Outside of fast-food and fast-casual restaurants, which are predicated on familiarity and uniformity, no two food and beverage operations are the same. Each has its own characteristics; its own challenges. It’s these variables that keep managers up at night wondering how to tweak the revenue side and reduce operational costs without adversely affecting product quality and delivery. It’s a lot to juggle.
F&B is the second-most important revenue stream in a hotel after rooms. It is imperative, then, to control the cost structure to ensure a healthy bottom-line. Let’s not forget: F&B is highly volatile, which is to say we all eat and drink; thus, effectively controlling the cost of sales element is always a challenge.
When it comes to cost center gross profit margins, the rooms and F&B departments are divergent. While the rooms division is looking at a ~25% cost basis and a ~75% GOP margin, the F&B operation is closer to a ~75% cost basis with a ~25% GOP margin. That contrast screams for effective cost control.
The purpose of this article is to present the different operational costs and undistributed costs, in accordance with USALI cost structures. (Note: Hoteliers, it’s not a bad idea to check that your accounts department is following the Uniform System of Accounts for the Lodging Industry (USALI) when it comes to producing an account of the hotel operation.)
The aforementioned 25% GOP on the F&B cost center is a low-end objective, while the target GOP percentage will vary considerably in accordance with the type of asset operation. However, whether it’s a luxury beachfront property or a city-center select-service hotel with limited F&B offerings, it’s important to set out a realistic cost plan when preparing the operational budget.
Objectives & Key Results
1. Revenue (100%)
F&B revenue starts with your point-of-sale (POS) system and how it’s managed, controlled and integrated with your property-management system (PMS). But effectively controlling your revenue starts with hiring the right people. For instance, rethink hiring staff purely on their previous experience. Don’t forget: You want sales people, not just order takers. All frontline staff should be fully aware of the department’s revenue objectives and should actively play their part in securing those objectives.
When revising a menu card or bar list—and it’s recommended to do this every three months—keep it relevant to your customer base. Carefully consider the number of menu options to include, and keep an eye open on the latest trends in both the bar and the dining room. Consider being a trailblazer rather than a trend follower. You should always look to differentiate from your competitors to gain a competitive advantage.
Encourage up-selling and cross-selling whenever possible. The customer is always keen to listen to a restaurant server or bartender’s advice on the offerings.
2. Cost of Sales (≤32%)
There is no hard or fast rule as to a cost percentage to aim for. Again, it depends largely on the type of operation. However, there are outer limits to consider if you’re going to arrive at the bottom line without feeling you need to scrap the filet mignon and replace it with Margherita pizza.
A good starting point for F&B cost of sales for a 4- or 5-star full-service resort or city operation would be 35% on food and 25% on beverage sales. With a 70/30 mix on sales, this will give you an overall cost percentage of around 32%. Take into account regional variances, since, amongst other factors, the tax structure for alcoholic beverages varies region to region and will affect the ultimate selling price.
Check back on last year’s results for comparison purposes, and also look at net price point in both the restaurant and bar when compared with your direct competitors. Remember: You don’t want to spook the market with a pricing policy that will drive customers away.
A few cost control pointers to consider:
- Aim to keep monthly inventory turnover above x4.0 for food and x1.5 for beverages.
- Keep total food wastage below 0.5% of sales.
- Prepare a budget for the staff restaurant F&B costs and control the food transfers from the main kitchen to the staff kitchen.
- Drill down and analyze any significant sales potential differences for beverages in both the restaurant and bar.
- Establish and control an effective pouring policy and pricing policy in the bars.
- Listen to section heads and supervisors at the weekly staff meeting.
3. Payroll Costs (≤30%)
Payroll can prove to be one of the more challenging of costs to control in any F&B operation, especially if you work in a seasonal market with a shortage of qualified labor.
If this is the case, look to establish a full-time contracted nucleus of qualified professionals in each team—kitchen, restaurant and bar—taking into account the availability of semi-qualified seasonal labor, and look to contract the high-season employees through an agency. The latter can push up your costs if not properly controlled, but it does afford you the much needed flexibility if business suffers a downturn.
Given the COVID-19 situation, there will be important service-delivery changes required, especially if you have relied on a buffet service in the past. Staffing costs will no doubt suffer because of these changes, so it’s better to be prepared in advance with a plan and a budget reassessment in hand.
4. Other Costs (≤8%)
Other costs cover a whole host of operating costs, from staff uniforms, table linen and laundry, to menu printing, bar and restaurant supplies and entertainment.
The most efficient way to control these costs is through strict year-over-year budgeting control and benchmarking the cost percentage within your competitive set. Be sure to compare similar types of operation, as costs can vary significantly from an all-inclusive operation to a standard full-service operation.
We’ve considered a ball park figure of (≤8%) for these costs; however, this could be as low as 5% depending on the hotel’s entertainment policy and requirements.
5. F&B GOP (≥30%)
If we add up the different costs as laid out above, then we have the following:
- Cost of Sales 32%
- Payroll Costs 30%
- Other Costs 8%
- Total Costs 70%
Which leaves the GOP margin at a reasonable 30%.
These figures are merely what we consider to be typical for the average operation, and will vary region to region. However, the message here is to make your own budget plan, taking into account the reality of your property’s location and type of operation, with the primary objective of producing a departmental GOP margin of between 25% and 30%.
6. Undistributed Costs
While these costs are not taken directly into account when assessing the performance of the F&B department, they are ubiquitous in the operation and can easily eat away at a healthy overall GOP or EBITDA, if not properly controlled.
The usual culprits are Administrative & General (<9.5% of total revenues), which account for myriad costs that need close inspection. Others that derive from the F&B department include credit card commissions, along with Property & Maintenance (<3.5%) and Utilities (<4.0%)—think kitchen equipment maintenance, gas, water and electrical power.
However, as these costs vary significantly operation to operation and region to region, as a percentage of total revenue, they should be benchmarked against the data of a chosen competitive set in order to understand exactly where your property is positioned and where you should start drilling down for any excesses.
To maximize your F&B departmental result, careful planning, control and communication are key. Once you are satisfied with the objectives laid out and the owner/manager has signed off on your budget plan, it is of paramount importance that your key managers and supervisors are fully aware of the objectives and what their role and responsibilities are in meeting the goals.
When the monthly analytical results come in from your accounts department, you should sit down with the team and analyze the costs and revenues against your budgeted plan and look to correct any deviations on costs, while also analyzing your revenue using per capita values—both resident and transient—as a guide.
Check your departmental cost ratios against the budgeted percentages—cost of sales, payroll and other costs—on a monthly and year-to-date basis, and correct any overspend within a short timeframe in order to protect your departmental GOP.
Photo by Taylor Davidson from Unsplash.