In this post, I will look at the observation from Cafe owners so far in 2019.
So when you started your café you expected to be having fun, selling delicious food and excellent coffee to your customers.
This was the dream. Who said you needed to find staff and worry about your finances. Margins were something you vaguely remember in your leaving cert copybook.
If you have been operating for a number of years you will have enjoyed the lower VAT rate of 9% now you are experiencing the dreaded 13.5% VAT rate, which has come with its own problems.
In January you as a café owner had two choices
- To pass on the VAT increase to your customers
I have seen the signs in Cafes letting their customers know about this increase and apologising for having to do so.
This strategy would have helped to maintain your product margin, as a rule of thumb 65% is a good benchmark.
2. The café who absorbed the VAT.
A few of our clients used this strategy. Where there was no increase in price to the customer, however, this was communicated to customers in order to generate goodwill, and potentially to generate higher footfall.
What was the best option?
Cafes who absorbed the VAT appear to be finding it harder than cafes who passed on the increase. The VAT has been one piece of the puzzle, Wage and product cost increases have also resulted in Cafes reporting a 15%-20% reduction in net profit in the 1st Quarter. (sample of 25 taken from our clients) of Cafés who used this option have seen the impact on margins and increased their prices by generating new products and changing the menu.
Cafes who focused on reducing staff hours to counteract the increase in wages, either by the minimum wage increase or by rewarding staff with increases above the minimum wage have reported stagnant growth or declining margins. However some cafes are reporting wage percentages been the same as last year, this was achievable by cutting hours across all parts of the business.
It is time to get lean.
What we are observing in the West and Midlands is a decline in food sales impacting sales, an increase in costs and less margin to pay fixed and non-fixed expenses are putting the squeeze on Cafe owners.
By using Benchmarks such as the Gross wage percentage vs net sales and Cost of sales Vs Net Sales Percentages and compare these to last year will allow you to monitor your progress.
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