George Bernard Shaw aptly put it – “there is no sincerer love than the love of food.”
But love isn’t exactly one of the main ingredients in a restaurant’s success – breaking even and profitability are. How do hotels ensure revenues from the F&B side of the business by outsourcing food and beverage operations to a specialist service provider – a well known, award winning independent restaurant or chain?
Bringing in a renowned food and beverage specialist can revive revenues by attracting both in house guests as well as walk-ins. They also serve as a unique selling point in the marketing of the property. The benefits of outsourcing are numerous – it can enhance the quality of service and profitability while decreasing overall financial risk for the hotel in terms of operating costs, overheads and high employee turnover. The hotel can also leverage the existing customer base of the restaurant brand and capitalise on its brand recognition and loyalty. The restaurant owner receives the benefits of a strategic location, a captive customer base and can leverage the brand of the hotel.
The trend is quite well ensconced overseas, as food and beverage internationally is generally loss making and underperforming, viewed as a necessary evil, an unprofitable amenity which impacts overall guest experience if absent. However, when outsourced to a specialist, who runs it as an independent business entity, it is less of a risk for the hotel.
Ramnidhi Wasan, managing director, HVS Asset Management & Strategic Advisory says, “Globally, high real estate costs as well as increased manpower attrition have forced hotel operators, especially those operating budget and mid-market assets, to outsource their restaurant operations to more established players in the food and beverage space. This allows hotel operators to concentrate on accommodation operations that are lower in costs as compared to an equivalent food and beverage operation.”
In the luxury/ upper upscale, full service segment, there are plenty of successful examples. For example, The Mirage in Las Vegas by the MGM group boasts restaurants such as Japonais (renowned restaurateurs and partners Miae Lim, Rick Wahlstedt and Jeffrey Beers have joined forces with The Mirage to open a Japonais outpost in Las Vegas) as well as Stack (a Light Group brand, a US based hospitality company that manages and operates several food and beverage properties across various hotels in Las Vegas). Another example closer to home is the Marina Bay Sands in Singapore which boasts a Punjab Grill by Jiggs Kalra.
In India, food and beverage generally does well and contributes to the profit of the hotel. In most five-star hotels, food and beverage contributes around 50% to 60 % to the bottom line of the hotel.
“There is no ‘one size fits all’ in this business.” says Dilip Puri, managing director, India and regional vice president, Starwood Asia Pacific Hotels & Resorts. “We will start seeing this in economy and mid-scale hotels as a part of the business model since they work on high margins and operating food and beverage services will drag gross margins down. Most international operators are quite willing to look at this and encourage developers to go for the outsourced model, normally for one of the restaurants, providing all three meals. We also will see restaurants backed by celebrity Michelin star chefs make their entry into luxury hotels.”
Restaurants in five-stars, outsourced to speciality chefs, have started doing well over the last few years in India. The Taj was at the forefront with Wasabi by Morimoto, where Iron Chef Masaharu Morimoto created a legendary contemporary Japanese restaurant at the Taj Mahal Palace in Mumbai. Another example would be the partnership between Ginger hotels and Café Coffee Day.
Prabhat Pani, chief executive officer, Roots Corporation, says, “Ginger Hotels believes that outsourced partnerships in the food and beverage space work very well in the ‘no frills’ segment that we operate in. The partnership brings in the expertise and brand equity of a strong food and beverage operator into the hotel, which has a positive appeal not only for guests staying at the hotel but is also able to attract walk-ins for the food and beverage experience alone. Hence, the relationship is synergistic. Ginger Hotels has partnerships with multiple players in different geographies – some of the prominent national or regional players are Café Coffee Day, Sayaji, Khaaja Chowk and Foodies.”
Each market segment whether it is luxury, full service or economy or limited service, requires strategic and targetted approach prior to taking the outsourcing route. Homi Aibara, Partner, Mahajan & Aibara, says, “The hotel needs to ensure that there is a fitment with reference to the service provider’s brand, quality, consistency and fit with the hotel. Profitability and the correct pricing keeping the target demographic in mind should also be considered.”
Experts say that the food and beverage service provider chosen should have a well established brand and a demographic group that overlaps with the hotel’s brand and target audience. In terms of marketing efforts, marketing the restaurant should be a joint effort to ensure that the communication is in line with the brand standards of both the service provider as well as the hotel.
Manav Thadani, chairman, HVS South Asia, cautions, “I would not recommend going the outsourced route in the budget or mid market segments simply because of the quality factor. With these hotels generally providing only a single restaurant, any quality or service pitfalls will rub off on the entire property and dilute the guest experience. Outsourcing food and beverage operations may work in full-service budget hotels where there are more options for the guest. But the service provider’s quality standards need to be consistent and in line with the standards of the hotel.”
Control on quality is clearly the biggest risk impacting this model. Hotels run the risk of the endangering the security and health of their in-house guests, should there be substandard quality of food being served. While all these risks may be mitigated through careful selection of their outsourced agency and stringent audit of the outsourced operations, it would be difficult to control damage wrought by maligned reputations and perceived positioning of the outsourced outlet and the hotel. However, the risk of quality should be taken care of by partnering with a well-established brand where the assumption is that the brand would protect its value by ensuring that quality and high levels of service are maintained.
The hotel also needs to consider whether the restaurant operator is committed and in the partnership for the long run and gain a thorough understanding of the financial position of its partner. Will the restaurant operator be able to sustain operations during a downturn? Do they have sufficient financial reserves or will they back out of the deal leaving the hotel high and dry?
In terms of the financial structuring of the deal, some of the common deal structures are:
Lease agreement: the hotel provides the space for the restaurant in exchange for a rental as well as a percentage of gross profit. The agreement typically would have a performance termination clause as well as minimum base rent and profit sharing clauses built in. Here the hotel’s control over daily operations is limited. Both the hotel as well as the restaurant could contribute towards the capital costs of setting up the restaurant.
Joint venture: A separate financial entity is created by the hotel and the service provider. Profits are shared in a pre determined proportion and the operations are outsourced to the service provider. While the hotel provides the actual capital, the service provider brings their intellectual capital and expertise to the table.
Franchise: This allows the hotel to leverage the brand name, operating system and expertise of the chef/ restaurant and maintain a level of control over daily operations. The hotel pays the franchisor a royalty fee, generally a percentage of profits and in return the franchisor is responsible for training the hotel staff and ensuring that quality levels are consistent across the chain. The hotel would be responsible for capital costs and might incur additional expenditure adapting the franchisor’s design specifications to their interiors. This is not a traditional outsourcing model, as instead of outsourcing operations, the hotel is outsourcing the intellectual process- the concept, the brand name, the cuisine.
Celebrity chefs may merely franchise their names and their expertise; they may not operate an outsourced restaurant. Additionally, they may not be involved in the daily functioning of the restaurant. At the other end of the spectrum, chain-restaurants typically tend to take over the operation and are involved in all restaurant functions not limited to duties like hirin and procurement. This may be more profitable for hotel operators as compared to a franchise agreement with a celebrity chef.
In the true sense of the word, an outsourced restaurant would have minimal capital and operating expenditure from the asset owner – the hotel, who may just be drawing a monthly rental from the service provider or operator and (maybe) a share in the profits of the outsourced operations. Claas Elze, Principal at Apara Hotel Advisors, says, “Typically, the hotel would require the restaurant operator to invest in the capital expenditure. Each deal is subjective and a spectrum of deal types is possible. For example, the hotel can fit out the kitchen and the restaurant and charge a higher rental from the operator. Alternately, the operator may prefer to provide a portion of the capital expenditure in return for a longer lock in period or a termination payment.”
For any outsourcing relationship to be successful, both the hotel as well as the service provider should be aligned towards a common goal – increasing customer satisfaction. Expectations, control mechanisms and service quality standards need to be clearly defined. A restaurant is an integral part of the hotel’s product offering and the impact of outsourcing on customer perception and satisfaction should be taken into consideration. A successful partnership involves the coming together of two complementary brands, comparable levels of quality, a similar demographic as well as a demand for the restaurant concept, cuisine, ambience and experience that the restaurant offers.
By Amrita Chhabria
