The next time hotel owners and operators enter their hotel, instead of making a right towards the front desk, they may want to head to the left towards the restaurant, lounge, and banquet rooms.  What they will find on the other side of the lobby is the fastest growing source of revenues and profits within their property.

No one can deny that effective yield management, and the resulting growth in rooms division profits, has certainly had the greatest dollar impact on hotel profits during the fabulous run-up in the 1990s.  However, when analyzing such measurements as improvement in profit margin and growth in revenues, the recent nod goes to the food and beverage department over the rooms department.

Profit Improvement Not Marginal

During the 1990s, food and beverage department profits grew at an 8.3 percent compound annual pace.  This compares to a 5.1 percent growth rate for full-service rooms department profits during the same period.  Please note that departmental profits come before deducting overhead expenses such as marketing, maintenance, and utilities.  In addition, beverage in hotel vernacular refers to the sale of alcoholic beverages.

Prior to the 1970s, most hotels considered food and beverage as a necessary evil in order to attract guests to rent rooms.  The exceptions were some urban properties that truly attempted to draw local patrons, and resorts that positioned their restaurants as an integral part of the guest experience.  For those hotels not emphasizing food and beverage, their main goals were to keep the kitchen clean and not lose too much money.

As limited-service hotel development began to flourish in the 1970s, hoteliers realized that you can still attract leisure and commercial travelers without having an on-site, three meal a day restaurant.  During the 1980 and 1990s, the majority of new hotels constructed did not contain food and beverage facilities.  Concurrently, the owners of those hotels that remained in the full-service segment dictated that their properties could no longer afford to operate a department that lost money, and/or did not serve any strategic purpose.

The result has been a polarization regarding food and beverage service within the industry.  On the one hand you have lodging facilities that have either eliminated their restaurants and lounges, limited the hours of operation, or solely offer complimentary food and beverage service.  Alternatively, hotels that continue to offer full food and beverage services have aggressively operated their departments in order to make money and complement the market position of the property.  Methods to accomplish these goals have included the leasing of restaurants and lounges to outside operators, bringing in celebrity chefs, or heavy investment in menu development and décor.

Over The Lips And Into The Register

Each year from 1990 through 1997, the annual growth rate for rooms revenue at full-service hotels surpassed the same measurement for food and beverage.  However, in 1998, this trend reversed.  In 1998, a drop in occupancy, combined with a slow down in the growth of room rates, resulted in a 5.2 percent growth in rooms REVPAR.  During the same year, food and beverage revenues grew 7.5 percent, the third consecutive year of growth in food and beverage revenue in excess of 6.0 percent.

Given the continued softness in occupancy gains and rate growth, we are projecting food and beverage revenues to grow greater than rooms revenue for the years 1999 and 2000.  Our estimates of food and beverage revenue growth for these two years are 6.2 percent and 5.2 percent respectively.

On The Plate Or In The Glass

Historically, the growth in beverage revenues has lagged behind the growth in food revenues.  From 1980 through 1999, food sales grew at a compound annual rate of 4.1 percent.  This compares to an average compound annual growth rate of 1.1 percent for beverage sales during the same period.

During the eighties and nineties, food revenues grew each and every year.  Beverage revenue, however, posted annual declines in sales volume during eight of those years.  This fluctuation shows the sensitivity of alcoholic beverages sales to social patterns, as well as internal marketing efforts.

Changes in social behavior might also explain the recent surge in food and beverage revenues.  Each year during the 1990s, food revenues continued to be the main driver of the growth in total F&B department revenues.  However, starting in 1996, the spread between food revenue growth and beverage revenue growth began to narrow.  Finally, in 1998, the 9.1 percent growth in beverage revenues surpassed the 7.2 percent growth in food sales.  It is no surprise that this rise in hotel beverage sales has occurred simultaneous with the trendy return of classic cocktails and cigar bars.

The rental of guest rooms will continue to have the greatest impact on bottom line dollars.  However, management has proven that given the proper level of attention and support, the food and beverage department of a hotel can be an attractive component of the product, as well as a profit center unto itself.

Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.