Rethinking Hotel Food and Beverage Strategies

The hotel industry is at a crossroads, facing the dual pressures of economic challenges and evolving guest expectations. Traditional approaches to hotel food and beverage management are no longer viable, as evidenced by the financial struggles of several high-profile hotel groups. To navigate these volatile, uncertain, complex, and ambiguous (VUCA) times, hotels must rethink their F&B strategies, embracing innovation and differentiation tailored to their unique brand identities and market positions. This approach should be built from the ground up, rather than relying on sticky plaster incremental change strategies as we are currently witnessing in F&B.

The Case for Change

Food and beverage operations within hotels have become increasingly challenging, with profitability steadily declining. This trend has turned F&B into a cost centre for many hotels, exacerbated by rising supply chain costs, increased utility expenses, and higher labour costs. The current market conditions are particularly challenging for F&B, with RevPAR (Revenue Per Available Room) rising by 17% in Europe compared to January 2020, while F&B revenue has only increased by 5%. More concerning is the inflation rate for restaurants and hotels in the UK, which was 6.3% in the year to June 2024 and while this offsets some of the cost increases that have impacted hotels and restaurants it has not been possible for F&B to pass on all increases to their guest and they have had to absorb some of the increases they have had in labour, cost sales and utilities. This has made it increasingly challenging for the F&B departments, restaurants and bars to maintain previous financial year's profit levels and in particular at the levels of 2018/ 2019 in profit flow through.

Many hotel groups look at food and beverage through the lens of rooms and continue to manage their food and beverage operations in much the same way they did decades ago, albeit with improved technology. If you were to walk into a hotel today, the core operations would closely resemble those of the 1980s, just visually enhanced with modern tech systems. Without a comprehensive reset and strategic overhaul that encompasses both corporate departments and hotel operations, hotels will struggle to build business resilience and achieve or maintain profitability in their F&B and maybe even for rooms in the future due to wage costs and availability of people to clean the rooms.

The common operational responses to achieve profitability at the hotel level, are typically cutting opening times, reducing staff, focusing more on beverages, shrinking menus, and slashing critical costs including in areas like pre-opening budgets and marketing, which has resulted in slower ramp-ups, diminished profits, and unsatisfactory guest experiences, particularly in F&B, and sadly ultimately disappointing guests and owners.

Sadly many leaders are in denial about the need for a fundamental reset in F&B operations, opting instead for incremental changes over bold, transformative strategies. With rising interest rates, increasing inflation, and growing debt, it is urgent for hotels to rethink their F&B operating models.

This includes understanding that high street operators often fail in the hotel environments due to differing operational needs and expectations in terms of commitment including hotels mindsets of rooms and cost management although for some bizarre reason many hotel operators think independent restaurants, brands and named chefs are a silver bullet. The fact is in isolation they are not, but perhaps with a clear well thought out modernised F&B strategic plan they could be part of the solution.

For me thinking about the examples below of potential mismanagement and in some cases serious financial distress among some hotel operators in the past twelve months, it's clear we have a a problem in our industry. It's particularly disheartening because often the individuals within these organisations are generally exceptional, and talented people. The core issue lies here with the financial structures and how they conflict with the current hotel financial operating model. Everything looks Rosie while ADRs are high, the fact is this will not be maintained, as guests and businesses are unable to sustain such levels of ADRs, and to me these rate are impacting Food and Beverage spends and hotel F&B profitability. The truth is we need to see more R&D and greater transformational change in hotels or suffer the consequences in a next 2 to 4 years.

Selina

• Once valued at $1.2 billion, Selina’s market value has plummeted to $25 million.
• Rapid expansion led to overextended resources, financial mismanagement, and an inability to meet loan obligations.

FTI Group

• The bankruptcy of its subsidiaries, Meeting Point Hotel management Holding GmbH and Meeting Point International GmbH, highlights high debt levels and inadequate financial restructuring.
• Despite some locations maintaining positive cash flow, overall financial health remained precarious and sadly they went into insolvency.
• FTI Group’s turnover increased by 10% to €4.1 billion in the past financial year, and it was expected to returned to a profit in the double-digit million range, unfortunately FTI is now in insolvency

Whitbread (Premier Inn)

Whitbread’s decision to cut 1,500 jobs and convert restaurants to hotel rooms reflects underlying issues in its F&B segment.

The company aims to expand hotel rooms at the expense of F&B operations. You could say this is a smart strategy, however I believe it was complacency that allowed many of the restaurants to become unsustainable financially speaking.

Whitbread’s balance sheet shows total shareholder equity of ￡3.5 billion and total debt of ￡994.9 million, with an interest coverage ratio of 5.23.

Soho House

In quarter one 2024, Soho House generated $263 million in revenue but still lost $46 million.

Net debt rose 4% to $664 million. The company ended March with $145 million in cash and cash equivalents.

The company has never made a profit in its 28-year history the company's net debt jumped by 20% to $638 million in 2023, further complicating its financial situation and burdening its efforts to achieve profitability

Stock Price Decline: Since its IPO in July 2021, Soho House’s stock price has dropped by about 60%, from $14 to around $5.20 as of early 2024.

Annual Loss: In 2023, Soho House reported a worse-than-expected loss of $118 million, marking a significant financial setback for the company.

It's difficult to understand that it's acceptable for a hotel group to not deliver a profit and still see its share price increase because its membership went up?

We have all seen many of the leading hotel groups have increased their debts, my question is what will happen when we hit uncertain times and ADR and occupancy demand falls? To me we need hotels to seriously start looking at simplifying room cleaning, innovating food and beverage so they can reply on less resources and deliver on point guest experiences profitably, with greater agility and adaptability or many hotels will close.

Local and Country Level Economic Pressures

The impact of the increase in the National Living Wage (NLW) on labour costs in 2024 has hit UK hotels particularly hard. The NLW increased by 9.8% in April 2024 for those aged 21 and over, extending the NLW to younger workers and likely leading to higher staff cost increases. New legislation around holiday entitlement and holiday pay calculations for part-time and casual staff has added to total labour costs. Additionally, the earning threshold for skilled worker visas will increase to ￡38,700 from April 2024, potentially shrinking the available talent pool and increasing competition for talented labour. While fair wages are essential, these increases underscore the need for a comprehensive reset of the hotel and F&B operating models.

One of the problems we should be working to solve is how can we simplify operations yet make hotel guests feel they have the chance to interact with staff on a more personalised level?

There are definite signs of rate fatigue which are already evident in the STR reports April 28 to May 4, 2024. During this period, luxury hotels in the Top 25 Markets experienced the largest weekly RevPAR decline, dropping by 4.7%, due to a 4.4% fall in ADR. Additionally, increasing supply in the chain scales may have contributed to ADR pressure. Group demand in Luxury and Upper Upscale hotels rebounded after a previous slowdown, but the year-over-year comparison remained nearly flat at -0.4%, group demand did not significantly rise according to STR.

It is also worth noting that in 16-22 June 2024 in the U.S. revenue per available room (RevPAR) decreased 2.4% year over year (YoY), which was entirely the result of an occupancy decline of 1.8 percentage points (ppts). Average daily rate (ADR) was basically flat at +0.1% YoY.

Should we be concerned? I think so.....

We have all read this week that McDonald's for the first time since Covid reported a decline in Global Revenue.

Its time to rethink how hotel F&B operates

Given the rising costs and changing market dynamics, it's crucial to rethink hotel food and beverage operations from an operating business model perspective. Here are some strategic approaches hotels could consider, including building brands from existing successful hotel restaurant concepts. While none of these strategies are a silver bullet on their own, a combination of them can reduce losses and optimise profit contribution to the hotel's overall profit and loss statement. Additionally, they can provide guests with greater choice and enhance the hotel's reputation. It could be a win win.

Outsourcing

Outsourcing F&B operations can help hotels manage costs and focus on their core brand competencies. By partnering with specialised F&B providers, hotels can benefit from their expertise, economies of scale, and established supply chains. This model can reduce labour costs and operational complexities, allowing hotels to offer diverse and high-quality dining options without directly managing the F&B operations themselves. Perhaps a good business partner could be compass group, Sodexo or smaller local catering companies.

Leased Spaces

Leasing restaurant spaces to established third-party operators does happen is some hotels. To me this model should be used where hotels typically lose money in F&B. Taking this approach can provide a steady rental income while ensuring that the F&B offering remains attractive and competitive. This model allows hotels to host renowned restaurant brands, which can enhance the hotel's reputation and draw in guests who are specifically interested in dining at independent restaurants. The lessee handles all aspects of the F&B operations, including the team relieving the hotel of associated risks and expenses.

Joint Ventures

This is my preferred approach entering into joint ventures with F&B brands that can align both the hotels and the restaurant brands interests, where both parties have skin in the game in relation to profitability and quality. This model involves shared investment and profits, fostering a collaborative environment where both the hotel and the F&B brand partner working towards common goals. Joint ventures can bring innovation and fresh concepts to hotel dining, potentially attracting more guests and increasing revenue.

Franchising

Franchising using well-known restaurant and bar brands within hotel premises can leverage the brand recognition and loyal customer base of the restaurant brand. This approach can boost foot traffic and create a unique selling point for the hotel having a positive impact on the rate. The franchisor typically provides support in terms of training, marketing, and operations, ensuring a consistent quality of service that aligns with the restaurant or bars brand standards.

Building Brands from Successful Restaurant Concepts

Hotels can capitalise on their successful restaurant concepts by developing these into standalone brands. This approach would involve the following:

Brand Expansion: Taking popular existing in-house restaurant concepts and expanding them into other hotel locations. This can create additional revenue streams for the hotel group and increase brand equity and visibility of successful concepts that work with the brands existing hotels guests.

Merchandising: Selling branded products, such as signature sauces, snacks, or meal kits, both within the hotel and through online platforms can help bring in additional revenue streams.

Culinary Events: Hosting pop-up events of their in house brand, including cooking classes, or culinary tours centered around the hotel’s successful restaurant brand can enhance guest experience and generate additional income especially if done outside of the hotel environment for example a pop up in an empty high street restaurant space.

Strategic Partnerships: Forming alliances with other businesses to co-brand or co-market the restaurant can broaden the restaurant or bars reach and appeal to new guests that ordinarily would not be a customer of the hotel brand.

If hotels move beyond traditional approaches to managing their food and beverage operations, including financial operating models, they should categorise their properties into distinct operating models, each with a tailored F&B strategy, cost structure, and blueprint. Again some simple approaches could be as below, working with one of the models mentioned above?

Destination-Worthy Dining: Perhaps Luxury, Lifestyle or boutique hotels should focus on creating F&B offerings that are destinations in themselves. This involves investing in high-quality, unique dining experiences that can attract both guests and local patrons, enhancing the hotel’s ADR and relevance in its location and will generate a demand, this could be as a Joint venture or franchise setup for example.

Self-Serve and Grab-and-Go Options: Contact light hotels or those targeting budget-conscious travellers should provide convenient and quick dining options. Implementing grab-and-go venues can meet the needs of guests looking for fast, affordable meals without sacrificing quality. Collaborations with local independent operators or creating brands that work both in the hotel and on the high street could be viable options.

In house focused:

These concepts are designed purely to meet the needs of hotel guests, with no desire for attracting external guests, simply focused on providing great comfort food of a good quality limited menu choice yet able to be personalised based on the guests preferences and align perfectly with the hotel brand desired guest experience.

Dispelling Myths About High Street Operators

There is a prevailing myth that high street restaurant brands can seamlessly transition into hotel environments. However, experience shows that this is not always the case. High street operators often charge crazy up front fees and Minimum income guarantees leaving the financial risks with he owners, often they struggle within the hotel environment due to:

Different Marketing Approaches: Hotels and high street restaurants attract different customer bases and require distinct marketing strategies. The need for hotels to maintain brand protection often means they must approve everything first, making the process frustrating and slow for smaller independent operators who thrive on spontaneity. This suggests that hotels might benefit from allowing their food and beverage teams more autonomy, enabling them to be more agile and responsive to the success of the venue too :).

Cost Structures & Finances : The financial dynamics of running a restaurant in a hotel does differ significantly from standalone operations, affecting how profitability is determined in a hotel compared to an independent operator? Many people believe hotel food and beverage profit and loss statements are also obscured by legacy accounting systems and have cross charges hidden with costs etc in the P&L, and yes this is true in some cases, nevertheless for hotels to attract and have a successful F&B collaborations they would need to address P&L transparency to avoid these issues.

Employee Integration: Employees need to align with both the hotel and the restaurant brand, creating challenges in maintaining a cohesive team and the guest service experience. Currently many people in food and beverage feel they are second to the rooms, rather than an equal, I would be interested to hear your thoughts on this point?

Operational Needs: The operational priorities of a hotel differ from those of a high street restaurant, necessitating a different approach and results expectation, perhaps there is somewhere in the middle, which I think there is nevertheless egos would need to be left out of the negotiating table with both sides focused not he success of the food and beverage operations. Sounds easy in reality it is challenging.

Leveraging Internal Strengths

This is the real solution for many hotel groups as it lies in capturing and optimising the hotel groups own existing concepts that are working and then remapping these existing concept identities for each location and brand based on known concept success parameters. Software solutions to help capture concepts, with overlayed performance data is possible. Feel free to discuss this with me as we have developed a system that does this.

In Summary

Hotels must stop relying on outdated F&B models and embrace a diversified, brand-specific approach. By differentiating their F&B offerings, leveraging successful internal concepts, and carefully evaluating external partnerships, hotels can enhance guest experiences, improve operational efficiencies, and ultimately boost profitability. The future of hotel F&B lies in innovation, strategic thinking, and a willingness to break away from the status quo. By having the right insights from across the business, hotels can improve strategic financial planning, drive profitability, and effectively manage capital and staff resources. This approach will help mitigate revenue leakage, ease complex tasks, and ensure effective staff management based on demand, supply, and market fluctuations.

With the right insights and leadership, hotel F&B can reclaim its profit margins and meet the challenges of changing consumer preferences head-on.

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