| By Sally Robinson and Stacy Saef, London and Lawrence Kantor,
Los Angeles - Summer 1998
When Regal Hotel Group struck an alliance with a major restaurant company
this past summer, it cast light on new ways hotels compete for food and
beverage (F &B) revenues. With more than half of the revenues in Regal's
102 hotels coining from restaurants and bars, the F&B function has
played a significant role in the chain's profitability. U.K.- based Regal
moved to bolster this business by taking a £1 million equity position
in The Restaurant Partnership, an organisation that devises F&B solutions
and outsourcing to the hospitality and leisure industry. Even more than
opportunities for adding branded outlets, management cited the expertise
brought to Regal's F&B operations as the ventures most important benefit.
1
Hotel guests generally enjoy the convenience of F&B outlets, hut
when given the chance, they frequently choose a known brand off the premises,
leaving a hotel for nearby restaurant chains. In the process, they take
much-desired dining dollars with them. As customers become more brand -
-aware, competition for F&B business continues to grow in importance
for many hotels. From the hotel's perspective, a joint venture or outsourcing
arrangement can provide a combination of restaurant skills and brand strength,
often supported by national advertising. Hotels adding branded restaurants
have reported improved F&B volume, including room service sales, as
well as an attendant increase in occupancy and average rate. In a period
of hospitality industry consolidation, branded restaurants may become a
point of differentiation among hotel properties.
Restaurant companies, of course, also stand to gain from this flurry
of alliances. In today's market, many companies are being forced to look
outside traditional development options and to consider new types of locations.
Given these benefits, it is surprising there is not more outsourcing
of food and beverage in the hotel industry. In this article, we explore
outsourcing trends, as well as what goes into a successful partnership
between hotel and restaurateur.
Core Competencies and Outsourcing
During the early 1990s, businesses faced the difficult task of assessing
procedural strengths and weaknesses to trim fat and streamline processes.
Outsourcing non-critical activities allowed companies to extend their organisational
core competencies. The hospitality and leisure industry was no exception
to this trend. During the past few years, hotels have been called on to
assess their core competencies, while attempting to shed responsibility
for non-core activities.
Core competencies can be defined as those unique disciplines that confer
competitive advantage, motivating customers to buy a company's goods and
services over those of a competitor. As this decade comes to a close, businesses
are further dividing the non-core segment into two categories: "essential
non-core" and "non-essential non-core."
Those activities that are both non-core and non-essential are being shut
down. Processes that are essential, but "non-core," become prime candidates
for outsourcing. Providing quality rooms and guest services remains a hotel's
primary function. The F&B function, however, commands attention because
of its importance to guest satisfaction and brand management. Many hoteliers,
however, make the mistake of thinking that it takes the same competencies
to operate a restaurant as it does to run a hotel. In actual fact, the
restaurant business requires a different set of skills, including more
attention to detail, than rooms management. By reengineering F&B operations,
hotel management has the opportunity to redirect energies from the restaurant
business and focus efforts on enhancing hotel operations and profitability
and, potentially, shareholder value. This raises important questions for
management. When does it make financial and operational sense to outsource
F&B? If the decision is made to outsource, how can a partnership be
structured most successfully?
The Outsourcing Equation
Outsourcing partnerships typically bring together organisations with
diverse capabilities. Understanding what each side of the equation requires
to succeed is essential. This important guideline applies whether a hotel
owner is considering outsourcing all or part of its F&B operations
to a restaurant chain, or merely outsourcing its coffee shop to a local
restaurateur.
Historically, restaurant chains have been strict about the demographics
and economic indicators in a market before committing to a location. And
until recently, there was no shortage of suitable sites. Prime demographic
indicators include a mix of office space, upper-middle class residences,
and upscale apartments with higher-income professionals looking for an
element of fun. If a potential restaurant site was not viewed as a "home
run" location, a restaurateur would typically pass on a development opportunity.
Due to increased competition and a limited number of prime sites, restaurant
companies have found they must go further afield than in the past, breaking
traditional biases about what locations work.
Until recently, hotels have been reluctant to outsource their F&B
operations - or single restaurants. Traditionally, hotel management viewed
F&B operations as a low margin or unprofitable service required to
enhance guest satisfaction. As such, F&B profitability was always examined
with a mentality of "minimizing a loss." As a way to rationalise an unprofitable
track record, hotel management often convinced itself that there was insufficient
demand for profitable F&B operations. In addition, as hotels emerged
from the last recession and downturn in hotel profitability, emphasis was
placed on the renovation of guestrooms, lobbies and banquet space over
F&B outlets. Based on historical trends, renovation priority has consistently
been given to profit-generating guestrooms over unprofitable food and beverage
operations.
Additionally, hotels opting to create a new concept or introduce an
existing, branded concept may find start-up costs to he exorbitant. Estimated
costs of upgrading a food and beverage outlet to a chain's specified standards
range from $500,000 to $1.5 million, depending on the extent of renovation
and equipment purchases required. Of course, outsourcing operations to
a local restaurateur would likely cost far less. The hotel, however, would
not benefit from the brand recognition associated with a larger, more established
name in the marketplace. Lastly, hotel management companies earning fees
based on gross revenue may be reluctant to reduce the base on which their
management fee is calculated. This may prompt hotel owners and managers
to reassess their management position. Frequently the parties agree to
either renegotiate revenue-based fee percentages or include revenues earned
by third-party F&B operators in the management fee calculations.
Despite the issues associated with outsourcing of food and beverage
operations, there are compelling reasons for hotels to consider this option.
Brand strength and competitive positioning for the hotel property are among
the most important.
Branding and Repositioning
Why is it that guests often prefer to patronise known brands rather
than a hotel's stand-alone F&B outlet? While consumers are more brand
aware than ever before, research suggests there may even be a perceived
stigma associated with dining in a hotel restaurant. Integrating a branded
concept into a hotel is a way to minimize the stigma, bringing guests back
to the hotel outlets and reducing internal costs. Additionally, familiar
dining concepts seem to put travelers at ease. Customers who are away from
home and out of their element are comforted by the availability and consistency
that accompanies a known brand name product.
In 1995 Choice Hotels surveyed its full service hotels and learned that
most of its properties experienced a great deal of difficulty keeping restaurants
profitable. Reported food expenditures of 40 to 50 percent of their F&B
revenues, accompanied by labour costs of 45 to 50 percent, made it virtually
impossible to generate a profit, according to Barbara Shuster, Director
of Choice Hotels International's Choice Picks programme. To combat this
trend, select Choice hotels implemented a food court concept in the F&B
area, and were surprised to see food and labour costs on F&B revenues
drop to an average of 32 percent and 28 percent, respectively.
In addition to brand identity, most operators find that guests are not
only more willing to patronise high-street brands conveniently situated
within the hotel, but they are also willing to pay more for the privilege
of dining with a familiar concept. Increased willingness to dine coupled
with increased willingness to spend results in increased revenues.
Hotels introducing a branded restaurant into their property often experience
higher external traffic. Market exposure translates into increased outlet
revenue and enhanced customer perception of the F&B outlet brand name,
as well as enhanced customer perception of the hotel itself. Thus the net
result of rebranding and repositioning can be increased profit and enhanced
shareholder value.
Making it Work
Before taking the plunge into the world of outsourced or reengineered
F&B operations, hotel management must take several factors into consideration:
| Competition |
No outsourcing arrangement will work, unless
there is market demand. Competitive analysis should include restaurants
in neighboring hotels, as well as stand-alone restaurants in the area.
Profitability issues and pricing a new outlet also must be considered in
the market context. Many hotels find that the brand name restaurant buys
recognition in the customer 5 mind and creates a draw for business. The
partnered restaurant sets the hotel apart from other hotels in the area
and segment by providing a strong competitive and marketing advantage. |
| Marketing |
The hotelier and restaurateur must establish responsibility
for marketing of the new concept. Frequently hotels agree to advertise
the operator in the guestrooms, although the outlet typically absorbs the
cost of signage in the rooms and throughout the hotel. Additionally, the
restaurateur typically assumes responsibility and accountability for all
external advertising. |
| Guest expectations |
The goal of outsourcing F&B operations is to enhance
profitability by increasing
internal as well as external traffic, without losing
the current customer base. It is essential to consider guest reaction to
the change in F&B concept. If a negative reaction is anticipated, a
hotelier risks losing its customer base and thus future earning potential
to the competition. |
| Management styles |
It is important to look at both the local and corporate
management styles of both the hotelier and restaurateur, Incompatibility
of the two styles could result in a rocky relationship and tumultuous times.
In order to avoid this friction, some hotels have found it advantageous
to appoint the general manager of the restaurant to the hotel's executive
team, thereby creating a sense of responsibility and belonging and enhancing
relationships throughout the organisation. |
| Terms of the Contract |
The operational terms of the contract must be set out
in detail. Quality standards and monitoring mechanisms should be detailed
to ensure that the restaurant is operated at a standard that is acceptable
and complementary to that of the hotel. Additionally, hours of restaurant
operation, including room service, are critical specifications. As breakfast
is typically a money - generating activity, and frequently not one
that restaurant chain operators are accustomed to serving, many hoteliers
prefer to maintain responsibility for this meal. However, concessions affecting
profitability occasionally need to be made in order to solidify a working
relationship. |
A successful outsourcing relationship involves first and foremost trust
and cohesion between the two partners. Of course, operational terms must
be clearly detailed and make economic sense for both parties. While the
requirements of a restaurant chain may be more stringent and costly than
those of an independent restaurant operator, the basic tenets of a trusting
partnership, complementary levels of quality, compatible clientele and
a location with sufficient demand to justify a restaurant operation are
all necessary. Successful implementation of an F&B outsourcing partnership
can result in enhanced brand recognition and profitability for both the
hotelier and the restaurateur.
Structuring
an Outsourcing Partnership - The Options
| Leasing -
A hotel leases a room or section of the hotel, preferably with self-contained
back-of-the-house areas in exchange for a flat fee and/or a percentage
of sales. Statistics are not available for this type of transaction, as
leasing deals vary depending on the area of space being leased, the brand
being introduced into the market, the location of the hotel and agreements
that may have been established by a head office. The hotel benefits by
receiving a guaranteed rent, plus a revenue "top-up" each month. The landlord,
however, loses control of F&B operations. Management must agree to
let someone else run the show. |
| Franchising - This
option suits a hotel seeking to change a restaurant concept without investing
in an internal and potentially untested concept. The hotel buys an established
brand and system for a fee. The process begins with an upfront payment
- a buy-in to the right to operate a better known and more profitable concept.
Frequently, the franchisor requires the hotel to make an additional payment
for a capital investment, requiring a purchase of specified equipment.
Under the franchising terms, the hotel pays the franchisor a royalty fee,
usually based on a percentage of sales, for the privilege of using the
name and resources. Throughout the relationship, it is the franchisees
responsibility to ensure that hotel staff is adequately trained to assure
quality consistent with other branded sites. Marriott International was
one of the first major hotel chains to enter into F&B franchising arrangements,
with a 1989 franchising partnership with Pizza Hut. Marriott has since
introduced Pizza Hut outlets and in-room dining options at many of its
properties throughout the world. |
| Joint Venture
- This is a variant of franchising and contracting. The hotelier creates
a strategic alliance with a known, successful restaurateur. The two parties
create a separate financial company, which is appointed as the lessee of
the restaurant. The new organisation, the restaurant lessee., then outsources
the F&B operations to the restaurateur. Typically the hotel provides
the capital expenditures and the restaurateur brings intellectual property
and expertise. The two parties share the successes and the related profits.
For example, Marco Pierre White formed a joint venture with Granada hotels
valued at £2 million to provide F&B services at seven select
Forte hotels in the UK. The new organisation, MPW Criterion, will reengineer
the way select Granada hotel F&B outlets do business. Additionally,
before its merger with Starwood Lodging, ITT Corporation, owner of Sheraton
Hotels and Caesar's Casinos, formed a partnership with Planet Hollywood
International to develop, construct and manage Planet Hollywood - themed
casinos in Las Vegas and Atlantic City. The two parties were also entertaining
the idea of converting existing hotel outlets into Planet Hollywood restaurants. |
| Proprietary Brands
- Hotel chains can create a proprietary brand, introducing the concept
into all of its properties. This approach appeals to guests who enjoy consistency
throughout a hotel chain. However, it is difficult to gain wider customer
identity outside of the hotel properties. Marriott, for example, already
has its own concepts in place, including JW's Steakhouse, Allie's American
Grille and Champion's Bar. Likewise, Regal Hotels is growing its own brands,
including Hard Edged and Morrisey's Pub, in several of its hotels as well
as developing F&B solutions through its alliance with The Restaurant
Partnership. |
1. UK: Finance News- Regal Restaurant Deal, The Times, June 17, 1998
Sally Robinson is a Senior Consultant in Arthur Andersen's
Hospitality & Leisure Practice. She is based in London.
Stacy Saef is a Consultant in Arthur Andersen's Hospitality
& Leisure Practice. She is based in London.
Lawrence Kantor, based in Los Angeles, is a Senior
Manager in the firm's Hospitality & Leisure Practice
©Arthur Andersen |
