Protecting Margins, by Bruce Robinson, CEO Hospitality NZ

This interesting article by Bruce was published in the June 2015 Hospitality magazine and in my opinion deserves repeating.

Bruce writes that the economic outlook is positive and transaction data suggests there is continued growth in spending across accommodation and food and beverage. A period of economic growth is an opportune time to review prices and margins. Over the past few years hospitality operators have been reluctant to increase prices despite facing increased input costs. Costs are still increasing in a number of areas, particularly supplier costs, rates, wage increases and skilled staff shortages.

It is a fallacy to think that by selling more you will make more and recover those costs, even more so if a discount approach is used to drive that increased volume.

If a business was operating on a gross profit of say, 40%, and it offers a 10% discount, that means it actually needs to sell 33% more volume to break even. Conversely, again using a 40% gross profit margin, if a business increases its prices by 10%, then sales need to drop by 20% or more to be worse off. So if you put the prices up by 10% on a 40% gross margin, and you lose 10% of business, you will still increase your profits.

Different hospitality operators have products which operate on different profit margins, but the principle is still the same. Generally speaking, too many hospitality businesses have been slow to increase prices because they are concerned that will have a significant negative impact on sales. However, history and the numbers suggest this is not the case. Prices must be reviewed and pushed in an upward direction while discounts, if used at all, need to be very carefully managed.