Mr. Escoffier

Food & Beverage

The Impact of the Recession and the Administration's Policies on Hotel Food & Beverage

By Marcel Escoffier, Associate Professor, FIU School of Hospitality Management

Politics Aside: We are in a Recession!

By the time you read this even those in politics will agree with we business people that we are now in a recession. Technically, the "R" word is used when there are two consecutive quarters of negative economic growth. (Let's not parse that term!) Nearly every American is aware that things are not headed in the right direction. The current investment crisis has affected us all.

As has happened numerous times in the past, we Americans were not prepared for this downward spin in the economy. We have failed to save money for it, our debt burden is unusually high, and the value of our principal asset, our home, has fallen. All this has translated into a noticeable drop in consumer spending.

Businesses are no better off than the general public. As usually happens, businesses over expanded during the boom, and bought out other businesses at exorbitant prices.

The Hotel business has mirrored general business. We borrowed like there was no tomorrow, over built our industry, and built the wrong kinds of hotels.

What is "Stagflation"? And how can We Cope?

As if all that wasn't bad enough, commodity prices have hit the roof. What is turning out to be a wrong-headed solution to the energy problem; gasohol, has sucked up our primary grain production. Coupled with the rising international economy, which has resulted in more demand for food supplies, we are experiencing higher than normal grain futures prices.

Like some variation of that old childhood song, the one that goes, "the leg bone is connected to the thigh bone..." The linkage between the futures speculation and the rise in commodity prices and what we have to pay for all kinds of food is painfully apparent to us all. Cattle eat corn, corn prices have risen, now milk, cheese and beef prices have gone up. The food chain linkage just seems to go on and on.

During the Nixon Administration (the early 1970's) a new economic term was coined which nicely captures the combination of a recession and a rise in costs; "Stagflation." Stagflation is the worst of both economic worlds; inflation in prices coupled with a lowering of spendable income (a reduction in economic growth.) In the 1970's this situation resulted in a rise in unemployment. Today, so far, employment has remained historically low, but it is rising and could very well reach 1970's proportions.

What does this Mean to the Hotel F+B Function?

The bottom line is that F+B Directors face a number of challenges which must be addressed right now. Our food costs are going up, while our labor costs are not going down. Customer counts are falling, especially regarding the customers who generate strong food and beverage sales, and those who are staying at the hotel are demanding lower menu prices.

Our tipped employees may need our help. As customer counts go down, and as those customers who do come tip less, we will experience higher turnover of our tipped employees. Unfortunately, those who leave will most likely be our better employees as they will be going to restaurants or private clubs where their service is appreciated and they can continue to receive tips at a level which they are currently experiencing.

While it has not happened yet, it is highly likely that unemployment will rise in the next few months. This may mean that more people will apply for what job openings we can offer, increasing job applications, decreasing what we will have to pay in starting wages, but also meaning a greater likelihood that we will have fewer people will be coming to our hotel as vacation travelers.

A Coping Strategy that has Worked Before

The last major recession was at the end of the 1970's and the first couple of years of the 1980's. (Take my word for it, most downturns of the 1990's to today have been relatively minor.) During the late 1970's, inflation was running over 10% per year (it is now less than 6%) and unemployment by 1980 was well above 10% (it is now under 7%.) It was at that time that President "Jimmy" Carter publicly stated that America was suffering from a "malaise," a term pounced on by the Republicans and which helped Ronald Regan win the election.

The strategy hoteliers used during that period was twofold: "batten down the hatches" was one, and "plan for the future" was the other. Let's save that second one for now and look at "batten down the hatches."

Batten Down the Hatches

We need to immediately cope with both the demand side and the supply side of our business. A review of our future bookings should show us that new bookings are slackening off. Business travel declines during the initial stages of a recession. These "road warriors" will have received orders from their home offices to cut travel expenses wherever possible. They will want to spend less money on F+B. There will be both fewer rooms sold to business travelers and those who do check in will have a tighter meal budget. Just like what is happening now with the casual dining chains, we will be pressured to reduce our menu prices or to come up with menu items that result in lower check averages.

The other big business at most hotels is the travel business. Family travel (independent travel) will decline when compared to the boom years. High gas prices will make the situation worse. Again, F+B Directors must cope with a very price conscious market. Pizza or buffets will be popular while exotic or fine dining will be less so. This will lower our per guest daily revenue figures as well as reducing our tipped employees' income.

Group travel will be a bit different as well. Domestic group business will soften, and those groups who do stay with us will be very price conscious. Foreign travelers, on the other hand, will have money to burn. The U. S. Dollar will continue to trade are historically low levels against the other major currencies. A successful strategy would be to pry more money out of these foreign tourists by offering regional specialties at special prices, or otherwise getting them to spend money at our hotel. Bar revenues could rise, an emphasis on regional wines and spirits could be a real revenue boost. I recommend looking back to about the year 2000 and seeing what travelers spent at your hotel. That dollar figure can be increased by one and a half times (multiplied by 150%) to get the number European guests should be spending at your hotel today.

From a cost standpoint, it is almost too late to act. You should have been containing commodity costs months ago. You have been altering recipes to use fewer grains, less milk products and de-emphasizing meats? Right? If not, do so NOW!!! Reducing portion sizes (such as introducing a Tapas menu) will help. Small portion sizes mean smaller portion costs. A Tapas or tasting menu at the bar might increase sales to the road warriors who are still coming to your hotel.

Other cost containment policies may have been overlooked. The Summer growing season is almost upon us. Have you driven out to the farms in your area? Do so now. Lock in some local produce prices now. Get your Chef to begin to think about Fall and Winter menus. Can you buy fresh local produce (which should be cheaper during the harvest season) now and store it for the Winter?

It is also time to embrace the healthy eating movement. (You have started doing that? Right?) An emphasis on fresh vegetables is healthy, and cheaper on using all that fried food. "Veggies... Not Meat!" should be your rallying cry. Get your food costs under control.

Equipment sales has been dropping for months. Now is a great time to negotiate outstanding deals on new equipment. If you have any equipment that is nearing its useful life, or are on the verge of being nickel and dimed to death with repair costs, now would be a good time to negotiate a great deal on replacing your "clunker" equipment with new stuff.

Sometimes Life Does Go On

While I know of no economist studying this, I am sure that during a recession people still have birthdays, still get married, still graduate from schools, still retire, and still celebrate other life milestones. Now is the time to book as much of this business as you can. Get your banquet department selling. Life goes on, and, while there will be price resistance (a new catering menu, perhaps?) still, there will be opportunities to increase your banquet business. This business will be much more competitive during the economic downturn. Many housewives will try their hand at catering parties as a way to augment family income. Selling events will be more difficult. But the sooner you get started, the better off you will be.

Life goes on for your business clientele as well. Get involved with your community. Sponsor a business roundtable every week. A breakfast meeting can be held at your hotel one or more days a week and who knows? Some enterprising local business may sponsor the event.

Speaking of local business. They are hurting, too. I just signed a contract for a new roof. What was proposed at $38,000 last year is now $29,000! Hum... what kinds of repairs or fix-ups might your operation need? Contractors are very hungry. Now is a good time to show your support for local business, and get a good deal in return.

Now is the Time to Plan for the Future

So what can you do to plan for the recovery? First, begin any renovation or remodeling plans now. You don't need to commit to anything at this time, but at the earliest signal that the economy is about to get better, sign those contracts!

Now is a good time to improve your workforce. Get rid of the marginal employees and hire some of the really good talent that is available. Let's be honest, no matter how good you are as a manager, you have some employees who seem to be weaker in terms of skills or attitudes than most. It is time for them to either get with the program and improve their performance or get out. Conversely, there will be a labor pool of really good people. Hire them. Many will already be working. Stealing great employees from your hotel competitors is risky; remember the golden rule. But what I am advocating is an active recruiting program.

Recessions are good for colleges. Many people choose to change their careers during times of economic distress. Some are forced into making this decision by the poor economic times. I wonder how many Bear Sterns personnel are reviewing their career opportunities at this time? Talk with your local college and see what is out there. Do not limit yourself to hospitality programs (Dean West: Sorry, but this is really what I think!) There are great philosophy majors, graphic artists, actors and actresses; all kinds of people who could be really successful in our business. Meet them now, while they are still in college, and hire them part time. Maybe, if your are lucky, they will come and work for you full time when they graduate.

Oh, yes, those farmers. Remember them? Some may be willing to get involved in a long term relationship with you. By now (the sixth month of the recession) the government will be pumping lots of money into turning the economy around. Many farmers are very, very good at seeking out available government funds. Why can't a local farmer generate food for your hotel on a more year around basis. ("More year around" means for more months of the year than is usual in your locale.) If you are a willing purchaser for their goods, they can get money from the government to become a reliable supplier of the goods you desire. A win-win situation for both the farmer and the hotel.

When Will it End? Think January, 2009!

You probably have heard about leading and lagging economic indicators. In my opinion, the best leading indicators are railroad freight car loadings, airline air fares (especially for business travel), the stock markets, and the movie industry. The best lagging indicators are our government, large construction, and the banking industry.

By the time you read this, the economic downturn will be nearly six months old. A few months before the recession ends, business travel usually picks up. I have a few ideas on when this recession will, but for now; I recommend that you check on airline ticket prices. The airlines usually start a business travel promotion about the time that the recession ends. I have read some economic papers that argue that these deals are what kick starts the economic recovery. Unfortunately, as is usually the case with economists, I have read other papers arguing that the recover is what convinces the airlines to lower their prices so as to gain market share. Either way, when the business travel business starts to pick up, the generally economic recovery is sure to follow.

I titled this section, "Think January, 2009". I was not joking. It is a safe bet that when the new President gets sworn in next January the first order of business will be massive governmental efforts to turn things around. Recessions rarely last for more than a year, maybe a year and a half. It will be about 15 months since the start of the recession come January 2009. So the natural timing is there for a turn around. The politicians will be trumpeting their turn around strategies. The really big corporations will be into the first quarter of the new year and hungry for good business results. The holiday season will be at least OK, not awful, probably not great, but still leaving a lingering good feeling among the general population. In other words, a whole bunch of institutions and the American people as a whole will be pushing for an economic turnaround. You should be planning for it, too.

Keep your F+B operations as intact as possible. The storm will be rough, but there is an end in sight. Have plans ready for implementation when you see those leading economic indicators begin to go positive. Be ready for a recovery, for it will happen. Things will be different, but I am confident that these things will never change: businesses will still believe in getting their sales staff to go out into the field to solicit business. Those business guests will still be hungry and thirsty. The general public will still want to get away from home, and they will still travel to your hotel. So be ready for the economic recovery.

Marcel R. Escoffier was an Associate Professor at the School of Hospitality Management Florida International University. He had over thirty years experience in hotels and restaurants throughout the U.S. Unfortunately, Mr. Escoffier passed away in September, 2009. We at HotelExecutive.com would like to continue publishing Marcel's articles on our website as a tribute to this brilliant man. The one thing we loved most about him most was his sense of humor. He would always make light of any serious situation, and this was reflected often in the articles he wrote for the Hotel Business Review. Mr. Escoffier can be contacted at editor@hotelexecutive.com Extended Bio...

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