• Jul. 24, 2017, 1:52 pm

Invoice digitization can save restaurants a bundle

The following article was submitted by Plate IQ, an accounts payable automation platform that caters specifically to restaurants and the hospitality industry.  They digitize all paper invoices from clients, and capture the line item detail of every invoice, giving them the ability to provide extensive analysis on the aggregated relationship between restaurants and their vendors.
The theory of supply and demand teaches us that consumers will pay the same prices for the same goods in a competitive market. In reality, however, markets are rarely perfect and prices fluctuate wildly, with people often paying different prices for a variety of reasons. All types of customers experience price shifts — not just online shoppers and Wall Street traders.
At Plate IQ, we help restaurants manage their invoices by digitizing and capturing the line item data on every invoice. We’ve seen that vendors frequently charge restaurants different prices for the exact same ingredients and supplies. We wanted to understand just how common this form of price variation is, so we combined invoice data from thousands of restaurants to create a dataset of millions of individual items purchased over a 90-day period. We analyzed instances where the same supplier sold the same item to different restaurants for different prices on the same day.
There are several reasons that might explain some of this variance — vendors often change their pricing for restaurants based on overall purchase volume, restaurant location, or for a variety of contractual reasons. Nonetheless, we saw daily price variation for nearly two thirds of items in our dataset. While vendor prices typically varied by less than 25% for an individual item, these price discrepancies can add up quickly.
We first wanted to see just how common supplier price variation is in the restaurant industry. We counted how many days in a 90-day period an item was sold by the same supplier to different restaurants in the same area for prices that differed by more than $0.50. We were only interested in times where a vendor sold an item at different prices on the same day, since prices for many food items fluctuate seasonally, even weekly, depending on a host of supply factors.

More often than not, vendors were charging different prices for the same item on a given day. Only 36 per cent of items in our dataset were always sold at the same price, so nearly two thirds of ingredients showed some same-day price variation in the 90-day period. When vendors charge restaurants different prices for the same item on the same day, how large is the price difference? For all items that showed at least some price variation, we calculated the maximum same-day price difference observed over a 90-day period. The distribution of variation sizes is shown below.

Roughly one third of items shifted in price by less than 10 per cent of their average price. The remaining two thirds showed more dramatic price variations, with vendor prices varying up to 50 per cent for the same item between different restaurants on the same day. We next looked at which items vendors were most likely to sell for different prices on the same day. We divided the number of days on which we saw price variation by the total number of days that item was sold, and expressed the result as a percentage. The 25 items for which vendors’ prices shifted most dramatically in one day are ranked below.

The products with the most variable prices were diverse, encompassing produce, dairy, meats, and dry goods. For the products above, vendors charged prices that varied on 87 per cent or more of the days on which they were sold. The items we ranked above represent a range of categories. Does that mean that price variation is roughly as common in one category as in the next? To find out, we looked at the percent of products in each category that varied in price at least some of the time. Categories are ranked accordingly below.

Restaurants are most likely to encounter variation in vendor pricing when purchasing alcohol — nearly 60 per cent of the items in this category showed some price variation. Similarly, in the produce and non-alcoholic beverage categories, vendors charged different prices for more than 50 per cent of the items sold at least some of the time. Even in the categories where price variation was least prevalent — kitchen supplies and prepared foods — 20-25 per cent of products had shifting prices.

Next, we wanted to find the items for which vendors charged the most variable prices to different restaurants. We first filtered our dataset to items with prices that varied on at least 10 days. Then we took the maximum same-day price variation for each product and expressed it as a percent of the average price. The 25 items with the greatest price variation are ranked below.

Prices for these top 25 products swung up to 52 per cent in a single day between different restaurants purchasing the exact same product from a given vendor. At the top of this ranking, for example, the cost of a chicken cutlet shifted by nearly a dollar within a single day. And some unlucky restaurateurs have paid up to $41.73 for dark brown sugar — ranked eighth on our list — while their neighbors paid just $28.73 from the same supplier.

We also wanted to summarize price fluctuation magnitude by category. We calculated the average price variation (as a percent of mean price) over all items within each category, and ranked the categories by this figure. Our analysis of the frequency of price variation above showed that kitchen supplies are among the items least likely to be sold for different prices. But this table shows that when prices do swing, they swing by a lot; the average kitchen supply varied in price by nearly 14 per cent. Seafood, prepared foods, and alcohol had the lowest average price variation, and perhaps thankfully so: because seafood and alcohol were among the top three most expensive categories overall, upward pricing shifts in these categories could have the greatest impact on restaurants’ margins.
Finally, we wondered if there was a straightforward explanation for all these price shifts. Could it be that restaurants are being quoted different prices from the same vendor simply because they’re buying different quantities of that item, and receiving volume discounts? To find out, we assessed whether an item’s price was positively, negatively, or not correlated with quantity purchased. We summarize the percent of items that fell into each category below.

For about 50 per cent of items, there was no relationship between price and volume purchased of that item. In other words, the price might have shifted, but not in a way that was correlated with purchase volume. Of the items that did show a relationship between price and quantity, we more often saw that high-volume purchases were priced lower — a trend that reflects bulk discounting.

That said, 15 per cent of the time the restaurant getting the best price was actually buying a lower quantity! So does this mean volume discounting does not exist in the restaurant industry? Not exactly. More commonly, vendors will give a discount to restaurants based on the total amount purchased from a vendor for all items on the bill versus the amount of a single item.
So when are restaurateurs most likely to encounter different prices for the same item on the same day from the same vendor?Most items show some price variation, typically on the order of a few dollars per unit (or within 20 per cent of the average cost). Alcoholic and non-alcoholic beverages and produce items are most likely to swing in price, but kitchen supplies, produce, and dairy prices swing the most when they do vary in a given day.
For restaurants, the best way to get a deal from your vendors is tracking whether you are getting good prices in the first place. In this case, what you don’t know definitely can hurt you — and your bottom line.
Plate IQ was built upon the principle that manually processing paper invoices is an unnecessarily expensive and time-consuming process for restaurants that provides little insight into their actual costs. Our Web-based platform automates the accounts payable process by digitizing invoices, mapping them to restaurants’ specific expense accounts, and syncing them directly into their accounting software. Through this process, we intelligently capture detailed line-item information from all invoices and present real-time, actionable information to the restaurant operator.
With Plate IQ you can also track vendor item pricing in real time. The result saves restaurants as much as 50 per cent off their bookkeeping costs and dramatically improves their ability to manage food and bar costs, as well as other key expenses. To learn more about Plate IQ, please contact us at [email protected] or visit our website: www.plateiq.com.
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