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Chad Crandell, ISHC, is president and co-founder of CHM, the leading pro-vider of asset management services to owners, developers, and investors of hotels and resorts (collectively valued at more than $3 billion). Mr. Crandell oversees all CHM corporate functions, focusing on client relations, develop-ment, and deal sourcing. He maintains extensive experience in the structur-ing of fair and equitable hotel ownership agreements, and plays an active role in all contract negotiations. Mr. Crandell also advises on key operational challenges, including risk mitigation, capital planning and expenditures, and investor-funded capital projects. Mr. Crandell is a partner in CHM Partners, an investment platform that co-invests in hotel properties with select client investors. He is a past president of the Hospitality Asset Managers Associa-

tion (HAMA), is regularly quoted in industry articles, and has written a number of chapters and case studies in industry textbooks. Mr. Crandell is a member of the International Society of Hospitality Consultants (ISHC) and holds a Counselor of Real Estate (CRE) distinction. Mr. Crandell received his bachelor of science degree in hotel administration from Cornell University.

Kristie Dickinson is a vice president for CHM and has been a member of the asset management team since the company’s inception in 2000. Ms. Dick-inson maintains eighteen years of experience in hotel operations, hospitality advising, and asset management. Areas of expertise include sales and mar-keting effectiveness, market positioning, rate strategy development, revenue management, and food and beverage programming. Ms. Dickinson supports strategic asset planning efforts for more than twenty-five hotels under asset management, and is a member of the acquisition due diligence team. Ms. Dickinson is also responsible for CHM’s corporate imaging, including mar-keting/public relations efforts and the company website (www.chmhotel.com). She is a member of the Hospitality Sales and Marketing Association Interna-

tional (HSMAI) and has written several industry articles, case studies, and chapters. Ms. Dickinson earned her bachelor of science degree in hotel administration from the Whittemore School of Business at University of New Hampshire.

16Leveraging Hotel Food and

Beverage Partnerships to Improve Profitability

By Chad Crandell and Kristie Dickinson

284 Chapter 16

Hotel food and beverage departments has evolved considerably over thepast few decades, shaped over time by a combination of changing consumerpreferences,trendsinfoodserviceandconcepts,andhotelbrand/managementapproachesandresources.possiblyoneof themost influential factorsdrivingindustrychange,notonlyinthefoodandbeveragedepartment,butthroughouthoteloperationsoverall,isthelinkbetweenprofitabilityandinvestmentreturns.evenduringperiodsofrevenuegrowth,increasingoperatingexpenseshavesig-nificantlyerodedprofitmarginsinrecentyears,challenginghotelownersandoperatorstore-thinktheoperatingmodelandimplementchangetoregainlostprofits andhotel value.Withmore thanone-quarter of all hotel revenue esti-matedtocomefromthesaleoffoodandbeverage,thisdepartmentrepresentsasignificantopportunitytoderivemoreprofit,enhancevalue,andboostinvest-mentreturns.

the purpose of this chapter is to introduce the concept of “partnering,”specifically,engagingwithoutsidefoodandbeverageexpertsforthepurposesofoperatingorbrandingoutletstoimproveoverallhotelprofitability.Wewillexploresomekeyconsiderationssurroundingthedecisionofwhichtypeofpart-nershipmightbefeasibleatagivenpropertyanddescribethetypicalpartner-shipstructuresmostprevalent in the industry today.Wewill then review thebenefitsandrisksassociatedwitheachstructureandoutlineavailableresourcesforownersseekingpartnershipopportunities.

InarelatedchapterinthesecondeditionofthebookHotel Asset Manage-ment: Principles & Practices,wedescribeaprocessforidentifyingopportunitiesthatenhancefoodandbeverageprofitability,focusingonmethodshotelierscanusetoevaluatetheirfoodandbeverageprogramsandonstrategiesforincreas-ingrevenueandreducingexpenses.1throughthisprocess,hotelierscanreadilyidentifythosecomponentsofanexistingfoodandbeverageprogramwhicharepositivelycontributingornegativelyaffectingahotel’sbottomline.Itisimpor-tantthatthisprocessbeundertakenasafirststepbeforeexaminingthestrate-giesandpartnershipopportunitiespresentedinthischapter.

Hotel Dining Past and Present

Hotelrestaurantshavehistoricallystruggledtogainthesamenotorietyastheirindependentlyoperatedcounterparts.guestshavelongassociatedhoteldiningwithlacklustermenus,non-descriptconcepts,overlyformaldiningrooms,andexorbitantlyhighprices.fromanoperatingperspective,hotelrestaurantshavelongbeenregardedasanecessaryconvenienceorrequiredamenity,oftenman-agedasacostcenterratherthanaprofitcenter.twentytothirtyyearsago,itwasnotuncommonforfull-servicehotelstooperatemultipleoutlets,manyopenforredundantmealperiods,heavily taxing theoperation froma cost standpoint.earlydevelopmentguidelinesforhotelsreducedfoodandbeveragespaceplan-ningtoacalculationofoverallfloorspaceandprovidedguidelinesfortypicalallocations for the coffee shop, specialty restaurant, formal dining room, andcocktail lounge, all deemed as necessary components for full-service hotels.

Leveraging Hotel Food and Beverage Partnerships to Improve Profitability 285Hotel foodandbeverageoutletsweresingularlyfocusedonguests,with littletonoexternalmarketingorconsiderationforphysicallocationwithinthehotel,withmanyoutletsbeing tucked into the far cornersof theproperty, resultinginlittletonooutsidepatronage.non-guestpatronageofhotelrestaurantswastypically reserved for businessmeetings, special occasions, holidays, and theoccasionalsundaybrunch.outsideofafewselectrestaurantsthatwereabletogainrecognitionasdesirabledestinations,thegeneralperceptionofhoteldiningwasmediocreatbest.

thankfully, great strides in hotel dininghave beenmadewithin thepastseveraldecadeswithmorepropertiesfocusingonqualityoverquantity.Hotelstodayfeatureawidervarietyofconcepts,bothoriginalandbranded, thataremoreresponsivetotheneedsofhotelguests,groups,andthelocalmarket.simi-larly,theindustryhaswitnessedashiftinfoodandbeverageprogramming.ademand-basedmodelisemployedfordeterminingspaceandconceptrequire-ments,takingintoconsiderationahotel’spositioning,location,andwhatlocaldiningalternativesmaybeavailableforguests.afundamentalchangeinoutletprofitabilityexpectationshasalsooccurred,wherebyprofitisexpectedandoper-atinglossesarenolongeracceptable.theoutcome,asevidencedbypropertiesthatwerebuiltwithinthepastfewyears,areinnovationsinhoteldiningfocusedonmeetingguestneedswithfeweryetmorecreativeoptions.newhoteldevel-opmentsupportsatrendinallocatinglessphysicalspacetofoodandbeverage,yet throughdesignand innovation,moreprofit isbeinggeneratedoutof lessspace.today,hotelownersandoperatorsaremorefocusedthaneveronfoodandbeverage,recognizingtheimpactthatawell-executeddiningprogramcanhaveasasalestool,providingcompetitivedifferentiation,andasanopportunityfor driving incremental profit. froma hotel brandperspective,many compa-nieshaveallocatedadditionalresourcestowarddevelopinginternalrestaurantconceptsandbrandsandforgingnewrelationshipswithfoodindustryexperts,nationalrestaurantcompanies,andevencelebritychefstohelpchangetheland-scapeofavailableoptionsforhotelowners.

notable progression aside, the economic landscape has given way to asteadilyincreasingexpensestructurethatcontinuestoplaguethehotelindus-tryandchallengeoperatorstocomeupwithnewwaysofsustainingprofitlev-elswithout damaging the guest experience.over thepast decade, hotel foodandbeveragedepartmentalrevenuehasaccountedformorethanonequarterofthetotalrevenuegeneratedbyallhotelssampledinpKfHospitalityresearch’spublication,Trends in the Hotel Industry.2despitestrongsalescontributions,theaveragefoodandbeveragedepartmentalprofitmarginistypicallybetween20and30percent(seeexhibit1),andcanvaryconsiderablybasedonahotel’smixofbanquetsales(whichgeneratemoreprofitthanoutletoperations).excludingbanquetprofits and consideringall other expenses that arenot typically allo-catedtoindividualhotelrestaurants(e.g.,administrativeandgeneralexpenses;utilitiesexpenses;propertymaintenanceexpenses;basemanagementfees,;andfurniture, fixtures, and equipment [ff&e] reserve),many outlets still operateatprofitmarginswellbelowtherestaurant industryaverage,withsomeevenoperatingatlosses.

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What Factors Affect a Hotel Restaurant’s Ability to Generate Meaningful Profit? Hotelsbynatureareuniqueandhighlycomplexoperations,unlikeanyotherformofrealestateorbusiness.thenumberofguests(occupancy)andtheirpropensityto use in-house food and beverage canfluctuate day-to-day, depending on thereasonforvisiting,whethertravelingaloneoraspartofagroup,lengthofstay,season,weather,andmanyotherfactorsoverwhichahotelmayhavelimitedcon-trol.Whilehoteloperatorshavebecomemoresophisticatedinforecastingvolumeandadjustingoperatinghoursandexpensestomeetdemand,profitabilityisstillachallengeforhotelrestaurants.thechallengeoftenrelatestothenumberofout-lets,operatinghours,staffingrequirements,locationwithinthehotel,andoverallmanagementofoutlets.mosthotelcompaniestakeadecentralizedapproachtofoodandbeveragemanagement.adirectorof foodandbeveragemayoverseeabanquetmanager,abeveragemanager,apurchasingmanager,in-roomdiningmanagers,restaurantmanagers,andthekitchen.Inthisscenario,therestaurantmanagerresponsibleformanagingaspecificoutletactuallyhasverylittlecontroland/orinfluenceoverthebroadfinancialpicture.themenuissetandapprovedbythechef;thepurchasingishandledintheaggregatefortheproperty;andtheman-agermayormaynothaveanydirectcontroloverhiringormarketing.Inshort,ahotelrestaurantmanager’ssphereofinfluenceisquitelimitedandfocusedforthemostpartonfront-of-the-houseoperations.fromacareerprogressionstandpoint,ahoteloutletmanagerpositionisoftenregardedasasteppingstonetowardmov-ingupthefoodandbeveragedepartmentalladder.bycontrast,anindependentlyoperatedrestauranthasageneralmanagerresponsiblefortheoperation’sfinan-cialperformance.thisgeneralmanager,awell-respectedandhighlycompensatedposition, typically oversees front- and back-of-the-housemanagers and a chef.

Exhibit 1 Summary of Food and Beverage Partnerships

CompiledfrompKfHospitalityresearch,Trends in the U.S. Hotel Industry, 2000–2010.

Leveraging Hotel Food and Beverage Partnerships to Improve Profitability 287streamlinedreporting,directaccountability,andanoutlet-level focusonprofit-abilityareafewtraitsthatdistinguish“restaurants”from“hotelrestaurants.”

somehotelcompanieshaveadoptedanorganizationalstructuremorecloselyalignedwith privately operated restaurants,while others have recognized thatspecialtydiningisnottheircorecompetency.regardless,theendgoalistopro-videfoodandbeverageoptionsthatmakeeconomicsense,whilemeetingguestexpectations,brandrequirements,andownerinvestmentgoals.engagingwithathird-partyfoodandbeveragepartnerhasopenedthedoorformanyhotelstodojustthat.

To Partner or Not To Partner: Key Considerations beforeseekingthird-partysolutionstofoodandbeverageproblems,ownersandoperatorsshouldidentifytheissuesthataffectdepartmentalprofitability.doesahotelhavetoomanyoutlets?aretheconceptsdated?dointernaloutletscompeteduringcertainmealperiods?Howmuchprofitdoeseachoutletgeneratewhenexpensesarefullyallocated?theprocessforassessingahotel’sfoodandbever-ageprogramandthequalitativeandquantitativefactorsthataffectdepartmentalprofitsappearinHotel Asset Management(citedearlier).Havingcompletedthatprocess,ownersandoperatorswillhavedeterminedanoptimalfoodandbever-ageprogram,includingthenumberandmixofoutlets,spatialrequirements,anddesiredoutletlocations.throughthisprocess,someoutletsandconceptsmayberetained,whileotherswillbeeliminatedor reconceptualized. It is at thispointthatownersandoperatorsmayconclude,basedontheirplanandfinancialanaly-ses,thatahigherreturncanbeachivedbypartneringwithathird-partyforspe-cificoutletswithinahotel’sdesiredfoodandbeverageprogram.partneringmaypotentiallymakesenseifthereisaconceptand/orthird-partymanagerthatcan(1)generateincrementalbusinessvolume;(2)generatehigher-pricedbusiness;(3)operatemorecost-effectively;and(4)generatemoreprofit,evenafterfees.

outsourcing and/or branding food and beverage conceptsmay not be therightdecisionforeveryhotel,butforsome,afoodandbeveragepartnershipcanbringvaluable opportunities andfinancial upside. thedecision topartnerwillrequireclosecoordinationwithmanypartiesinvolvedwiththeasset;itwilllikelyaffectmanyareasoftheoperation,andmanagementmustevaluatetheseeffectsbeforeseekingapartnership.ownersandoperatorsmusttakeintoaccountthefol-lowingkeyconsiderationstohelpshapethetypeofpartnershipthatmightworkbest,aswellasdeterminewhatsolutionsmayormaynotbeviableatagivenhotel.

Internal Considerations

Labor Unions.manyU.s.hotelsarealreadyinoperatingpartnershipswithunions.Unionsareestimatedtorepresentmore than100,000workers inapproximately900hotels.alaboragreement(alsoknownasacollectivebargainingagreement)governs the hotel/union relationship, outlining work rules, wages, and otheremployment conditions. When evaluating partnership opportunities, hoteliersmustunderstandthepotentialeffectssuchchangeswillhaveontheirstaff.forexample, partneringwith anon-unionized restaurant operatorwill usuallynot

288 Chapter 16

getaunionhoteloutofstaffingtheoutletwithunionlabor.asmostleaseopera-torsrequirefullcontrolofthespaceandexperience,includingemployeeselection,anexistingunionenvironmentmayeliminateastraightleaseasanoption.theremay,however,beanopportunitytobringinathird-partyoperatorand/orlicensedconcept.Ineithercase,hotelsandunionshavebeenabletorenegotiatewithsomedegreeofsuccessvariousaspectsofpastpracticesthatmaynolongerberelevantoreconomicallyfeasibletosupportnewconceptsandacustomerexperiencethatoperatesataprofit.Itisintheinterestsofboththeoperatorandtheuniontoworkharmoniouslytowardsolutionstoremainprofitableandpreservejobs.

Brand Standards.Whilemosthotelmanagementagreementsincludeaprovisionforpartnering,hotelbrandcompanieshavespecificstandardsgoverningnearlyall aspectsof abrandedhoteloperation. standards surrounding foodandbev-eragetypicallyfocusonensuringguestshaveaccesstooptionsthatmeetbrandexpectations and address quality of product, service style, hours of operation,available meal periods, menu, pricing, and approved concepts, among others.anotherareathatisroutinelyproblematicisin-roomdining,withmanybrandsrequiringaround-the-clockservicesevendaysaweek.suchoperationshavehis-toricallybeenchallengedtomakeaprofit,given theoperatinghours,butmustbe considered, especiallywhennegotiating a third-party solution.brandshaveshownmoreflexibilityovertheyearsintermsofacceptingalternativesolutions,requiredinpartbythegrowingneedtore-toolfoodandbeveragetoremainprof-itable. Understanding the requirements of and potential challenges to existingbrandstandardsisimportantwhenembarkingonanexternalpartnership.mosthotelbrandswillwanttoweighinontheconceptandprogrammaticelements,includingfitandfinishofthespace.brands,asdiscussedlaterinthischapter,haveinfactbeenincreasinglyactiveinsupportinghotelownersinforgingrestaurantpartnerships;theyrepresentavaluableresourcewhenexploringoptions.

Market Positioning.Hotelsshouldfostera“senseofplace”inwhichalloperatingelementscombinetocreateacohesivepositiveguestexperience.Whenconsideringpartnershipopportunities,ownersandoperatorsmustconsider theirproperties’positioningtoensurepotentialpartnerssupportorenhancetheguestexperience.asuccessfullyexecutedpartnershipnotonlyincreasesfoodandbeverageprofit,italsodifferentiatesthehotelfromcompetitors,boostingroomsalesintheprocess.

Physical Plant.toassesspartnershipoptions,ownersandoperatorsmustrecog-nizeanychallengesandconstraintsthehotel’sphysicalstructureimposes.doesthehotelhavemorethanonekitchen,orwillhotelstaffandathird-partyopera-torhavetoshareone?doesthespacehavestreetaccess?Canthehotelseparatelymeterthespaceforutilitiesandrelatedexpenses?doesthehotelhavemorethanonerestauranttofulfillallmealperiods?Whatistheparkingsituation,andcanthelotorgarageaccommodateadditionalcarsfromanewrestaurant?ahotel’sphysicalrealitiesaffectitspartnershipopportunities.

Anticipated Investment Horizon. partnerships typically require commitmentsoftentofifteenyears(possiblylonger).beforeenteringintopartnerships,ownersshould consider investmentholdperiods, especially if owners anticipate sellingtheirhotelsinthenearfuture.potentialbuyersmightrejectpropertiesencumbered

Leveraging Hotel Food and Beverage Partnerships to Improve Profitability 289by long-termagreements.Conversely, if theanticipatedholdperiod issuchthatitwouldallowampletimeforanewoperationtoramp-upandaddincrementalprofitandvalue,apartnershipcouldbehighlybeneficial.

Capital Resources.Inalmostallcases,ownersmustinvestcapitalinpartnerships.amountsdependon thepartnership type. for example, a hotel’s ownermightpay an initial setup fee of $10,000 to $15,000 for a newbrand license.anotherownermightspendmillionsofdollarstobuildcustomspaceforitsleasepartner.Whendeterminingwhichpartnershipstopursue,ownersmustassesstheircapitalresourcesandestablishtheamountstheycanspend.

External Considerationsowners and operators have little control over several external factors thatwillcertainlyaffectfuturepartnerships.

Location.marketlocationplaysahugeroleinoutsideparties’levelofinterestinhotel restaurants.national restaurant chains tend toprefermajormetropolitananddestinationresortmarketsthatattractlocalresidents.potentialpartnersalsoconsideroutlets’locationswithinthehotel;mostrestaurantgroupsrequirestreetaccess and separate entrances. to identify beneficial partnership opportunities,ownersmustassessmarketdynamicsandtheirlocations’desirability.

Competitive Market.toruleoutduplicativeconceptsandidentifyopportunitiesthatfillmarketgaps,ownersshouldassesstheircommunities’competitiveland-scape.forexample, toattractabrandedsteakhouse,ahotelownermustdeter-minewhichsteakhousebrandsthemarketalreadymaintains,andwhetherthesepropertieswouldcompetewiththehotel’ssteakhouseconcept.localcompetitiondoesnotaffectalloperations;forexample,astand-alonestarbucksdownthestreetprobablydoesnotdirectlycompetewithastarbucksinthehotel’slobby.

Typical Partnership Structures and Operating Modelsthefollowingsectionsdescribetheindustry’smostprevalentfoodandbeveragepartnershipstructures.thesectionsalsooutlinetypicaldealterms,andlisteachstructure’sprosandcons.exhibit2summarizestheinformation.

License Agreement.alicenseagreement,orfranchise,isthesimplestformoffoodandbeveragepartnership.Undera licenseagreement,ahotel (i.e., the licensee)paysfortherighttooperateanoutletunderaspecificbrand(i.e.,thelicensor)andsellrelatedproductsinaccordancewithbrandguidelines.licensorsmightofferinitialtrainingandhelphotelsestablishtheiroperations,buthotelmanagementteamsandstaffultimatelyassumeoperational responsibility.licensedconceptsin hotels are typically national brands that look and feel like their stand-alonecounterparts (though some featuresmaybemodified for specialuses inhotelsandairports).tosuccessfullyimplementlicenseagreements,ownersmustensurethebrandsorconcepts:(1)alignwithhotels’overallpositioning;(2)resonatewithguestsandenhanceoverallsatisfaction;(3)areequally,ifnotmore,cost-effectivetooperate;and (4) let thepropertygenerate incremental revenue (throughvol-ume,price,orboth)tomorethanoffsetthelicensingfees.

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Exhibit 2 Summary of Food and Beverage Partnerships

Structure Typical Terms Benefits Risks

License •• Minimum•five-to-ten-year•term

•• 5•to•8•percent•of•gross•revenue•

•• Use•of•a•well-known,•established•brand•with•a•proven•track•record•of•delivering•revenue

•• Maintenance•of•control

•• Hotel•management’s•ability•to•execute•on•concept•and•derive•incremental•profits

•• Cost•related•to•brand/concept•standards•(service,•product,•fit-out)

•• Owner•assumes•100-percent•responsibility•for•financial•risk

Lease •• Minimum•ten-year•term•• 6•to•10•percent•of•gross•revenue•(with•minimum•payment•guaranteed)

•• Share•in•common•expenses

•• Tenant•owns•employees

•• Guaranteed•base•level•of•income

•• Share•in•the•upside•• All•expenses•paid•by•lessee

•• Creditworthiness•of•tenant•• Very•limited•control•• Expense•for•build-out•• Locked•in•for•a•minimum•of•ten•years

•• Concept•shelf-life

Third-Party•Operator

•• Five-to-ten-year•term•• 3•to•6•percent•of•gross•revenue,•plus•incentive

•• Owner•shares•100•percent•in•upside

•• More•flexibility•in•agreement

•• More•entrepreneurial

•• Owner•is•100•percent•responsible•for•risk

•• Complexity•(i.e.,•multiple•management•companies•within•one•hotel)

Hybrid:•Operator/License

•• Minimum•ten-year•term•• 3•to•6•percent•of•gross•revenue,•plus•incentive

•• National•brand/operator•recognition;•typically•high-profile

•• Payment•of•a•management•fee,•which•includes•a•license

•• Longevity•of•partner•company

•• Attention•from•partner•company•in•light•of•competing•interests•to•grow

•• Complexity•surrounding•partnership

•• Multiple•contracts•(between•operator•and•owner•and•operator•and•hotel•manager)

licensedconceptscanrangefromquick-serviceoutletstofull-servicerestau-rants,butthehotelteam’sabilitytoderiveaprofitmaylimittheuniverseofreal-isticoptions.theamountofspaceahotelcanallocateandthecostofbuildingoutspacetomeetlicenseguidelinesalsoaffectpartnershipopportunities.forexam-ple,starbucksisalicensedconceptthatworksformanyhotels;itrequiresmini-malspaceandoffersastraightforwardproductthatstaffcandeliverwithproper

Leveraging Hotel Food and Beverage Partnerships to Improve Profitability 291trainingandequipment.starbucks’producthasastrongbrandfollowing—oneforwhichmanypatronspayapremiumovera“home-grown”coffeeconcept.

Lease Agreement.leaseagreementsaresimilartolandlord/tenantrelationships;arestaurateur(i.e.,thetenant)leasesspacewithinahotel(i.e.,thelandlord)forapre-determinedfoodandbeverageoutlet.thehoteltypicallygainsalocked-inreturn,butusuallymustfundatleastpartofthespace’sbuild-out(eitherbydirectlycon-tributingcapitalordeferringrentduringtherestaurant’sfirstyearsofoperation).leasepaymentstypicallyequalapercentageofsales(averagingbetween6and10percentofgrossrevenues),withaguaranteedbaserentminimum.Hotelownersfind the lease agreement structure attractive because it lets them share in suchoutlets’upsidewhilereceivingguaranteedbasepayments.

the lease agreementmust addresshowvarious expenseswill behandled.Ideally,hotels should separatelymeterutilities, trash removal, andotherdirectexpensesandchargeforthematcost.sharedexpenses,likecommonareamainte-nance,cleaning,andvaletparking(tonameafew),mustbenegotiated.

leaseagreementstypicallylastaminimumoftenyears;mosthaveoptionstoextend.themajorriskfactorsofaleaseagreementinclude(1)thetenant’scredit-worthiness; (2) the concept’s shelf life; (3) the build-out’s expense; and (4) thefactthatthehotelmustrelinquishcontrolofaguestexperiencetoathird-partyoperator.

leaseagreementstypicallyworkbestwhenthereismorethanonerestaurantand thehotel is able tomaintain some levelof controlover foodandbeveragesalesandservice,perhapsbyoverseeingatleastoneoutletandbanquets.How-ever, there arealso instanceswhereanentire foodandbeverageoperation canbeleased.leasedrestaurantstypicallyincludenationallyorregionallyacclaimedchefsand/or restaurant companies thatoftenhavemultiple concepts.as statedearlier, thecaliberof thespace,accesstoaseparatekitchen, locationwithinthehotel,streetaccess,visibility,andaproperty’slocationareallfactorsthatwillinflu-enceahotel’sabilitytoattractadesirableleasepartner.attimes,though,aleasepartnerforaspecialtyfoodoutletorquick-serveconcept(e.g.,coffeecafés,burritobars)maybemorelocal innature.Ineitherinstance,thepotentialforbusiness,bothinternalandexternal,willbeamajorfactorinthechoiceandultimatesuccessoftheoperation.

Third-Party Operating Agreement. somehoteliers believe effective conceptingandcostcontrolwillgenerateincrementalrevenueandprofit,butonlyifathird-partyoperator(eitherafirmor individuals)withexpertise inrestaurantand/orloungeoperationshandlesthosetasks.Underathird-partyoperatingagreement,thehotel(i.e.,theowner)paystheoperatoramanagementfee(typicallyfrom3to6percentofgrossrevenues)and,inmostcases,negotiatedincentivefeeswhentheoperatorachievesspecificfinancial targets.thethird-partyoperatingagree-mentgiveshoteliersmorecontroloverfoodandbeverageoutletsthandoesthestraight-lease scenario; inaddition, itgiveshoteliersall theoutlets’profits (lessmanagementfees).However,underathird-partyoperatingagreement,thehotelalsoassumescompleteresponsibilityforoperation’sexpensesandfinancialrisks.

third-partyoperators tend tobe localor regionalfirms thatuse theirownstaffandconcepts(thoughseveralnationalthird-partyrestaurantoperatorslike

292 Chapter 16

cb5andmyriadrestaurantgrouphaveaproventrackrecordofpartneringwithhotels). third-party operators are typicallywilling to share kitchens andworkwithintheconfinesofthehotel.agreementsusuallylastfivetotenyearsandcaninvolveasinglefoodandbeverageoperationorahotel’sentirefoodandbeveragedepartment,includingbanquets.

Hybrid.ashotel owners seekprofitablepartnerships, they sometimesdevelopnew relationships that do not fit the previously describedmodels.We refer tothesenewrelationshipsas“hybrids.”Hybridorblendedstructuresstemfromcir-cumstancesthatrequirehotelstomodifythecommonmodels.Hybridstructuresusually involvenationalor internationaloperators (i.e.,prominentbrandswithsuccessfultrackrecords).ahotelthatpartnerswiththeseoperatorsreapsseveralbenefits;notonlydowell-knownbrandsgenerate foodandbeveragebusiness,theyalsohelp sell roomsas theyenhanceahotel’s credibility among travelers.because hybrid arrangements are themost complex partnerships, they requireextensivenegotiation,closeoperatingcoordination,andcustomaccountingsolu-tions.additionalriskcanbeattributedtothenationalpartner,which,likehotelmanagementcompanies,maybecorporatelyfocusedonexpansion.ensuringthatpropersupportandresourceswillbeallocatedtoaspecifichoteloperationiscriti-caltothesuccessofsuchanarrangement.

theWboston recently implemented ahybrid food andbeverage arrange-ment.Whenthehotelwasunderconstruction,ownershipsawtremendouspoten-tialinthespacesprogrammedforfoodandbeverageuse,includingprimespacewith street access and a geographic location promising strong visibility andhigh volume potential. ownership sought to leverage an existing relationshipthrough starwoodHotels andresorts to partnerwithCulinaryConceptsHos-pitalitygroup,acompanythatdevelops,owns,operates,manages,andlicensesworld-classrestaurantconceptscreatedbymichelinthree-starchefJean-georgesvongerichten.thehotel,however,wassubjecttoaunionizedlaborstructurethatappliedtoallspaceswithinthehotel,whetherleased,managed,orotherwise.formanyfoodandbeveragepartners,assumingaunionizedlaborsituationisnotanoption,soastraightleasewasnotpossible,yetthebrandandconceptrequiredexpertise not readily transferred or available through licensing. therefore, thevarious parties needed to come together in a negotiated hybrid structure. theCulinaryConceptsteamwasbroughtinunderanoperator/licenseagreementtoprovidethemanagementteam(operator)andmarketconcept(license);underthedirectionofCulinaryConceptsmanagement,theunitwasstaffed(servers,cooks,hosts,etc.)bystarwoodemployeesundertheexistingunionagreement.CulinaryConceptswaspaidacombinedmanagement/licensefee,aswasstarwood.Hotelownership,hoteloperator, and restaurantoperatorentered into thishybrid tri-partyagreement.

Resources anumberofresourcesareavailabletohelphotelownersunderstandtheirpart-nershipoptionsand toprovidevaryingdegreesofsupportduring thedecisionprocess.

Leveraging Hotel Food and Beverage Partnerships to Improve Profitability 293

Hotel Brand and Operating CompaniesWithhotelbrandsincreasinglysupportinginnovationinfoodandbeveragecon-ceptsandaccommodatingarangeofsolutions(frominternalturnkeyconceptstomastercontractswithpre-qualifiedfoodservicebrandcompanies),ahotel’sbrandcompanyisalogicalplaceforownerstostarttheirresearch.

forexample,inearly2011,respondingtoowners’growingdesireforleasesorpartnershipswiththird-partyoperatorsandcelebritychefs,Hiltonlaunchedaweb-basedinteractivetool(www.hiltonrestaurantconcepts.com)thathelpsown-ersidentifyappropriaterestaurantconcepts.thewebsitegivesownersaccesstoconceptsthatworkinfull-servicehotels,includingthosedevelopedinternallybyHiltonWorldwide, aswell as those of national food service brands likeruth’sChrissteakHouse,mitchell’sfishmarket,andtheCoffeebean&tealeaf.Hiltongivesownersinternalguidesoneverythingfrommenudevelopmentandtrainingtomerchandisingandfinancialauditing.thesitealsoprovidesalistofqualifiedrestaurantconsultants.Hiltonhotelshavepartneredwithconceptslikemorimoto,drago’sseafoodrestaurant,foxsportsgrill,benihana,andthepalmrestaurant,aswellaswithfamedchefssuchasdonnascala(attheHiltonorlandobonnetCreek)andJohnbesh(attheHiltonneworleans).

marriottInternationalhasalsoestablishedastrongcorporatefoodandbev-erageresourcecenter,facilitatedthroughitsproprietaryownerwebsite,marriottglobalsource.Here,hotelownersofmarriott-brandedproductscanaccesscom-prehensiveprograms,internallydevelopedconcepts,andinformationguidestoboost their food and beverage outlets’ profits. the site encourages propertiestofocusonelementsthatenhanceguestsatisfactionandprofitability,andchal-lengesthemtocreateandsharebestpractices.marriottoffersseveralinternallybrandedconcepts, suchasChampionssportsbarandQuenchpoolsidebar&grill.marriottalsooffersa“greatroom” lobbyconcept thatdrives foodandbeveragerevenuethroughday/nightserviceandmulti-purposeseatingoptions.marriott is pro-partnership, encouraging third-party affiliations with well-knownchefslikegordonramsay(starofthetelevisionshow“Hell’sKitchen”),Kerrysimon(the“rockn’rollChef”associatedwithl.a.market),andfrenchchefalainducasse,tonameafew.tohighlighttheseoutlets,marriottcreatedarestaurantshowcasepagethatwebuserscanaccessfromthecompany’shome-page,www.marriott.com.

starwoodHotelsandresortsisanotherfoodandbeverageinnovator,havingestablishedrelationshipswithcutting-edgerestaurateursatmanyof its full-ser-viceproperties,suchasWHotels,st.regisHotels,andWestinHotels&resorts.starwoodrelationshipsincludeventureswithCulinaryConceptsbychef/restau-rateurJean-georgesvongerichten,andthegerbergroup,knownforitsWhiskeybarnightlifeconcept.

KimptonHotels&restaurants,developer,owner,andoperatorofindepen-dentboutiquelifestylehotels,takesauniqueapproachtofoodandbeverageoper-ations.asitsnameimplies,KimptonHotels&restaurantsviewsbothhotelsandrestaurantsasintegraltotheguestexperience.Kimptonregardsthemasdistinctentities, each requiring a specific skill set andhigh level of expertise.as such,Kimptonoperates itshotelsandrestaurantsas separateunits, andensures that

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hotels incorporate unique, chef-driven, destination restaurants as part of theirguestexperiences.

Hotel Asset Managersassetmanagersarekeenlyfocusedontheareaoffoodandbeverage.theycol-laborate with operating teams and identify strategic opportunities to enhancedepartmentalprofitability.theyholdthedistinctadvantageofrepresentingsev-eralownershipgroupsandgenerallyreceiveexposuretoawiderangeofprop-ertytypes,brands,andmarkets.throughthisexperience,assetmanagersgainanunderstandingofbestpracticesandanabilitytorecommendoptionsthatprovedsuccessfulatsimilarproperties.mostassetmanagementcompanieshaveexperi-encewithmajorbrandcompaniesandarefamiliarwiththeprocessofidentifyingandevaluatingpartnershipsandtheirfinancialvalue.

Restaurant Consultantsownersmaychoosetoretainrestaurantconsultantstohelpwithfoodandbeverageplanning,concepting,design,branding,andpartnering.severalrestaurantconsult-inggroupsexisttoday,manyofwhichoffermanagementservicesandpartnershippossibilities.ownersshouldseekconsultantswithhospitalityfoodserviceexperi-ence(suchascb5andtechnomic,amongmanyothers).brandcompaniesandassetmanagerscanprovidereferrals,ascantheIsHC’swebsite,www.ishc.com.

Existing Partnersownersofoneormorehotelswithexistingfoodandbeveragetenantsmightcon-sideraskingthosetenantswhethertheyhaveinterestinexpansion.Hoteliersfaceriskswhenexpandingexistingpartnerships,butifthosepartnershipshaveprovensuccessful, hoteliersmay encounter less risk than if they embark onnewpart-nerships.anexistingpartnermightexpand its currentoperationoraddanewconcept, eitherwithin the hotel or acrossmultiple properties under the hotel’sownership.forexample,amajorurbanhotelhadexcessretailspaceforlease.anexistingleasepartneroperatedarestaurantwithinthehotelandexpressedinter-estinnotonlyopeningasecondrestaurantwithinthecomplex,butalsoleasingadjacentretailspaceforatake-outcounterthatwouldoperateintandemwiththenewrestaurant.theexistingtenant’sfirstrestauranthadbeensuccessful,andthehotelwasinamarketthatgeneratedsignificantlunchanddinnertraffic.giventhetenant’sstrongcredithistory,restaurantconcepting,andoperatingexpertise,thehotel’sownersnegotiatedafavorableleaseagreement.

Conclusion manyopportunitiesexistforinformedhotelownerstoincreaseassetvalueandoptimizeinvestmentreturns.Inlightofrisingexpenses,hoteliersmusttakehardlooksat their foodandbeverageoperations,andunderstand theways individ-ualoutlets(thetrueperformanceofwhichisoftenmaskedbylucrativebanquetoperations)canaffecttheirprofits.Inthelastdecade,thehotelindustryhascome

Leveraging Hotel Food and Beverage Partnerships to Improve Profitability 295alongwayinpartneringtovaryingdegreeswithdiningexperts.Indoingso,theindustryhasrespondedtoconsumertrendsandexpectations,whilecreatingsus-tainableandprofitablefoodandbeveragedepartments.aone-size-fits-allsolutiondoesnot exist, buthoteliershave realopportunities—whether through internalsolutionsorpartnerships—torefinetheirfoodandbeverageoperatingmodels.

Endnotes 1. ChadCrandellandKristiedickinson.“bestpracticesinmaximizingfoodandbever-

ageprofitability,”ingregdenton,lorie.raleigh,anda.J.singh(eds.), Hotel Asset Management: Principles & Practices, second ed. (lansing,mich.:americanHotel &lodgingeducationalInstitute,2009),293–323.

2. CompiledfrompKfHospitalityresearch,Trends in the U.S. Hotel Industry (lawrence-ville,Kan.:pKfHospitalityresearch,2000–2011).