Business Success Factors
Costs in Hospitality & Catering
Running a hospitality or catering business involves three main types of cost. Understanding these is essential because controlling costs directly affects whether the business makes a profit or a loss.
The three main costs in hospitality and catering are: labour costs (wages, salaries, training, National Insurance), material costs (food ingredients, drinks, cleaning products), and overheads (rent, utilities, insurance, equipment, marketing).
- Labour costs — the cost of employing staff, including wages, salaries, training, and employer National Insurance contributions. Labour is typically the largest cost in hospitality, often accounting for 25–35% of revenue.
- Material costs — the cost of raw materials such as food ingredients, beverages, and cleaning supplies. For a restaurant, food costs are usually 28–35% of the selling price.
- Overheads — all other costs of running the business, including rent, utility bills (gas, electricity, water), insurance, equipment maintenance, and marketing.
Calculating Profit
The WJEC specification requires you to understand two types of profit calculation:
Gross profit is calculated by subtracting material costs (cost of ingredients/goods) from revenue (total sales). It shows how much money is left after paying for the raw materials used to make the products sold.
$$\text{Gross Profit} = \text{Revenue} - \text{Material Costs}$$
Net profit is calculated by subtracting all costs (materials, labour, and overheads) from revenue. It shows the actual profit the business keeps after every expense has been paid.
$$\text{Net Profit} = \text{Revenue} - \text{Total Costs (Materials + Labour + Overheads)}$$
A restaurant has total revenue of £500,000 per year. Its material costs are £150,000, labour costs are £175,000, and overheads are £100,000.
Gross profit = £500,000 − £150,000 = £350,000
Net profit = £500,000 − (£150,000 + £175,000 + £100,000) = £500,000 − £425,000 = £75,000
This means the restaurant keeps £75,000 after all expenses. The gross profit of £350,000 looks large, but once labour and overheads are deducted, the actual profit is much smaller — showing why cost control is vital.
The Economy & Its Impact
The strength of the economy has a direct impact on hospitality businesses. When the economy is strong and people have more disposable income, they spend more on eating out, holidays, and leisure. When the economy weakens (during a recession), customers cut back on non-essential spending, and hospitality businesses suffer.
Two specific economic factors you need to know are:
- Value Added Tax (VAT) — a government tax added to the price of goods and services. If VAT increases, prices rise for customers, which may reduce demand. If the government lowers VAT for hospitality (as it did temporarily during the COVID-19 pandemic), businesses can lower prices or increase profit margins.
- Value of the pound and exchange rates — if the pound is strong, foreign holidays become cheaper for UK tourists, meaning fewer people holiday in the UK (bad for UK hotels). A weak pound makes the UK cheaper for foreign visitors, boosting tourism. However, a weak pound also makes imported ingredients more expensive, increasing material costs for caterers.
Environmental Impact
Hospitality and catering businesses have a responsibility to minimise their environmental impact. The WJEC spec identifies two key areas:
Seasonality means using ingredients that are in season locally, reducing the need for importing food from abroad (which increases carbon emissions from transport). Sustainability involves the three Rs: reduce (minimise waste and energy use), reuse (repurpose materials where possible), and recycle (separate waste for recycling).
Technology in Hospitality
New technology is transforming how hospitality businesses operate. The spec identifies several positive impacts:
- Cashless systems — contactless card and mobile payments speed up transactions, reduce queues, and improve security by handling less cash.
- Innovative digital technology — apps for ordering and booking, web-based reservation systems, key card access for hotel rooms, and digital menus (QR code menus became widespread during the pandemic).
- Software — stock management, payroll, rota planning, and accounting software streamline operations and reduce human error.
Online booking systems allow customers to reserve tables or rooms 24/7, even outside business hours. This increases bookings and reduces the need for reception staff to handle phone calls. Stock management software tracks ingredient usage in real time, helping chefs order the right amounts and reduce food waste. Payroll software automates wage calculations, ensuring staff are paid correctly and on time. However, technology requires investment and staff training, and system failures can disrupt the entire operation.
Media & Its Impact
Media can have both positive and negative impacts on hospitality and catering businesses. The four types of media you need to know are:
- Printed media (newspapers, magazines) — a positive review in a food magazine can boost bookings; a negative review can drive customers away.
- Broadcast media (television, radio) — TV shows like MasterChef inspire people to eat out and try new restaurants. A restaurant featured positively on TV may see a surge in demand.
- Internet and social media (websites, Instagram, TripAdvisor) — positive online reviews attract customers, but a viral negative review can cause serious damage. Social media is fast, free to use, and reaches millions of people.
- Competition from other establishments — businesses must be aware of what competitors are doing. If a rival opens nearby or runs a promotion, the business may need to respond with its own marketing or improvements.
Social media is both an opportunity and a threat for hospitality businesses. On the positive side, platforms like Instagram allow restaurants to showcase their food with visually appealing photos, reaching potential customers for free. Positive TripAdvisor reviews build trust and encourage new visitors. Many businesses now use social media advertising targeted at specific demographics and locations. However, one negative review or complaint can go viral, damaging the business’s reputation far more quickly than a newspaper review ever could. Businesses must actively manage their online presence, responding promptly to complaints and encouraging satisfied customers to leave reviews.