Key Considerations In Outsourcing Hotel Food & Beverage
By Larry Trabulsi Senior Vice President, CHMWarnick | July 23, 2017
As my colleague, Michael Doyle, asked in his article 'Outsourcing for Hotels 101 '... Why should hotels outsource, or challenge a traditional operations model? The most common answer is to maximize profitability. Industry-wide, Food and Beverage revenue represents over 25% of total hotel revenue, yet generating a meaningful profit margin in F&B (which is difficult to measure with accuracy) can be challenging. In many hotels (particularly lifestyle and boutique hotels) F&B can be an integral part of the guest experience, and a large source of revenue (and maybe profit) for the hotel. But unlike other, less visible departments, outsourcing F&B can be more challenging, yet also more rewarding.
In addition to increased profitability, there are other factors that can be favorable to outsourcing. For many properties, enhanced F&B can contribute to the overall identity of a hotel that the hotel by itself (and current management company) cannot. This identity can help to attract local customers who may never have considered eating or drinking at the hotel; and for hotel guests for whom great F&B may be a deciding factor in where to stay. In mixed-use projects with a residential component, this identity and presence may also help to position and ultimately sell real estate ("have room service prepared by x"). Another benefit of bringing a third-party into a hotel is that it can complement, or fill a void, with other existing outlets that may be self-operated. Examples may include a high-end celebrity chef driven restaurant to go along with a more traditional, three meal a day restaurant.
Out-sourcing this key area can have numerous risks as well, with the biggest risk being loss of control over operations (in the event of a full out-sourcing, such as a lease). Examples we have seen include reputational risk to the hotel due to poor service/reviews, health department issues, and financial issues with the partner. While an agreement may outline a process and remedies for the hotel owner, separation and execution of remedies, may be easier said than done. These risks need to be weighed against the possible benefits.
Before going down the path on an outsourcing, a hotel owner needs to do their homework. To assist with these assessments, the owner may need to bring in outside expertise. Project team members may include a real estate broker, who has knowledge of the local restaurant market and can provide a dose of reality to a situation (even though brokers sometimes see things through rose colored glasses); attorneys with experience in negotiating similar deals; and other F&B consultants or asset managers who can identify solutions to many operational issues.
The first step is an internal assessment (both financial and operational) of the proposed operation. The financial assessment should focus on the "before" (i.e. current performance) and "after" (i.e. with an outsourced opportunity). This exercise should encompass a full hotel profit and loss statement, and not just departmental profit. At one hotel that I recently reviewed, the P&L statement reflected a breakeven at the F&B departmental level, but upon further analysis (due primarily to undistributed costs that were tied to the restaurant), the "actual" loss was over $300,000/year. This exercise should be as detailed as possible, and may get to individual staffing levels to uncover the true operating profit or loss of outlets.
From an operations perspective, the owner should understand how the proposed operation fits into the overall mix of other outlets within the hotel (or in a mixed-use complex, other operations within the complex). Would the proposed operation compete, or complement other outlets? Is there a risk of sales erosion (perhaps by meal period)? From an operational perspective, an owner needs to understand how the proposed operation fits into the hotel. Additionally, the internal assessment needs to look at the facility (proposed space). Does the space have its own kitchen? How is it accessed by patrons? Generally speaking, a restaurant in a poor location, with limited visibility and foot traffic, may not be successful regardless of who is operating it!