Use these key considerations for analyzing the true profitability of a hotel’s food-and-beverage outlet.
Given rising labor costs and the risk of eroding marginal departmental profits of hotel outlets, owners should evaluate the highest and best use for every outlet space.
Hotel profit-and-loss statements typically do not calculate a true net income by outlet. Owners need to manually add applicable expenses to translate departmental profit into actual earnings before interest, taxes, depreciation and amortization when evaluating outlet performance.
Allocating F&B departmental profit
The first step is to determine the isolated costs of a specific food-and-beverage outlet. It should be the owner’s objective to accurately delineate all applicable departmental expenses among each outlet. Unfortunately, most management companies use an allocation methodology based on revenue to determine cost of sales and kitchen labor allocations by outlet, roomservice, and banquets and catering. This practice can significantly overstate or understate applicable expenses.
For example, assume a hotel has $700,000 of kitchen labor. The fine dining restaurant requires more kitchen labor than the banquet operation, but only produces 30% of the total hotel’s F&B revenue. In this scenario, $490,000 of $700,000 in total kitchen labor would be assigned to banquets. A review of the actual labor reports could reveal that only 30% (or $210,000) should be allocated to banquets. In this scenario, the other outlet’s profitability, excluding banquet, would be overstated by $280,000.
Once appropriate allocations are determined so that costs are bifurcated accurately among all F&B outlets, the owner should evaluate if any of the below expenses are applicable to a specific outlet.
Undistributed operating expenses and non‐operating costs:
- A&G – Any labor and operating expenses that support the subject outlet, such as accounting support, security, licenses and permits costs and others should be deducted as an expense.
- Credit card fees – At a minimum, the credit card percentage that applies to the entire hotel needs to be applied to each outlet as an expense.
- IT – All software costs that apply to each outlet should be reflected. It also should be determined if specific IT labor hours can be assigned to an outlet.
- S&M – Advertising and marketing costs specifically deployed against an outlet plus any sales manager that sells private dining functions for an outlet.
- R&M – Kitchen equipment maintenance, such as hood cleaning, and other maintenance agreements and part of the maintenance labor should be applied.
- Utilities – A portion of the utility expenses should be applied at a minimum based on square footage.
- Reserve for replacement – This should be added based on the required percentage as of total outlet revenues, typically at 4%.
- Insurance costs and real estate taxes – This expense should be allocated based on how assessments are determined (percentage of profit or square footage).
Variable fees, such as management fees and applicable franchise fees, as well as program fees or marketing fees, which are a percentage of total revenue, including F&B revenue, need to be deducted as an expense.
EBITDA by outlet
If the hotel is located in a market with significant local market capture potential, the EBITDA should be compared to a market rent per square foot that could be achieved by leasing the space out.
If leasing the space is not an option, additional analyses should be completed by meal period to determine the profit by meal period. Can operating hours be shortened or can the restaurant be closed during certain days, can the menu be changed to reduce the kitchen staff required, can the restaurant be repositioned or should the space be used by other hotel functions? There are various options that should be analyzed and discussed with the management companies. Ultimately, management companies should be held accountable to maximize the EBTIDA of every F&B outlet.
Nele Breitbart is a senior vice president at Hotel Asset Value Enhancement (hotelAVE), the largest hospitality asset management firm with a current asset management portfolio comprising over $5.5 billion, 22,000 rooms and over 30 different hotel operators. She has more than 14 years of hospitality industry experience and is responsible for overseeing a portfolio of hotels, including luxury and resort properties, identifying and monitoring strategic value enhancement opportunities, completing asset valuations and negotiating management and franchise agreements. Prior to joining hotelAVE in 2007, she worked with Hyatt Hotels and Resorts where her duties were generating proforma operating statements, analyzing hotel operating statements, organizing project costs, completing financial analysis utilizing different valuation techniques, and compiling market research. She also has international experience, having worked at Hyatt’s EAME (European‐African‐Middle Eastern) corporate office as a development analyst and served with Jones Lang LaSalle as an intern assisting in the valuation of four‐star and three‐star properties within Germany. Previous to that, she served as the Interim Manager in the Accounting and Banquet Sales Department of the Relexa Hotel Bellevue, a renowned four-star hotel in Hamburg, Germany, after successfully completing a three-year rotational apprenticeship program at the Relexa Hotel Bellevue. She is a graduate of Cornell University's School of Hotel Administration.
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