Branding and Repositioning Food & Beverage
the case for outsourcing partnerships
The Outsourcing Equation
Branding and Repositioning
Structuring an Outsourcing Partnership - The Options
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 

Also See
Year 2000: A Business Issue (Y2K) / Arthur Andersen / Summer 1998
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