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< Back to news 18 February, 2015

Q&A: Falling Oil Prices

Elly Earls from The Caterer recently interviewed our Director of Sales Tennant Hilditch about the falling price of oil, and wanted to know our thoughts on the impact it might have on our customers.

Oil prices are falling – what are the key effects of this on hospitality procurement?

No one really anticipated a reduction in oil prices, and certainly not to the extent that we are seeing of late. Historically, energy and oil costs have been rising year-on-year and as such many manufacturers and distributors have signed into long term purchasing deals to try to hedge against the increases. Where these contracts are in place, it will be difficult for companies within the sector to renegotiate and therefore, the cost of product will be fixed, meaning no real benefit to the industry unless the contract is due to come to an end.

How can operators make the most of this situation?

Deals for utilities will be difficult to renegotiate if hoteliers and restaurateurs are tied into long term contracts, however, larger individual or group users may want to forward purchase now so that they gain the benefits when the existing contract comes to an end. For example, if the current contract runs to August 2015 they may want to purchase through to 2016. So this means that for many businesses the benefits of today’s low prices may not feed through to their bottom line until sometime in the next 12 months. The cost of food and other consumables would be dependent on their chosen route to supply, as an operator will have no impact on the purchasing strategy of their supplier.

Other factors affecting hospitality procurement include good weather for crops and a strong pound. Taking these together with falling oil prices, how much benefit can operators expect to see if they implement the right strategies when it comes to purchasing?

Working with a purchasing organisation, such as Beacon, allows those in the hospitality sector to access preferential long-term deals, which would not ordinarily be available to them. Environmental and economical changes may mean that some hotels benefit from some very short term pricing relief, but on the whole the evidence suggests the biggest wins are to be gained by rigorous negotiation with trusted suppliers for longer term contracted pricing.

How long do you think the current situation when it comes to oil prices might last?

Oil prices are difficult to predict – as of the end of January, we have seen seven consecutive months of price decreases, but this could change, and is being closely monitored by the industry. In terms of a long term strategy, purchasing now for 2016 and even 2017, may mean that operators can benefit from the current low prices, and then potentially pass on a saving to customers – this has been illustrated by budget airline, Ryanair, which has announced customers will not see a big saving on fares despite the lower fuel costs as it has hedged its fuel for the next year at an above-market price. Ryanair has now been able to hedge fuel for 2017 at a much lower price, and that is what we recommend operators look in to, to ensure they benefit from the lower prices in the future.

How can organisations like yours help operators make the most of the current situation?

Companies like Beacon are in constant contact with the market place, analysing market reports and challenging on a line-by-line basis any changes to pricing, which are coming through. Many operators do not have the resource to analyse the market in this way, and especially independent and sole operators, do not have the economies of scale and leverage that are available to larger purchasing groups.

What are the key challenges operators are facing now when it comes to hospitality procurement?

It would be fair to say that small and medium sized independent operators that are working in isolation from larger groups would find it difficult to keep fully in touch with market trends in pricing. More and more often the pricing of products in the UK, is influenced by global trends and commodity markets – a lack of knowledge around these trends is a key issue that faces many within this sector. As an example, nationally, the news of falling food prices on a global level seems like very positive news for the hospitality industry, however, with production, packaging and distribution costs taken into account for the Food Service Industry, as well as the rising cost of employment within the sector, the benefits will be fairly insignificant, as demonstrated by recent spikes in gas and linen prices.

Again, how can you help them overcome these? 

Yet again, it’s not only Beacon’s purchasing power and focus on pricing that helps our customers, it’s our insight into the industry as a whole, and sector, locally, national and global issues that could affect a customer’s purchasing strategy both in the short and long term. Working with a business like Beacon allows our customers to draw on years of experience within our teams, as we provide an extension to their procurement team.

For the full article, please refer to this week's Caterer magazine or click here to view.