across the hospitality and leisure industry in the UK to realise that inflation is the next significant challenge, after Brexit, Covid-19 and the flexing of consumer requirements and international travel patterns, that is eroding margins and threatening the recovery for many in the industry.

The lifting of Covid-19 restrictions has undoubtedly helped the sector when compared to the preceding pandemic years, however, the current significant inflationary pressures, running well into double digits in some sectors, are having a negative effect on margins, and curtailing investment that would help drive the recovery further and faster.

The inflationary challenge

The inflationary challenge is not only affecting the ‘here and now’. It is likely that the resultant cost-of-living crisis will dent consumer spending meaningfully as the year goes on. This, for some organisations, may mean the difference between continuing trading or otherwise, even if the government does offer taxation support, to help provide some additional fuel to back the industry’s economic recovery. So, what can the industry do itself to tackle and reverse margin erosion, and can procurement departments be a part of the treatment or even a cure?

Well, our first port of call under the current circumstances will often be to look at the menu, which is arguably the most important focal point and piece of marketing collateral that the sector has, and we can use this to not only re-position our inflation impacted ranges but also to restructure our approach to the consumer enhancing our attractiveness to them. Procurement must play a lead role in this process through having the finger on the pulse of the global commodity marketplace and through developing the right category strategies and negotiating the right deals to unlock the right time / right future ‘menu solution’ for the business.

Reversing margin erosion

Over and above the usual management of direct costs, procurement can also drive a wide range of margin enhancements through the proactive management of indirect costs across the business, and in particular categories, such as energy which has seen category bills rise by 150%, or more when compared to pre-pandemic levels.

The procurement function could also further reverse the impact of margin erosion by:

• Supporting the development of online ordering both as a service for customers and as a method to enhance efficiency and reduce costs with suppliers.
• Implementing contract management or supplier relationship management programmes or enhancing them where they already exist.
• Reducing waste through keeping track of inventory, helping to ensure products are not over-ordered and giving more insight into best-selling lines thus reducing waste, enhancing yields, and potentially developing sales.
• Proactively managing controllable expenses, reviewing all those indirect contracts that have never been considered, and completing in-depth analysis driving commercial solutions.

Whatever tactics and strategies you chose to fight against this most recent attack on industry margins, remember that your procurement function, although potentially not the only cure, will certainly be a key part of any treatment. At 4C Associates we help our clients to understand the key drivers of margin across their trading ranges through a data-driven approach, enabling trading teams to make fact-based decisions that deliver sustainable margin improvement outcomes.

By Jonathan Williams