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Conrad N. Hilton College of Hotel and Restaurant Management University of Houston

Hotel and Restaurant Foodservice Partnership Strategy



Yoriko Masuyama



Conrad N. Hilton College of Hotel and Restaurant Management
University of Houston




Table of Contents



1. Abstract…………………………………………………………………………………...

2. Introduction……………………………………………………………………………….

3. Background of Hotel Food and Beverage………………..………………..…..………….

4. Characteristics of Hotel Food and Beverage….…………………………………………..

  1. Outsourcing Partnership Options………...………………………………………………..

  2. Product Branding………………………………………………………………………….

7. Upscale Restaurant – Case of Ruth’s Chris Steak House…………………………………

  1. Food Court Concept – Casual Dining…………………………………………….……….

  2. Conclusion…………………………………………………………………………………



  1. Abstract



The trend of outsourcing foodservice management in hotels is manifesting itself in everything from franchised fast-food courts in limited-service lodging to up-scale, chef- driven eateries in more up-market properties. The restaurant operators benefits by getting a visible, high-traffic location, and hotel gets a high-profile restaurant brand, built-in customer loyalty and a partner with expertise in running foodservice. Both hotels and restaurateurs find this alliance as a key strategy to bring better customer satisfaction, solve high employee turnover, and enhance profitability.

2.

Introduction



Lodging facilities have been taking advantage of outsourcing of food and beverage functions to outside restaurant expertise for their cost-effective solution of own F&B department. The results of operator’s new focus on hotel foodservice are that innovative hotel F&B concepts are being created, and strategic alliances are being established between well-known brand-name hotel and restaurant companies (Strate and Rappole, 1997). The successful restaurant chains have also actively explored franchising their operation to the hotels. The success of its partnership largely depends on how closely both parties’ mission statements and corporate strategies are discussed and analyzed.

Many discussions were explored in the past with regard to how successful hotel chains incorporated with outsourcing of their foodservice functions to the well-known brand restaurants. In this paper, the researcher extends this discussion to the current business strategies of successful restaurant brands located within hotel properties. The researcher further discuss the importance of agreement between both parties in terms of long-term goals, operating concept, and most importantly mutual understandings of managements to offer the customer satisfaction and service quality which ultimately improves bottom line of both parties’ financial statements.

3. Background of Hotel Food and Beverage Service



In an earlier era of lodging history, foodservice played a significant role in the organizational structure and product/service mix of hotels. Of the many factors that mandated organizational change in lodging companies, return on investment seems to have played a dominant role. The high construction cost and return-on-investment expectations by people from outside the hospitality world strongly suggest that space devoted to food service should contribute at least its share to the profit structure of modern hotel service (Bosselman, 1995). Hotel restaurants have often been managed as a costly amenity rather than a revenue center. In part because of the high cost structure of hotel restaurant, which means high prices relative to other restaurants, they developed among potential customers a reputation for being a poor value, offering indifferent service and inferior food.

There are other numbers of reasons for a lack of profitability in hotel foodservice.

    1. Hotel foodservice operations have generally been viewed as an amenity for the guest,

rather than a separate profit center. For this reason, many hotels have been over-outletted, over seated, and overstaffed (Casper, 1994).

2. Although hotel F&B departments have lower administrative and general, advertising, and management fees than full-menu table service restaurants, their round-the-clock schedule and guest services offset these advantages, resulting in higher payroll and benefits and direct operating expenses (Greenberg, 1995).

3. Restaurant outlets have often been buried very deep in the hotel, which makes it hard to

market them to non-hotel guests. Therefore most hotel F&B revenues are driven by the room department’s level of activity (Payne, 1998).

4. While upscale hotels have enabled to attract outside guests for its reputation of famous chef or name value of the restaurant, limited-service hotels were the first to give up on in-house foodservice. The economy motel chains that sprang up on the early 80’s proved there was a sizable market of guests willing to forego the convenience of on-premise foodservice in exchange for lower room rates. However, the financial arguments against providing on-premise foodservice are compelling. When we look at gross margins for the typical hotel operator, on guest rooms the average margin is 75%. On food and beverage gross margin is about 20%. Since the typical budget or mid-sized hotel operator is not very good at foodservice, these hotels focus is rather placed on hotel rooms (Casper, 1994).

Eliminating foodservice simplifies the entire operation, and allows lodging properties to operate significantly less overhead. This translates into a considerable savings that can be passed on to guests.

4. Characteristics of Hotel Food and Beverage Operation



In today’s cost-control environment, food and beverage operations are trimming payrolls and consolidating job responsibilities to cut operational expenses. Providing quality rooms and guest service remains a hotel’s primary function. By reengineering foodservice operations, hotel management has the opportunity to redirect energies from the restaurant business and focus efforts on enhancing hotel operations and profitability.

Developing alliances between brand-name hotel and restaurant companies is not a new business strategy, but it does seem that this approach is currently being used more frequently than ever to help companies maximize their profit potential.

According to Strate and Rappole (1997), there are at least five reasons for this. An alliance may:

  1. Create financial benefits

  2. Provide customers with greater value

  3. Improve a property’s overall image

  4. Strengthen an operation’s competitive position, and

  5. Create operational advantages.

In an attempt to improving the property’s bottom line and getting a competitive edge of foodservice operation, many lodging companies now leasing food and beverage facilities to an independent restaurant operator. In addition to creating a more dependable income, leasing reduces the overhead of F&B department. Purchasing a franchise from a brand-name restaurant chain is another way to gain the benefits of brand recognition without fully relinquishing control. Outsourcing partnership may vary in its diverse capabilities.

These outsourcing trends are due to cost-cutting necessary to sustain the continued financial viability of a hotel. It is equally necessary to provide in-house guests with consistent food and beverage services and brand outlet. Brand strength and competitive positioning for hotel property are the most important reasons for considering outsourcing foodservices. Successful implementation of an F&B outsourcing partnership can result in enhanced brand recognition and profitability for both the hotelier and the restaurateur.

5. Outsourcing Partnership Options



There are following options to restructure hotel foodservice by integrating outsourcing partnership (Robinson and Saef, 1998):

Leasing:

A hotel leases a room or section of the hotel in exchange of flat fee and/or a percentage of sales. Leasing contracts vary depending on the area of space being leased, the brand being introduced into the market, and agreements that may have been established by a head office. The hotel benefits by receiving a guaranteed rent and revenue from restaurateur. The hotel management loses control of F&B operations. There is a risk that leased F&B operations will develop marketing efforts inconsistent with the hotel’s image.

Franchising:

This option suits a hotel seeking to change a restaurant concept without investing in an internal and potentially untested concept. The hotel buys an established brand and operating system for a fee. Frequently, the franchisor requires the hotel to make an additional payment for a capital investment, requiring a purchase of specified equipment. Under the franchising terms, the hotel pays the franchisor a royalty fee, usually based on a percentage of sales, for the privilege of using the name and resources. The franchisees are responsible for ensuring that hotel staff is adequately trained to assure quality consistent with other branded sites. Marriott International was one of the first major hotel chains to enter into F&B franchising arrangements, with a 19989 franchising partnership with Pizza Hut. Marriott has since introduced Pizza Hut outlets and in-room dining options at many of its properties throughout the world.

Joint Venture:

The two parties –hotel and restaurateur—create a separate financial company, which is appointed as the lessee of the restaurant. The new organization then outsources the F&B operations to the restaurateur. The two parties share the profit.

Following chart explains pros and cons of above outsourcing deals for hotels and restaurateurs (Figure 3-1).

Contract Type Advantage Disadvantage


Leasing

(Hotel) - Receives a guaranteed rent plus - Loses operational control.

revenue based fee percentages. - Inconsistent brand image. - Reduces the overhead cost

(Rest.) - Can manage the operation without - Needs to pay monthly rent

interference. regardless to the revenue.

Franchising

(Hotel) - Can reposition restaurant without - Needs to pay franchise fee plus

spending investment additional investment for new

- Potentially increases revenues, equipment. occupancy, and profits. - Required a certain level of provided

- Quality consistent training, volume to warrant to use franchise

assistance, and advertising support brand name.

- Name recognition.
(Rest.) - Can operate usually at good - Needs to meet hotel’s image.

location. - Needs to change architectural design

- Stable franchise fee. to meet hotel interior.


Joint Venture

(Hotel) - Can get operational expertise. - Typically provides capital

expenditure.

- Need to share profits with restaurant.

(Rest.) - Capital expenditure to be provided - Need to meet both parties’ financial

by hotel. goal.

- Could operate at a good location. - Need to train hotel employee.


Figure 5-1 Key Advantages and Disadvantages


The primary purpose of a freestanding restaurant is to generate profit for the owner, whereas the hotel’s F&B operation is an amenity, of guest rooms and a service to hotel guests. Therefore, hotel food operations often have higher service standards and longer hours of operation. Payroll costs are higher, and décor packages are more expensive. To sidestep those costs, hotels are continuing their move toward branded food-and-beverage outlets. The freestanding restaurant also stays profitable within a hotel premises proving convenience for hotel guests. For hotel guests, familiar foodservice brand name gives comfort. Part of the deal is handling room service and catering. While the former is a notorious money loser in hoteliers’ hands, the latter can be quite profitable. When branded, both areas can perform better and become marketing tools for the hotel. It does very well late at night, particularly with female travelers who come in and don’t want to go to a restaurant or wait for room service (Ruggless, 1997). By adapting outsourcing, hotel operators could overhaul room service operation. Hotel’s room service is labor-intensive food service, considering setup, distribution and collection of trays, which all requires a high-cost operation. Today’s labor shortage in hospitality industry requires minimum number of staff that is paid more wages and benefits than those hired by restaurants. Therefore, hotels find the solution in outsourcing some functions of F&B department.

6.

Product Branding



Product branding refers to establishing a well-known name for a given product of service whereby the particular product or service and its attitudes are highly recognizable and easily recalled by customers. The basic concept behind such so-called branding is to establish a standard on which consumers may rely to predict value (Strate and Rappole, 1997). The following table shows hotel and restaurant strategic alliance examples.



Hotel Companies Restaurant Companies






Holiday Inn Worldwide Damon’s, Denny’s,

Ruth’s Chris Steakhouse,



TGI Friday’s, Convenience Courts (Mrs. Fields,

Pizza Hut, Little Ceasars, Blimpies, Taco John’s, Sara Lee)

Bristol Hotel Convenience Café (Coke and Folgers, Starbucks,

Mrs. Field)

New York – New York Hotel and Ark Restaurants (New York base)

Casino in Las Vegas

Doubletree Hotel (Promus) New York Restaurant Group

(Park Avenue Café, Mrs. Parks Café)

Marriott Hotels

Ruth’s Chris Steakhouse

, Studebakers, Benihana,

Traders Vic’s, Pizza Hut

Hilton Hotels Trader Vic’s, Benihana,

Ruth’s Chris Steakhouse

, Damon’s

Four Seasons Bice Ristorante

Choice Hotels Picks Food Courts, Pizza Hut

Promus Corporation Grace Services, TGI Friday’s, Olive Garden, Pizza Hut

Au Bon Pain (Boston based)

Radisson Hospitality Worldwide Carlson Hospitality (TGI Friday’s, Country Kitchens)

Damon’s

Ramada Inn / Plaza Hotel Bennigan’s Irish American Grill & Tavern’s



Figure 6-1. Hotel and Restaurant-Company Strategic Alliances

(Sources: Strate and Rappole, 1997, Ruggless, 1998, and Battaglia, 2000)

As is shown above, a current trend among hotels that have reevaluated their F&B operations is to replace the formal fine-dining concept with a more casual and relaxed dining experience. Another trend indicates that more and more hotel companies are looking to establish strategic alliances with brand-name restaurant companies. This chart also illustrates the fact that the established alliance between hotel chains and restaurant companies may result in loosing own foodservice characteristics of each hotel chain.

Among those hotel operators the upscale hotels are paying very close attention to their steak houses, which can provide strong profits. Hotel chains such as Embassy Suites, Marriott Hotels, Sheraton Hotels, and Westin Hotels & Resorts are focusing on adding steak houses to their operations. Among those chain restaurants, Ruth’s Chris Steak House is placed on focus.

. Ruth’s Chris Steak House – Strategic Achievement of Alliance with Hotel Chains



Ruth’s Chris Steak House, New Orleans-based steak house, has become aggressive and successful as a hotel foodservice operator. In 1993 steak-house franchisee Nancy Oswald and her partners in Birmingham, Ala.-based Prime Inc. opened the first hotel-based Ruth’s Chris Steak House in an Embassy Suites property in Birmingham. Since then, another six franchised and company-owned Ruth’s Chris hotel units have debuted at the Hilton Court in Parsippany, N.J., Westchester Marriott in Tarrytown, N.Y., the Vanderbilt Plaza in Nashville, Tenn., the Toronto Hilton, and at the San Juan Grand in Puerto Rico (Hayes, 1998). Ruth’s Chris Steak House took over the Birmingham hotel’s entire foodservice operation, including catering and 11 a.m. to 11 p.m. room service, and installed its private-party coordinator right in the Embassy Suites’ sales office.

The evident in steak-house conversions at properties operated by those upscale hotel owners or franchisees has opened the niche for top operators in the luxury steak market segment. Ruth’s Chris Steak House’s concept has perfectly matched with these upscale hotels requirements. For hotels the steakhouse set-ups of kitchen operation, simpler menu preparation, as well as staff trainings are all non-complex and more cost efficient than traditional fine-dining operations.

There is a co-branding synergy between upscale hotels and the luxury steak house concept, combined two brands that share the same upscale cliental. For Ruth’s Chris Steak House, these upscale hotels has already established the quality service, so that experienced hotel employee can be trained in a efficient manner in order to perform as a restaurant staff. As it is shown in the Figure below, Ruth’s Chris Steak House’s alliance with upscale hotels business identification rapidly transferred to the last major trend circle (Figure 7-1).

Industry Structure



N

Event Life Cycle Cycle



New

Issues

Evidence of

use by

leaders

Major Trend

a consistent

pattern of events
ew I
Innovations

Major Trends

Fact of Life

A pattern

is emerging

Exhibit 7-1. Identifying events in the environment (Olsen, 1998)

ssue
Major shifts by

Leading firms

Innovator/

Entrepreneur

fads


Olsen (1998) says that new ideas often emerge from the entrepreneur group. These ideas are often just fads. However, if conditions are right, these fads gain momentum and emerge as innovations. At this pint these innovations begin to establish themselves as important new ideas that an industry embraces as it competes for the future. If the innovation continues to gather momentum because it has proven to be successful, it usually transcends into a major trend and ultimately a fact of life. Ruth’s Chris Steak House’s alliance strategy has captured markets’ momentum and it has proven to be successful. However, this branding alliance has reached a consistent pattern of events in upper scale market, the restaurant management may be required to conduct market review.

As the hotel steak-house trend grows, however, upscale steak operators are adding more seafood dishes and alternative meat cuts to their well-tailored menus. Heath-conscious trend may require the restaurant operator’s continuous research on customers dining habits. But, still menu simplicity is standard for a prime steak house. The only instance where complexity usually enters is in the choice of wine, and steakhouse wine lists often are long and expensive in order to complement the high food price (Hayes, 1998).

8. Food Court Concept – More Casual Dining



On the contrary to Ruth’s Chris Steak House upper scale fine dining concept, the trend of hotel foodservice is moving toward more casual dining. Like much of the competition, Hilton Hotels also is becoming more attuned to specific customer desires to win foodservice dollars. Peter Kleiser, Hilton’s vice president in charge of food and beverage says, “The trend is definitely casual dining. People want casual fun, bistro dining with open display kitchens” (Allen, 1996).

In several of Hilton’s airport hotels, the company is catering to customers who check in at all hours with a 24-hour operation. Fashioned after fast feeders, the units offer pizzas, sandwiches, cakes, ice cream, flavored coffees, beer and wine at quick-service prices (Allen, 1996). The trend continues that people are eating and working at the same time. The customer is very ware of correct pricing.

The food court concept that was launched by the Choice Hotel group in 1995 was established based on these customers’ dining trend changes. The Choice Hotel’s alliance program included setting up strategic partnership with a number of nationally known foodservice providers—Sark’s Coffee, Pizzeria Uno and Nathan’s Hot Dogs – to create food courts like the ones consumers often eat at in malls (Andorka, 1998).

Choice currently has 26 food courts around the country. Eighteen of those food courts are in hotels, but the concept has been so successful that it has branched out into strip malls, gas stations and other ventures (Andorka, 1998).

The food courts concept perfectly matches leisure travelers who want to grab something quick and head out to the beach. For business travelers, it allows them to move quickly through lines at a business break, and still have time left over to make personal errands. The food courts is the popular concept seen in shopping mall, so that many travelers have used to use the facilities and they feel comfortable to use such facility in hotel chains.

The biggest challenge of the alliance between these restaurant and hotel might be mutual strategic agreement and continuous study on diverse customers new interests as well as trends. Developing marketing effort to get rid of inconsistent with the hotel’s image. This attempt holds key of success for both restaurant and hotel operators.

9. Conclusion


Current hoteliers need to consider the implementation of revenue-generating strategy that will reduce their operating cost and meet customer satisfaction of all operational aspects. In order to achieve this revenue-generating strategy, the outsourcing concept is a successful key for the hotel management. The restaurant operators also benefits from this partnership. Branding will continue to play a bigger role in hotel foodservice. Many restaurant companies would no doubt like to follow in the footsteps of hotel’s F&B outsourcing solution,

To achieve a competitive foodservice operation, hotel companies and restaurateur should meet mutual agreement in their mission goals for continuous improvement of customer satisfaction. Hotel and restaurant alliance is a subject that needs to be addressed as part of the strategic planning process. Successful foodservice management needs to be creative and revenue conscious in its daily operation.

References



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