Maximising Hotel Food and Beverage Profitability

Business, Hotels, Restaurants

Hotel Food and Beverage profitability has traditionally been under performing and hotel F&B outlets are notorious loss makers.

65% of hotel revenue is generated through rooms and with an approx 80% profit margin it is no coincidence that the focus of attention tends to be largely on rooms.

Although there has been increased attention on improving F&B profitability on a corporate level, implementation of new concepts and processes is left largely to the team on the ground – the same team that is focused primarily on rooms.

Although F&B departments can include multiple operating entities (restaurants, coffee lounges, room service, mini-bars, conference and banqueting, catering etc) financial performance is often measured and reported as an aggregate total, making it difficult to identify areas that may need improvement.

Given these factors opportunities in F&B are frequently overlooked at property level, resulting in lost profit and ultimately lower asset value.

Good asset management bridges the gap between corporate and property efforts and recognise that even minor improvements are worth pursuing (e.g. a £100,000 increase in NOI can create upwards of £1M in hotel value).

Due to the relative low contribution to the bottom line, F&B is habitually considered an afterthought in the hotel development process. This affects guest satisfaction ratings and lacklustre concepts that operate with high delivery costs – a lose-lose situation!

Although hotel F&B concepts have improved significantly in recent years, profitability remains an issue due to a lack of commercial awareness, poor implementation, delivery, monitoring and development.

So how can we significantly increase Hotel Food and Beverage profitability?

Good asset management approaches this in the following four steps:

STEP 1: Take a step back and look at the current investment strategy and the multiple factors that impact performance

Factors that impact performance of a hotel’s F&B program are highly unique to each property.

Before drilling down into detailed analysis it is important to identify basic underlying assumptions from which to assess the F&B operations today and to make recommendations for the future.

Consider the following:

  1. Hotel type – what type of F&B is deemed reasonable and financially viable?
  2. Optimal market positioning – understanding the hotel’s current positioning and its market positioning for the future is invaluable to F&B programming. A well-defined and efficient program will enhance guest experience. Likewise, a disjointed and half-hearted operation can significantly affect satisfaction ratings.
  3. Projected hold period – Although many opportunities may be identified, they must be aligned to the time frame of a future anticipated sale. Prioritise and focus on efforts that will maximise value within the holding period.
  4. Capital resources – no matter how big or small, there is a capital cost associated to most changes. Timing of implementation of change and new concept depends on the hotel’s cash position.
  5. Benchmarking – establish upfront high level KPI’s that will serve to shape the overall F&B department.

STEP 2: Review how current operational F&B components work together in line with market positioning

A site visit should identify:

  • A clear understanding of the team’s assessment of operations and their ideas and strategies for improvement.
  • A thorough understanding of the F&B department, including staffing and relationships among outlets (shared kitchens, operating structure, third-party management, outsourcing etc).
  • A complete inventory of in-house F&B outlets and operations.

A competitive market review should evaluate:

  • F&B strategies of the hotel competitive set.
  • Competitive non-hotel dining options in the local market.
  • Local market dynamics – which existing factors impact operations?

Financial analysis should piece together the story behind each operational unit and its financial performance.

  • In asset management the underlying goal and assumption is that any operating component should positively contribute to the bottom line and enhance asset value. Any areas that do not must be identified and addressed.
  • Aggregate data can hide a multitude of inefficiency and gives way to complacency. Loss leaders are masked by profitable outlets. This is not acceptable by asset management standards.
  • A detailed financial review and dissection of the F&B department is necessary to identify trends and isolate areas that underperform.

STEP 3: Putting it all together and develop an action plan

The final step is to put all the gathered information together to analyse the operation as a whole.

The best method of doing this is through a SWOT analysis to review each operation in its entirety, draw conclusions and make recommendations.

When making decisions for the future of the F&B department, consider the following:

Do not maintain an unprofitable outlet – Unprofitable outlets are common place in hotels and are justified by management as ‘the cost of doing business’. A best practise and steadfast rule from an asset management standpoint is that outlets that lose money are simply not acceptable. With all the innovations and creative concepts available today, there is no reason why an unsuccessful outlet should be maintained.

Less is more – Too many outlets create internal competition, so that even with a reasonable capture rate, the business is being spread across multiple operations, diluting overall departmental profitability. One of the underlying missions of a hotel F&B review should be to identify opportunities for consolidation and eliminating operational inefficiency. The resulting space that has come available can be turned into a profit making space.

Refine fine dining – Another major drain on F&B profit is often found in concept errors, particularly in fine-dining concepts. Traditional fine dining used to be about high-end options with white table cloths and formal service. Today’s fine dining concept is different. Go back to the hotel’s positioning and market segmentation to understand if a formal dining experience at a higher price point meets a need, given the guest profile. If it does the operation needs to create an identity on its own above and beyond the white table cloths and formal service. Fine dining in hotels must be able to compete against freestanding, similarly priced restaurants in the local market. The higher the price point, the harder it will be to retain guests seeking a fine-dining experience in-house.

Three-meal-a-day outlet – A common misconception is to meet guest dining needs all three meal periods should be provided in one outlet. The problem with this is that in order to appeal to everyone, the restaurant appeals to few and it is seen as a last option for guests. Such restaurants typically run at low volume and high fixed operating costs. Providing guests with options for all three meals is advisable, if supportable and if it meets expectations. However, there are alternatives and more profitable ways of accomplishing this.

Mini bars – Asset management best practise is to challenge the need for mini bars. History has shown that they are mostly not necessary from a guest satisfaction standpoint. They are habitual loss leaders and maintenance trouble spots.

Kitchen Design – There are nearly always opportunities to modify hotel kitchens for improved efficiency. Many kitchens serve multiple outlets. These battleships tend to be very ineffective. Given their sheer size, it is easy for inefficiencies to exist and it is difficult to control costs and to assign a cost structure to particular operations. Conduct a review to assess how the kitchen can be better configured to increase efficiency and to better match the style of service being offered within each operating outlet.

Commercial awareness – Destination dining cannot be staffed with middle management. Traditionally, brands are very hierarchical with little accountability or direct responsibility at outlet/operational level. This compares poorly to free standing restaurants where management is extremely hands-on and highly active and visible in front of house. In order to compete directly against local restaurants, hotels should adjust operating structures and staffing models so that their unit operate with the same passion and commitment. This will enhance accountability, establish clear areas of authority, improve quality, assign ownership of the profit and loss and will address critical elements that collectively will deliver an excellent dining experience.

Don’t forget conference and banqueting – Although C&B usually is a profitable unit, this area can often benefit from improvement. Review catering pace, selling practises, policies, room rental and event cancellation, menu pricing, staffing etc.

STEP 4: Implementation

All the research, review and financial analysis is only useful if the proposed changes can be effectively implemented. It is not uncommon for good change programs to fall at this last hurdle!

In order to successfully implement change the team on the ground needs to be actively involved in the planning and take ownership of proposed changes.

To get the team on board, seek their input right from the onset. Change is usually met with resistance and there will be challenges during the process, but if issues can be reasonably discussed and resolved as and when they occur the chance of success is greater.

Change does not happen overnight. A detailed step by step implementation plan is necessary to ensure that the team stays focused and initiatives are executed in a well thought out and strategic fashion.

Implementation of a change programme draws on multiple skill sets, disciplines and resources to effectively carry the plan through.

Although the team needs to be involved, they must remain focused on the day-to-day operations. When identifying who is going to drive through the plan, it is advisable to identify who in the operational team has the skill set to take an active part in the change program. Consider whether suitable candidates can temporarily reduce their part in the day to day process. If new concepts or major new changes are required then outside expertise needs to step in.

If ownership commits to implementing initiatives that require a major change in F&B, it is critical that the tools are in place to monitor and fine tune the plan to ensure that return on investment goals are met and the plan is a resounding success.


Would you like to know more?

Download our latest White Paper entitled “Why Return on Hotel Investment Can Significantly Underperform” or contact me, Lucienne Mosquera (Managing Director) for an informal conversation about your Investment.