Implications of F&B department on hotel value

Most hotel managers focus on the rooms department instead of the F&B department. The logic behind this is sound: the rooms department generates greater revenue and margins and, by extension, has a greater impact on a hotel’s profitability.

But in my experience, many hotels leave a lot of money on the table in the F&B department. There are many reasons for this.

The F&B department is profitable, especially in hotels with significant meeting spaces that can generate catering revenue. When compared to the commercial restaurant sector, profitability is relatively significant. It should be noted, however, that the uniform system of accounts for hotels is such that comparing F&B departments to commercial operations can be misleading.

Occupancy expenses, the third-greatest expense in a traditional food service operation, are typically not allocated in hotels. Similarly, not all repairs, maintenance, utilities, pest control, and other expenses are allocated. Simply put, the profitability of the F&B department looks good, which can result in management not focusing on whether it is maximized.

Often, food and beverage cost controls are limited or non-existent. Controls should be in place for procurement, receiving, storage and inventory, production, etc. Many hotels do not have such cost controls in place. Others allocate food and beverage costs to individual outlets and catering based on revenues, which can hide less profitable operations. If your F&B manager and chef cannot tell you what cost controls are in place for all the areas listed above, in all likelihood, they don’t exist, and their absence is adversely impacting department profitability.

I recommend owners or general managers ask their chefs and F&B managers the difference between the actual cost of sales and the theoretical cost of sales in each outlet during each period. The theoretical cost of sales is calculated by multiplying itemized sales by the costed recipes for each menu item. The actual cost of sales (beginning inventory plus purchases less ending inventory) should be about one to one-and-a-half points greater than the actual cost of sales, reflecting normal waste. If the theoretical cost of sales is greater (or even lesser), your F&B department has a control issue to investigate.

As a side note, one of my pet peeves is F&B managers who know how to control the cost of sales but do not. Changing how things are done is always challenging, especially when a hotel has long-term employees who have outlasted many managers and chefs. However, it adversely impacts profitability. Controlling the cost of sales in many of my hotel clients consists only of raising menu prices and then wondering why food and beverage capture rates are declining.

Labor cost controls are another area often overlooked in hotel F&B departments. If your operation has a schedule that is the same every week, labor costs are not being controlled. Scheduling should consider occupancy projections, hotel activity (if there is a group in the hotel on their own for lunch), events in the area, seasonality, etc. 

Labor should be scheduled based on forecasted outlet covers. Collective agreements and labor regulations should not be an excuse to avoid controlling labor costs; they must be followed, but there is always room to schedule according to demand. I am not advocating for minimizing labor costs to the detriment of service levels; schedule accordingly and not “because it is Monday.” F&B managers and chefs should review labor productivity daily by outlet, including catering (revenue per productive labor hour), and use this information as a management tool.

In my experience, most hotel F&B departments can improve their profitability significantly without raising menu prices.

The major departmental expenses are the cost of sales and labor. Controlling these expenses is as important as providing quality food, beverage and service. And by improving the F&B department’s profitability, you increase the value of the hotel.

Case study

According to CBRE’s 2023 Trends in the Hotel Industry report, the typical full-service hotel is 237 rooms and generates food and beverage revenues of $3,402,846 ($14,358 per available room) and department profit of $887,091. Hotels are typically valued on cash flows by applying a capitalization rate.

Capitalization rates vary from market to market and by asset, but for our case study, let’s assume a capitalization rate of 6.5%. The table below shows the implications of improvements in the F&B department profitability on hotel value.

This case study shows that improvements in F&B department profitability can significantly impact hotel value — $136,476 for every 1% improvement in profitability. If your chef and F&B manager are not practicing food and beverage or labor cost controls, it would be reasonable to expect 5% or greater profitability improvements when such controls are implemented. This case study does not consider the implications of increasing revenue.

Conclusion

The key takeaways from this case study to ensure that F&B department profitability is maximized. 

Ask your chef and F&B department manager what procurement, receiving, inventory, issuing, production, revenue and labor controls are in place. If they can’t answer, give them a first-year food and beverage management textbook from a local hospitality school and tell them to get to work. If you are told controls are in place, ask to see the forms and reports they use to track controls and ask where the opportunities for improvement exist.

Ask them the difference between the actual and theoretical cost of sales in the last period for each outlet. If they can’t tell you, ask them to calculate it. If it takes them a long time to get back to you, they likely don’t have costed recipes, which is a significant concern that begs the question of how menu prices were set. If the actual cost of sales is not 1% to 1.5% greater than the theoretical cost, ask them what actions they are taking to address this.

Ask what labor efficiency was last week and whether action is required for improvement.

Improving food and beverage controls will have a positive impact on the value of your hotel. 

Jeff Dover is the principal and managing director of fsstrategy Inc., a management consulting firm focused on the food and beverage industry

The views and opinions expressed in this column do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.