Unlocking hotel value on the F&B frontier
 
Unlocking hotel value on the F&B frontier
09 OCTOBER 2018 7:41 AM

Most hotels leave a considerable amount of money on the table by ineffectively managing their food-and-beverage departments, which adversely affects department profitability and—as hotels are typically valued based on cash flows—hotel valuations.

Hotels are typically valued on cash flows. Therefore, increasing hotel profitability increases hotel value.

Yet, whenever we conduct operations reviews for hotel food-and-beverage departments, we find a considerable amount of money being left on the table. Unlike past years—when hotel food and beverage was considered an amenity—departments are now profitable; however, this profitability is often a result of hotels not allocating fixed expenses to the department or a significant amount of meeting space/number of banquets, since catering is more profitable than restaurants.

Most hotel F&B departments could be operated better and many basic management practices are often not followed.

In many cases, recipes are not expensed accurately. The chef likely knows the cost of the protein in a dish; however, in many cases, written recipes do not exist and, when they do, have not been appropriately expensed or the costs have not been updated in a long time. This not only results in an inconsistent product, but also makes it difficult to set prices properly. I worked with one restaurant recently that had several items on the menu priced below the cost to prepare. Better to have a staff member at the door of the restaurant handing out a $5 bill and asking guests to dine elsewhere.

Hotel F&B departments often budget a certain food cost percentage and manage to the percentage without knowing what that percentage should be. Good operators calculate a theoretical cost of sales each period based on recipe costs and itemized sales. The theoretical cost of sales should be compared to the actual cost of sales each period. Theoretical cost of sales should be up to 1.5 percentage points greater than actual cost of sales allowing for some waste, spoilage, etc. However, greater variances indicate an operating issue that must be corrected. In my experience, hotels never know the theoretical food cost, which is impossible to calculate if recipes aren’t accurately expensed.

Hotels typically manage to budgeted cost-of-sales percentages. When budgeted cost percentages are not being met, the answer is usually raise prices. Quickly, the prices become so high that they affect the value proposition and guests choose dining options outside of the hotel, delivery services like Uber Eats replace roomservice, etc. It should be noted that breakfast menus are typically the target for price increases as this is the meal period with the greatest capture of hotel guests. Many hoteliers end up wondering why the breakfast capture rate is eroding while area restaurants with a better value proposition welcome the breakfast demand.

Most hotel F&B departments do not practice menu engineering. The prime real estate for any F&B operation—including banquets—is the menu or menu board. The menu should be designed to encourage guests to order items that generate the greatest margin. Many menu engineering strategies exist to accomplish this goal often without increasing the average check. The first time a restaurant or banquet operation uses menu engineering, margins typically increase by at least 3% and we have seen margins increase by up to 20%. Menu engineering should be practiced each time the menu is updated.

While conducting operations reviews of hotel F&B departments, we have observed a lack of basic control practices, like food cost allocations based on sales instead of by outlet. At one hotel, we observed several different outlets taking food products from a delivery before it had been checked by a receiver for completeness, consistency with the invoice and product specifications. At another hotel, several cases of wine and alcohol were being stored just inside the employee entrance waiting for a few days to be officially received so they wouldn’t have to be counted as part of the monthly inventory.

Sometimes, prices aren’t always updated when extending inventory. At one hotel, the extended inventory was provided to the chef who then added “work in process inventory,” which magically brought the food cost in line with the budget. Elsewhere, we’ve seen storage areas not secured with many employees having access. It often seems that the false profitability stemming from not allocating occupancy, maintenance or utility expenses to the F&B department results in department management justifying implementing basic control procedures.

Is your F&B department maximizing its profitability? Ask your chef and/or F&B manager to see the fully expensed recipes for all menu items. If they can’t provide this, they likely are not pricing items properly, are not comparing actual to theoretical cost of sales and are not practicing menu engineering, which means department profitability is not maximized and, by extension, hotel value is compromised. It might be time to buy your department management a first-year hospitality textbook on F&B cost control!

Jeff Dover is President of fsSTRATEGY, a consulting firm specializing in strategic advisory services for the hospitality industry, with an emphasis on food and beverage. Jeff is based in Toronto, Canada and can be reached at (416) 229-2290 extension 2 or jdover@fsstrategy.com.

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