Mr. Escoffier

Food & Beverage

A Million Dollars a Room? How F+B Can Help Cover Real Estate Costs

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

A million dollars per room... I feel like Rip van Winkle waking up from some long nap and finding a new world. About a year or so ago the luxury hotel market in the United States was just crossing the $500 a room night barrier. Luxury hotel rooms in some U.S. cities now average $600 to $700 per night. But $1,000 a night! Wow! Some kind of psychological barrier must exist at that $1,000 mark.

As F. Scott Fitzgerald once wrote, "The rich are different from you and me." Perhaps that is true, but an old New England saying is that the rich have "deep pockets but short arms." It will require some significant marketing effort to convince enough of people who can afford to spend $1,000 per night for a room that your hotel is worth the money. Let's explore some ways Food and Beverage can help the overall property's efforts in convincing guests that it is not only a fair amount to pay for a room in your hotel, but that the guest actually made a good choice in choosing to stay with you at that price.

The Room Rate Rule of Thumb

First, though, as a professor, I would be remiss in not reviewing the ancient Rule of Thumb. "Ancient", in this case, means originating in the early part of the 20th century. Before marketing as a discipline, before room rate formulas, revenue managers, and revenue management; at the very dawn of the rise of the modern hotel market, investors and operators used a heuristic (a "Rule of Thumb" is known by professor-types as a "heuristic") that states: Take the total cost of buying the hotel property, divide that total cost by the number of guest rooms in the hotel, and that is your cost per room. Divide that number by 1,000 and that is the average per room rate you must charge in order to break even at an average room rate of about 70%. So if you bought a hotel property for $15 million and it has 175 rooms, you must charge an average room rate of about $85. ($15,000,000 divided by 175 rooms = $85,714 cost per room. $85,714 divided by 1,000 = $85.71 room rate.) Some books on hotel operations from the 1920's say that this formula assumes a 67% occupancy rate, others round up to 70% occupancy.

The heuristic is not exact, so we can round the numbers up or down a little bit. So in the above example, we could assume the need to charge $85 per room night given a 70% occupancy in order to break even.

The Alternative: Waiting for Appreciation

Traditionally, hotel investors can be talked into an operation that doesn't anticipate positive current earnings on the promise that the value of the property will appreciate and the profits from the investment can be realized upon selling the project to other investors. There are tax and other money management benefits to this way of investing. But if the current residential real estate market downturn spills over into commercial property, this strategy may not work.

As long as it does work, however, the room rate heuristic can be mooted and investors will not pressure management to rent rooms at the $1,000 amount. As a former hotel General Manager, I, personally, would not want my career to be contingent upon continued strength in the real estate market. Being married to a nationally recognized expert on Federal Tax Policy, I would also not count on the tax benefits remaining as they now stand for very much longer. I would be looking for all the help I could get to meet the requirements of that room rate Rule of Thumb.

How F+B Can Help

The F+B department can help achieve the needed room rate at the required occupancy percent in several ways. One way would be to provide the kind of food and beverage experience guests who respond to those quoted room rates would expect. The target market for a hotel offering $85 room rates would expect a different F+B experience than those people in the $1,000 per night market.

Another way to help achieve the goals established by the Rule of Thumb would be to create a "demand house". That is, create a F+B experience that is so satisfying that guests go out of their way to stay in your specific hotel property. Were the hotel occupancy to rise above 70%, not only would the hotel make money at the $1,000 room rate, but it could even lower that rate and still make money. (This column is written for F+B people, but if you want to know more about how this works, see your hotel's revenue management personnel.)

Another Way to Help

Most hotel pricing formulas and organizational discussions in America were promulgated in an era when F+B was considered an amenity: a needed product for a hotel to offer, but not a tool for directly generating revenue. But since the 1980's, F+B has become more widely viewed as an excellent revenue generator. (See prior columns on how and where this transition has taken place.)

If we assume that the Rule of Thumb is not a room rate calculation but rather a room revenue calculation, than we can put F+B squarely into the mainstream of hotel revenue generation. In other words; going back to that $1,000 a night calculation, if a part of that $1,000 per night includes food and beverage revenue, than strategies that increase a F+B operation's quality should also be expected to increase the revenues generated by F+B.

A Plan to Achieve Hotel Revenue Goals

How can F+B actually help a hotel attract guests willing to pay $1,000 per night? F. Scott Fitzgerald correctly observed that the rich are different. They demand a level of service that few in the United States are even aware exists, much less capable that most hotels in our country are capable of providing. Las Vegas hotels began the re-birth of the trend toward attracting world-class chefs to open establishments in their casino-hotels. Hotels in New York City, Los Angeles, and other large cities have followed suit.

While F+B directors may wish to avoid the headaches associated with having another temperamental chef on staff, the drawing power of these world-class culinarians is undeniable. Most whom I have met seem passionate, serious people who demand from their staff the same energetic creativity which they possess. Very large properties seem to be at an advantage since the more usual hotel F+B operations can be segregated away from the kitchens of these culinary stars. Here is where "outsourcing" may work: the celebrity chef "owns" the specific restaurant operations relieving the burdens associated with managing its operation from the F+B Director.

The ideal method of incorporating these world-class star chefs would be in a total dining experience. Many great chefs in France have only recently retired from their small-hotel-with-three-star-restaurant operations. They would be enticed by smaller hotel properties to craft a total culinary package. Imagine your hotel offering freshly made jams and jellies, freshly squeezed orange juice, and, of course, real pastries on the terrace for breakfast. Lunch would be in an elegant day room with flowers everywhere and a fountain against one wall. Dinner could be in that same room, lit in a more elegant, golden light, served in the best white gloved style.

F+B as Part of Total Room Revenue Generation

The scenario I have described works in several ways. It provides a reason to charge appropriate prices for the food, service, and ambiance provided. Many smaller establishments do this today. One small five star property in Florida generates $175 per person in food revenue per guest, per day. That, alone, reduces the $1,000 per day burden to nearly the room rates charged in luxury hotels in New York City. But in this property's case it wasn't necessary to offer lower room rates.

Food is integrated into the guest rooms at this property as well. A premium bar is in every guest room, really attractive fruit displays, "high tea" platters and a "good night" snack plate delivered to each room all help to make this hotel a giant step above what its guests have experienced elsewhere. This compete hedonistic experience makes the over $1,000 per night room rate the hotel actually receives not just tolerable, but a value in the eyes of most guests.

But the scenario works in another, perhaps more important way. It gives the hotel the press coverage that makes the property a "demand house". After feature articles in travel magazines and on tv, people are now clamoring to stay a few days to experience this gracious, elegant ambiance.

Another Marketing Tack

"But my hotel is in a market where there are luxury chains that I must compete with." I have heard variations of this lament before. How can you charge $50 for breakfast when the "Ritz Seasons Palace" down the street charges $30?

Again there are several possible solutions. First, it is relatively easy using the star chef scenario as outlined above to out-luxury the luxury brands. I have stayed in several properties in the United States that do that. A second alternative exists which is a kind of end run around the chains.

Offering a unique package experience can get your target market out of the habit of comparing you to the "Four Carlton Oriental" hotel down the street. Miami has five or six luxury brand hotels in it. Yet the Biltmore in Coral Gables does very well with its F+B business, and, in turn, does very well with its occupancy percentage. Specific examples of this "end-run" tactic that I have seen include: offering a unique spa or other total health and fitness experience, provide experiences targeting specific family events (like weddings, but also anniversaries, graduations, etc.), providing unique vacation experiences (one hotel here has secured the guide services of a Native American to take people on a camping experience), of any other package which might get people into your resort for a "once in a lifetime" stay.

Can F+B Help the Owner's of Million Dollar a Room Properties?

The key to success in meeting this challenge is to work closely with the Marketing Department and the Rooms Division. F+B can be integrated into the total guest experience; from check in, in the guest rooms, as well as at the traditional meal service venues. No matter which approach your property takes: including F+B within a total guest package, or making F+B so world-renowned that guests clamor to spend $200 or more per person for dinner, you need to position F+B so that it is an integral component in meeting the $1,000 a night challenge.

One of the exciting aspects of this end of the hotel industry is the emphasis on placed creative, unique solutions to the problem of anticipating, meeting and exceeding guest expectations.

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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