Jeffery Koh, managing partner of cafe and bar 15 Minutes, recently received some bad news in a letter from a supplier: The price of Broccoli had almost doubled to $7 per kilo.
In normal circumstances, he would be horrified. But these days, Jeffery is no longer surprised because he is seeing two or three such letters coming in every month.
“We’re numb already,” he says half-jokingly, “so instead of feeling angsty over it, we’ve decided to embrace these problems and learn how to solve them.”
Fortunately, Broccoli is a sparingly-used item in the menu, which meant his business wasn’t affected so much. But that crunchy vegetable wasn’t his only problem.
“Nothing is spared. Prices have increased across the board by eight to 15 percent over the past year,” he says. It’s the same story for Danny Tang, founder of coffee chain Espressoul, and all the other entrepreneurs I spoke to.
For Danny, the price of chicken and vegetables like tomatoes and lettuce have ballooned by 30 to 40 percent.
Rising labour costs — as a result of the foreign worker levy — have put a further strain on their profits. Rent has also gone up. Danny is now feeling the heat: The F&B business is famously known for its brutal profit-margins, compared to other industries.
Which meant he had to sell more coffee or raise prices just to maintain the same profit margins.
“A business has to be more than just breaking even,” he says.
The situation faced by these F&B entrepreneurs is no accident. The global food crisis, like a gathering of small streams into one mighty river, has made its presence felt all around the world. While the poor and starved is feeling the pinch the most, no one in the supply chain is spared.
That’s the new reality.
Chow Penn Nee, an economist with the United Overseas Bank, says: “Long-term trend in global demand could be some of the factors pushing prices upwards, but in the short term, weather conditions and speculative activity would see further spikes in food prices.”
These long-term trends include the rise of the middle-class in India and China and the disruption of weather patterns by climate change, both of which put further pressure on food supply.
Already, frequent droughts and floods, which devastated food crops, as well as a spike in oil prices, which meant more crops are diverted from feeding the people and turned into biofuels, have led to the current crisis.
Food prices have shot up drastically since last year. Source: Food and Agriculture Organization of the United Nations.
But enough of the depressing stuff. For aspiring F&B entrepreneurs, the Singaporean’s obsession with food is hard to quench, meaning the demand will always be there. But dealing with rising food prices is something business owners have to learn, and learn well. Here are five tips to start:
1) Build good relationships with suppliers
While often overlooked, maintaining good relationships with suppliers is crucial for any F&B startup. They generally find it harder to secure good deals because of their relatively small scale when compared to giants like Starbucks or McDonald’s. Which means getting chummy with food distributors has achieved new importance.
“It’s how I negotiate for better pricing,” says Danny.
2) Have one menu as opposed to many
Restaurants often operate on different menus depending on the time of the day, or whether it’s weekdays or weekends. But for Wild Honey, a restaurant at Mandarin Gallery in swanky Orchard Road, it’s all breakfast, all the time.
Besides being a unique selling point that draws in the customers, featuring only one menu throughout the entire day allows them to operate more efficiently, says Stephanie Hancock, who founded the restaurant with her husband Guy Wachs.
Wild Honey’s version of the Egg Benedict. So far, the restaurant have managed to avoid raising prices. Photo courtesy of Wild Honey.
3) Reduce food wastage through good menu design
No, I’m not talking about how the menu looks.
As Stephanie explains: “We make sure we use as much of our ingredients as possible in designing our dishes.” In the long run, this saves cost as wastage is minimised.
Buying higher-quality ingredients to enhance the dishes in the menu can also help, although this may sound counter-intuitive. Again, nothing is wasted, as more premium ingredients tend to last longer from the point of purchase. And they leave customers happier and hungry for more.
4) Cost-cutting operating practices
Wild Honey is not your conventional restaurant. The first clue comes from the two iPads at the counter that serve as digitised menus. And when patrons are seated, they may be puzzled about why waitress don’t take their orders.
No, it’s not because they’re lazy. Rather, customers are encouraged to interact with the digitised menu and the staff behind the counter. The whole experience is more hands-on since the guests are very involved in the ordering process. And it’s more efficient for the restaurant too.
Although the whole experience is a little different, customers don’t seem to mind, judging by the long waiting times at the restaurant — just more proof that good food and great ambiance keep customers coming back.
Finally, to save cost, Stephanie and Guy double as owner-operators. “Guy’s at the restaurant seven days a week,” she says.
5) Pass costs to consumers only as a last resort
With the exception of Wild Honey, which have kept prices constant, the other entrepreneurs had no choice but to pass the cost to consumers. But it was not a decision they took to lightly. Xander Ang, founder and chef of Basil Alcove, had tried absorbing the costs and changing ingredients that are not essential to the dish.
Jeffery Koh, managing partner of 15 Minutes, rocking the DJ console.
“We do it in subtle ways that is not too noticeable. Customers don’t complain because they don’t feel it,” he says.
Jeffery of 15 Minutes believes raising costs should only be the last resort. He advocates that entrepreneurs should just do nothing at first. Yep, nothing.
“We shouldered the extra costs for three months before deciding our next move. Doing so allowed us to determine if the price increase was for the long-term. Raising prices for consumers as a knee-jerk reaction will just frustrate them,” he explains.
If prices continue to go up even after a set period of time, then it’s time to consider “recomposing the dishes”. Green peppers can be replaced by red peppers, for example. But there’s a caveat.
“Don’t substitute an ingredient with an inferior one, because customers may notice. Instead, find something that maintains the quality and flavour.”
But if the first two steps have failed to resuscitate profit margins, then it’s time to raise costs. A balance must be struck here: Dishes must not become so expensive that customers will be driven away, but they must be at a reasonable price to keep the business afloat.
“I don’t have to become rich, but my objective should be to maintain profitability,” he says.
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