The Recipe For Hotel Food And Beverage Profitability

Getting the alchemy just right for food and beverage service in a hotel is challenging, but necessary if the hotel is to be successful.

If it were easy, customers would flock to hotels just for their food service. With few exceptions, that is not the case – not even close. Traditionally, hotel food and beverage service has been a dismal competitor to restaurants, possibly outside of five star hotels and certain unique boutique hotels.

In fairness, it simply has not made financial sense for hoteliers to heavily focus on food and beverage, which has not traditionally been a money-maker. Food and beverage service has been the unwanted stepchild to room keys. As an amenity for guests and a requirement for hotel meetings, hotel food quality has waned, with exceptions in the boutique lodging space, such as Kimpton, Morgans and others.

Around 2010 modern boutiques arrived, following in the footsteps of their predecessors; focusing on an individual approach to the customer experience and with greater emphasis on food and beverage service quality. Many hoteliers learned that great food and beverage service can attract hotel and non-hotel customers to certain types of hotels.

Even today, however, regardless of the many advances in the delivery of food and beverage service, profitable hotel food and beverage remains a challenge. The age-old debates and questions continue: should food and beverage be viewed as a separate profit center that can stand on its own? Or it is simply to be taken into account in overall hotel performance? Further, does the owner or operator run food and beverage, or are the risks and rewards best left to an able restauranteur under lease?

There are a number of hurdles to getting hotel food and beverage right: changing consumer tastes and demand, shifting design strategies, increasing regulation, managing food wastes, and rising labor costs, among others. A major step to getting food and beverage service right, is getting it right the first time; it's too costly to attempt a do-over. To do so, hoteliers need to understand fully their market, their customer tastes, demand drivers, competition, and the impact of food and beverage on hotel room revenue. They need to put in place a food and beverage plan, and execute on that plan.

That takes time and research, but it is worth the investment. Food and beverage service is increasingly an important part of the hotel construct. In the US, hotel revenue is about a $200 billion dollar industry, with food and beverage service accounting for about 25% of such revenue.

The role food and beverage takes on in a hotel depends a great deal on the style and type of hotel and the customer base. Hotel owners essentially look at multiple sources of food and beverage revenue: in-room dining and minibars; restaurants/food service areas, bars, coffee/bakeries and snack shops; and banquets/conferences/catering.

Associated with these revenue sources are the costs and expenses of which hotel owners and investors need to be mindful, namely: food and beverage costs, labor costs (salaries, wages, bonuses, benefits, service charge distributions and taxes), department expenses, such as cleaning supplies, glassware and flatware, utensils, china, kitchen fuel, uniforms, etc. and related fixed costs such as the build-out decor, improvements, fixtures, furnishings and equipment that are key to generating food and beverage revenue.

Owners and investors need to understand the key sources of revenue within the hotel and how and where to focus their resources. To get to that understanding, owners and investors must have answers to questions such as: how much on average are hotel customers willing to spend on food and beverage, and from where within the hotel will such expenditures occur? Can the hotel fill an important market niche for banquet space with sufficient meeting facilities? Is the restaurant notable enough to compete with outside restaurants and keep hotel guests within the hotel and attract customers from outside the hotel? Are hotel guests really only using the hotel kitchen for in-room dining? In-room dining has rarely been profitable. Would it make more sense to eliminate food and beverage due to challenging costs and operational constraints? Hotel owners and investors need to understand their market and guest profiles before budgeting costly food and beverage facilities and improvements.

Owners and investors also need to understand the changing market for structuring food and beverage within the hotel. Most hotel operators will privately concede that they do not manage food and beverage all that well. This leaves open a great opportunity for owners and investors to separate food and beverage from hotel management, and operate that space as a separate business with the goal of profitability – or, at a minimum, to better manage expenses. This can give the hotel owner greater flexibility over how food and beverage service will be delivered.

A separate food service team can be engaged – or better, the food and beverage space can be leased to a third-party operator who will have a separate risk profile from the owner and hotel operator. There are, of course, legal and business issues that need to be worked through when hotel rooms and food and beverage are under separate management. Care must be taken to weave the terms of the agreement between hotel management and food and beverage management, so that the economics, terms, risks and operations are managed seamlessly.

For example, the hotel and food service documents have to address the specific areas that the hotel manager will control versus the food and beverage operator. How will operating expenses be allocated and paid? How will insurance, security and liabilities be structured? How will the two entities coordinate marketing, guests lists and group sales? Will the hotel manager receive any override from food and beverage revenue? Which party will control banquets and meeting space? Which party delivers room service? There are many other legal and business issues that need to be considered.

As the US and hotels come out of the pandemic, making food and beverage service work will even add greater challenges, business and legal. Among all hotel revenue sources, food and beverage lagged the most. Nearly 90% of hotel food and beverage was shut down.

Group hotel business took worst hit.

Hotel operators will need careful planning to reintroduce food and beverage successfully. For example, will room service make sense immediately post-pandemic? Probably not. Will unions present hotel owners with greater challenges? Quite likely. Will unions insist that room service be provided or their employees compensated as if room service were in operation? How will seniority be addressed? Will hotel operators be able to adjust work rules to provide breakfast and dinner only, and leave out lunch – which may be the last meal to return to hotels? Will hotel managers be able to adjust shifts? Even while leisure travel had jumped significantly, customers are primarily only dining in for breakfast. How will hotels recapture profitable group business, business meetings, weddings and so forth? Re-opening food and beverage post-pandemic is itself a new cottage industry with its own experts.

Today, primarily on account of the increasing influence of boutique hotels, hotels in general are making advances in food and beverage. For food and beverage to be financially accretive, hotel stakeholders will need to do the appropriate research, plan and engage in the financial and legal structuring necessary to create a food and beverage paradigm that both attracts customers and makes financial sense and fairly allocates risks. Such research and planning will be especially important as hotels emerge from the pandemic, and owners and hotel managers find ways to reintroduce food and beverage as part of the customer's hotel experience.