Why Inflation Doesn't Equal Growth

We have very little to celebrate in the hospitality industry at the moment, so it’s a good idea to take (and celebrate) every win that we can. When we do, we need to ensure that we’re celebrating the right things and for the right reasons - but - inflation doesn't equal growth.

Most hospitality business owners speak to their teams about revenue, revenue targets, and whether they managed to hit them or not. It’s great to get them involved - I love seeing GMs speaking to their teams about the fact that they had a record week, or that they’d smashed their target, or that this week was definitely better than this time last year! And I don’t want to stifle this enthusiasm (and I’m sure that you don’t either), but we do need to make sure that when they’re comparing “like for like” that they’re actually comparing like for like.

What we all often fail to take into account when comparing revenue figures is inflation. Yes, there are other things that we don’t speak about (see my article on Knowing Thy Numbers), but for now we’ll just focus on how inflation affects how we view things and how we should correctly compare this year’s figure to last year’s.

This is known as the “Time Value of Money”, or in other words, £1 this year would buy you less than £1 last year. Think of a Freddo (I might be showing my age here)- you used to be able to buy one for 10p. 10p today would not get you a Freddo. The 10p hasn’t changed, but its buying power has.

Let’s have a look at a worked example of inflation in action:

·       In April 2022, your net sales were £50,000, and then £60,000 in April 2023. The CPI inflation for April 2023 was 8.7%.

·       £60,000 - £50,000 / £50,000 = 20%. So it looks like you’ve grown revenue by 20%

·       But we want to see what £60,000 was worth the year before, so we divide the 2023 revenue (£60,000) by the rate of inflation.

o   £60,000 / 1.087 = £55,201. £60,000 in 2023 money is only worth £55,201 in 2022 money.

·       £55,201 - £50,000 / £50,000 = 10.4% in real growth terms.

Whilst 10.4% is still a decent achievement, when we factor in inflation, the rate of growth practically halves. Combine this with National Minimum Wage increasing by around 10% in the same year and the average labour percentage for a restaurant being around 33% (now 36.3% due to the increase in this year), and this wipes out another £1,820.

So now we’re now down to £53,381, and whilst this is still an increase of 3.38% on the previous year, it doesn’t take into account any supplier increases, utility increases, rates or rent increases, and so on...

Now, I’m not writing this to knock anyone on minimum wage who has finally had an above inflation pay increase, or to bash hard working team members that have helped to build the business that they’re working in, I’m writing it purely to demonstrate that quite a bit goes into the figures that you’re looking at that you may not have considered before!

As the image below shows, we’re not just at the mercy of inflation in our own economy, but we’re also at the mercy of the inflation rates of any country that we order produce from, or from any supplier than imports from another country.

So, what’s the takeaway here?

It’s not that growth isn’t possible - it absolutely is. But in today’s climate, we have to dig deeper than top-line revenue to really understand what’s happening in our businesses. By taking inflation, wage increases, and rising operational costs into account, we stop telling ourselves half-truths and start making better, more informed decisions.

Because if we’re celebrating record sales without checking whether there’s actually more money left at the end of the month, then we’re cheering for a number that might be growing - but means less every year.

Celebrate the wins - absolutely - but just make sure they’re real.