I love the increased advocacy and recent news pieces revolving around the economics of the hospitality industry, where restaurants and cafes alike are being squeezed by inflation and the lethargy of core product pricing.
In times gone by the quality of the operator was judged on their ability to manage their COGS, labour, utilities, and upfront lease negotiations. This was the true test of a quality product/brand’s economic sustainability. Today, there isn’t the same ability to move or adapt, with all options bearing a similar cost base. Couple this with technology no longer providing the same scale of efficiency it once did, it’s a tough landscape. So how can the hospitality industry bring into line products that have resisted inflationary price increases and improve margins?
We see solutions on 3 fronts. Pricing, Taxation and Tech.
Pricing
The first is to raise the basic price of the products sold, in line with inflation on the materials and wages. However, there is a market acceptance limit on the speed and amount the industry can increase prices, especially when the market (consumers) are also under the same cash and buying power constraints. Pricing tolerance, or the maximum price a product has value, is set by the individual consumer based on their immediate circumstances and will make or break the volume of a business. At the airport desperate for a coffee, $10 is high, but I am desperate. $7 at my daily café? You’re joking, I’ll make one at the office for free. This dynamic is crucial when considering pricing, not just your cost base. Read more about product pricing here.
Tax
The second is for advocacy groups, like AusFAB, AASCA, and Restaurant & Caterers, to engage legislators to improve the tax system when it comes to hospitality. It’s a sad position that the ATO makes more per coffee sale than the business that produces it. An above-average amount of a coffee sale goes to tax – GST (Net » 6%), Labour Income Taxes (»4-10.5%) and Taxes on profits (net » 2.5%), while the producer of the coffee nets out an average of » 2.5-8%. This is structural, not immutable.
Through great advocacy, most products supplied to a retail hospitality business were brought into the GST scheme, GST-free. On the flip side, virtually all products sold by retail hospitality businesses are Inclusive of GST. Combining this with a labour-intensive product, the net GST movements are typically higher in hospitality compared to other industries. What does this mean? GST is in almost all sales, but operators can only claim input credits on 35% or less of their costs to offset. The simple math on this equation is all 43,000 businesses, from restaurants to cafes to bars and tuckshops, take on a higher GST burden.
The Food Service sector is also one of the largest employers in our nation with over 900,000 employees, or 6.4% of the Australian workforce, and small businesses are the majority of employers. Unlike other Western democracies, with large natural resource wealth, Australia still raises more tax revenue from individual income tax than any other source. This means those with the lowest levels of wealth, where time is swapped for remuneration, i.e. PAYG employees, disproportionately pay the most tax. Further to this is the discrepancy between the tax paid by SMEs vs Large corporates. SMEs continue to pay more income tax than large companies in Australia ($90B vs $83B – a new record celebrated by the ATO). How, and how long it takes to fix this system, unfairly burdening SMEs, and the people they employ, is a long and murky road, which will take huge levels of investment in both time and money.
Technology
The third option, which also happens to be the fastest, is to find areas in the P&L where we can save money and create efficiency or increase margin. For us this is Technology. A bring-your-own-device POS system integrated with your accounting system used to give you back 15 to 30 minutes of labour savings per day, to justify the SaaS fees. In today’s world, we need more and more services – Bump Screens, Order Management, PreOrder, Order@Table (the list goes on) – that all come with additional price tags. This is where My Coffee Counts can help SMEs across the country save from $600 to tens of thousands per year.
We can provide them with a POS ecosystem that covers all their basic needs (with more features added monthly), software fee-free. This means we can delete the cost of a whole GL code from their P&L. Not only that, we can provide them with a low-cost payment gateway and terminal through our payment partners, which also raises money for their chosen community charity.
Could this be the difference between a coffee for $5.90 and $6.00?
While 10 cents doesn’t seem like a lot, when considered through the lens of a consumer evaluating a purchase, it could be the difference between breaching their pricing tolerance threshold or not. Or in simple terms, a sale, or no sale.