Let them eat cake

by Gregory J. Miller, PKF Consulting

Over the past decade, the food and beverage department at hotels has transitioned significantly. Hotels with restaurants continue to improve their F&B operations, from expanding menus to creating unique offerings for guests. On the other end of the spectrum, hotels without restaurants primarily focus on maximizing profit in the rooms department. However, it is not surprising that one of the fastest-growing segments of hotels under development is “select-service;” hotels that fall in the middle between full-service and limited-service operations, with one two-to three-meal-a-day restaurant. Hotel companies are aware that food and beverage operations are not just revenue generators, but increasingly important to the bottom line.

It is well established that for hotels with restaurants, the F&B department is generally the second-largest operating department in the property, behind rooms. In a recent analysis of full-service hotels, PKF Consulting determined that F&B department profit growth exceeded overall profit growth. The percentage growth in F&B profit grew almost twice as fast as total net operating income (NOI) growth from 1994 to 2004. As the department is large, any significant changes in revenues and/or expenses will impact the bottom line.

PKF Consulting analyzed food and beverage department revenues and expenses of 214 full-service hotels from the period 1994 through 2004. These same-store data came from PKF’s Trends in the Hotel Industry database. During the study period, the number of occupied rooms in 2004 was very similar to that of 1994. With similar number of rooms occupied in the sample hotels in 2004 as in 1994, the change in department revenues and expenses was analyzed without needing to account for large variances in occupancy.

Over the past decade, many trends have surfaced within the F&B department, both in terms of revenues and expenses. The following analysis discusses the change in contribution of F&B revenues to total revenue, trends in labor and cost of goods sold within the F&B department, and what has caused the strong growth in profitability in F&B.

Bring on the next course

Between 1994 and 2004, our sample of 214 hotels indicated that food revenue per available room rose at a 3.6% compound annual growth rate (“CAGR”) while beverage revenue grew at a 2.2% CAGR. The sample showed that food revenues provided 23.7% of total revenues in 1994. In 2004, food revenues grew to represent 25.6% of total revenues. The 10-year trend of food revenue clearly indicates that food revenue is increasingly significant in its contribution to total revenues. Conversely, beverage revenues have moderated from 5.3% to 6.4% of total revenue in the past 10 years, and averaging 6.0% of total revenue for the past three years.

PFK chart

There are a number of reasons that help explain why food revenues are growing faster than beverage revenues at hotels. First, F&B outlets have “upgraded” in recent years. There has been increased emphasis in the quality of food offerings. In addition, restaurants are less chain-mandated and increasingly attentive to the local restaurant market and the dining interests of the local community. As hotels have improved their F&B outlets, local residents have taken notice. Increasingly, hotel restaurants and bars have become popular hangouts among hotel guests and locals. Improved restaurant outlets and better quality dishes also justify charging more for food items, resulting in greater food revenues.

Importantly, Americans’ drinking patterns have changed in recent years. According to the National Institutes of Health, ethanol (alcohol) consumption has declined per capita over the past 25 years. While we have not conducted a study on alcohol consumption at hotels, national trends may indicate that hotel guests are also drinking less, which directly impacts beverage revenues.

Trends of F&B Department Expenses

Changes in F&B departmental expenses over the past decade has also indicated trends. Labor costs and cost of goods sold combine for approximately 80% to 90% of total F&B expenses. As such, we analyzed the trends in departmental expenses of the aforementioned line items.

Beverage cost of goods per available room (PAR) had a 1.8% CAGR increase from 1994 to 2004. Over the same period, the food cost of goods PAR had a scant 1.1% CAGR increase. Labor costs (payroll and benefits) have grown much faster for beverage service than for food service over the past decade. The CAGR growth rate for food labor PAR was 1.9% since 1994; the CAGR growth rate for beverage labor PAR was 5.0%. In summary, beverage expenses grew at faster rates than food expenses over the past 10 years.

F and B pkf chart

Focus on the Main Course, Skip the Bubbly

Based on the foregoing analysis, the percentage change in food revenues PAR rose faster than beverage revenues PAR in the last decade. Over the same period of time, beverage expenses have risen faster than food expenses. Taking the above data into account, it is not surprising that food profit has grown much faster than beverage profit over the past 10 years. The CAGR of food profit PAR grew 8.7% from 1994 to 2004. Over the same period, the CAGR of beverage profit grew just 1.9%. Combining the food and beverage profits, F&B department profit grew 5.4% in the 10-year period.

How did F&B profit grow in comparison to total departmental (operating department) profit and NOI? Departmental profit and NOI both grew at 3.0% on a CAGR from 1994 to 2004. Therefore, F&B profit grew at a faster rate than both operating profit and NOI. However, based on the above analysis, it is apparent that the food department is driving total F&B profit growth. Over the past 10 years, the food department has had an increasingly significant contribution to total hotel revenues as well as to NOI.

Gregory J. Miller is a Consultant in the Atlanta office of PKF Consulting. (Reprinted with permission.)

Contact: Dave Grimm
(720) 881-5477