An Analysis of the Relationship Between and F&B Operation

This article was found at:
http://www.hotel-online.com/Neo/Trends/Payne/Articles/An_Analysis.htm
and was written by:
Kirby D. Payne, CHA, is president of The American Hospitality Management Company which provides consulting and management assistance to hotels in the U.S.

For additional information, contact:

Kirby D. Payne at the firm

American Hospitality Management Company
1500 South Highway 100, #375, Minneapolis, MN 55416
Phone: 763-591-7640 Fax: 763-591-1593

email: kpayne@american-hospitality.com


It is not uncommon to hear, particularly among hotel owners and operators relatively new to the industry, that Food and Beverage (F&B) cannot make nay money and should be leased out if such facilities exist in a particular hotel. This, of course, begs a number of questions: How could a tenant make money of a landlord cannot, especially after paying rent? Why would a hotel owner with a major investment want an important interrelated business with a different business goals and possibly incompatible clientele in the building with minimal control over that other business. And, finally, the big question, What is profit?

While everyone will claim that F&B facilities are included in hotels to be profitable, I believe that should be secondary. The primary reason for an F&B facility is to enhance the potential revenues of the Rooms Department if the Hotel. This is particularly obvious with convention and resort hotels.

A good F&B operation, whether operated or leased, will allow more flexibility in marketing. This flexibility will help sell rooms during slow periods during the week or year. The presence of an F&B operation will allow the hotel to appeal to more market segments, thus giving the hotel a broader and more secure income base. An F&B operation should first be designed and concepted to maximize room revenue, secondly to do that profitably and third to appeal to non-hotel patrons,. The owner then needs to follow up with the same F&B marketing and management effort an lessee would invest, thus insuring success.

Examples from the Field

Recently we undertook an assignment to conduct an operational overview of what is physically a mid-priced full service hotel. It is generally operated a limited service, mid-priced hotel with a leased F&B operation. The hotel is affiliated with a well-known national brand, is in a major metropolitan area and is generally very competently managed. What follows are excerpts from our report regarding the leased F&B operation, its problems, their impact on the hotel, and some changes which should be implemented to minimize the detriment to the hotel:

Our expenses in the restaurants, recently leased to new operator, have been mediocre at best. There was one gentlemen walking around in his jacket on several occasions, believed to be either the manager or the lessee. None of the employees wear uniforms and this creates the impression of less-than-professional operation. On one occasion we to charge the bill to our room. There was no attempt to verify that we registered or that we had credit available and could charge the restaurant. For instance, if we were cash paying guests, with only a minimal deposit for telephone charges, we should not be allowed to charge in the restaurant because the hotel has no ability to capture this charge. The restaurant should be given a list of guests with credit established to charge in the restaurant along with their room numbers. This list could be produced by the Night Auditor and updated later in the day for afternoon check-ins. On one occasion, we observed to the server that the restaurant was extremely cold. She informed us that the restaurant was on the same system as the hotel and they could not control it. Of course, the lobby was not cold, so we are not sure of the validity of her statement. Regardless, it was uncomfortable in the restaurant. On two separate occasions we observed kitchen staff from the restaurant on the pay phone near the parking lot entrance to the hotel. They were wearing dirty kitchen uniforms, were loud and obviously on lengthy calls. They clearly planted themselves there because they had beverages and were sitting down. This should not be allowed. Brief calls (no longer than three minutes) perhaps can be permitted as long as they are quiet and the employee is neat in appearance.

Some Possible Solutions

Our recommendations for the case were a follows:

The guest and restaurant patrons have the understandable impression that the restaurant is part of the hotel. They should to need to know otherwise. Therefore, the hotel's same standards of behavior, operation, and appearance need to be required of the lessee. It is crucial that the restaurant operation not detract from the rest of the hotel. At present, this is unfortunately the case. Uniforms with footwear and accessory standards, name tags, well groomed appearance, professionally done with tasteful supplementary signage and appropriate graphics must all be present. Employees must be held to behavior standards which contribute to the hotels image, not detract from it. The tenants lease includes the right to use the landlord's liquor license. In this case, it would be the liquor license owner and fee simple owner who would be sued in dram shop case. With this is mind, we strongly recommend that the restaurant owner be required to conduct server training for all current and d future employees on a regular basis and provide the landlord with documentation of that training. The documentation should include the course name, content, instructor and the signature of every employee in attendance. The lease for the restaurant space is predicated on the tenant's revenues. In order to maximize those revenues and therefore the income of the hotel, there should be some joint marketing efforts. These might include:

Distributing restaurant discount coupons by the front desk staff at check-in with management's compliments
Tenant cards in the guest rooms promoting the restaurant and its hours, providing room service along with fast items such as pizza.
Packaging the hotel with meals for promotions during slow times.
Penetrating commercial business by including a hot cooked to order breakfast in the room rate.
Having professionally done menus for food and beverage service to the meeting rooms.
Include a restaurant representative to executive committee meetings.
An Analysis of F&B and Hotels
In summary, we reported, the restaurant is not just an appendage to lease out and collect minimal rent from; it must be developed as an asset that contributes to the overall profitability of the enterprise. Leasing is a common answer among limited service operators, however the full benefit of the presence of the facility will never be realized under any scenario, if the two separate businesses are not marketed together at a positive standard.

This excerpt highlights some common operational problems experienced by hotels with leased F&B operations.

Earlier I brought up the issue of how could a tenant make money if the landlord cannot, especially after having to pay rent? I don't believe that the tenant has as much revenue potential as the owner simply because he/she doesn't have any way to get the full potential out of the hotel's marketing staff. How would you commission the hotel's sales staff for the banquet business they book? Does it have to be rooms business associated with it, and whose money actually pays the commission?

The marketing harmony between the two independent businesses will never be there to the same level there would be when these things are not major issues.

On the expense side the efficiencies of scale are missing. Before the tenant pays rent s/he must pay all the same expenses the owner would have to pay, regardless of how they might be allocated on the hotel's financial statement, plus separate accounting, insurance, etc. Many items would cost a lot more because of the lesser purchasing power. Credit card commissions are an example. Labor efficiencies are also lost. Why should the hotel's staff clean up a room service spill in the hall or remove trays from a room? If the F&B lease includes the equipment and furniture and possibly its maintenance what incentive does the lessee have to be careful and who buys replacement items and who owns them?

At the bottom line of any profit the tenant makes after lease payments is profit the hotel owner has forgone!

The most common conflict between the two businesses lies in the area of banquet booking. The leased F&B operator only cares about F&B revenues. S/he will book anything any amount of time in the future to maximize those revenues. The hotel's management normally would hold back on booking banquets without major rooms business associated with it in more to have that space available as an enticement to various forms of guest rooms business with meeting and banquet room needs. Clearly, there must be cutoffs, depending on business patterns, when the space is released for banquet business but never to the detriment of a lucrative group business. How does the hotel insure that F&B services group room business in a manner that enhances repeat business?

If the F&B tenant's targeted clientele, which s/he may need to survive, is incompatible with the hotel's clientele the hotel will suffer. Imagine a family and business oriented highway location in the suburbs with limited parking. What would happen if the F&B tenant targeted high-school students who tied up the restaurant tables in the early evening after extra-curriculars and sports practice? What if the operator heavily promoted an early bird al-you-can-eat buffet on Friday and Saturday nights that tied up all the parking before check-ins? Who is entitled to hotel's physical resources an one this is agreed to, how is it enforced? Why would an F&B tenant accept those potential restrictions on revenues?

What is profit?

To a hotel owner it is cash-on-cash return. It doesn't make any difference what department is making money. That information is simply used as a tool to analyze ways to improve cash flow. A F&B operation managed internally might have a combined departmental profit, using the Uniform System of Accounts (for hotels) of 10% - 35% of F&B revenues. Some expenses-accounting, marketing and maintenance for instance-are all allocated to other departments thus eroding the departmental margin. However, the reverse is also true, there is no accurate way to measure how much additional rooms revenue, the crucial element in a hotel's financial success, a well-managed F&B operation contributed or, at worst, did not detract from!

The Bottom Line

I recommend that hotel owners do not forgo the profit the tenant would make or give up even partial control of the hotel's potential. Manage the entire hotel to maximize the cash flow.