HMA Bites: Food & Beverage Operations in Hotels

Welcome to HMA Bites - our regular column in Check-In where we take a look at an issue relating to hotel management agreements ("HMAs") and provide insight, tips and advice based on our experience in practice. In this edition, we look at food and beverage operations in hotels.

Historically, food and beverage (F&B) offerings in hotels could tend towards the bland and the drab. But in recent years, F&B has been the subject of renewed focus from hoteliers. As more and more consumers consider themselves "foodies" and consider cuisine to be an integral part of any trip, so hoteliers want to ensure that their F&B offerings enhance rather than detract from the guest experience, and also (where possible) act as a draw for non-hotel customers.

There is also sound financial sense in improving F&B performance. With F&B revenue contributing between 20% - 40% of total hotel revenue, it makes sense to get F&B right, and to find ways to drive profitability from that revenue.

Some hoteliers have come to realise that F&B is not where their (or their third-party manager's) strength lies – and have looked at outsourcing F&B operations (often to well-known chefs or restaurant brands) as a means of buying in the requisite expertise. With this in mind, Owners are increasingly carving out F&B operations from the scope of their HMAs – or at least reserving their right to do so in the future (with consequential amendments to the HMA).

So, what are the structures that a hotel owner ("Owner") can use if it wants to outsource its F&B operations? And what challenges does this bring – particularly where the Owner has an incumbent hotel manager ("Manager") in place under an HMA?

We typically see the following structures used when an Owner wants to appoint a specialist F&B operator ("F&B Operator"):

1. Lease – Here the Owner would carve out the F&B facilities (e.g. the restaurant and kitchen areas of the hotel) and responsibility for the operation of the F&B offering from the scope of the HMA, and grant a lease of the F&B facilities to the F&B Operator. Under this model, the F&B Operator would pay a rent (either fixed or turnover-based) to the Owner.
   
   
2. F&B Management Agreement – Here, again, the Owner would carve out the F&B facilities (e.g. the restaurant and kitchen areas of the hotel) and responsibility for the operation of the F&B offering from the scope of the HMA, and reallocate these to the F&B Operator under a specific F&B management agreement ("F&BMA"). Under this model (as with a normal HMA), the F&B Operator would be paid management fees (usually a base and incentive fee), with the remaining profit belonging to the Owner.
   
   
3. Consultancy Agreement – Here, primary responsibility for the operation of the F&B would remain with the Manager under the HMA, and the Owner would appoint the F&B Operator in a consultative role to provide high-level strategic advice and support (e.g. with menu-setting, provisioning, training and budgeting) to the Manager and the relevant employees. Under this model, the F&B Operator would be paid consultancy fees (as an operating expense under the HMA).

Though all parties have an interest in the success of the F&B operation, and whilst good F&B Operator selection and stakeholder management should ensure good working relationships, challenges do arise when outsourcing F&B operations, and these should be considered carefully. Among the most common challenges are:

1. Reporting and chain of command – The Owner will need to decide whether and to what extent there is a hierarchy between the Manager and the F&B Operator. Are they separately responsible and accountable to the Owner for their respective fiefdoms? Ostensibly this may seem a neat delineation of responsibility and may ruffle few feathers at the outset, but doesn't foster co-operation, and makes the Owner the middle-man and arbiter of disputes. Alternatively, is the outsourced F&B operation nonetheless treated as a component of the overall hotel operation, with the F&B Operator answerable to the Manager (and in particular, the GM)? This is a clearer and neater reporting structure, but the F&B Operator may object to not having the final say over F&B operations, for which it has been hired as an expert.
   
   
2. Provision of food to hotel guests – Whilst the F&B Operator may consider the restaurant as a standalone, public-facing outlet (and Owner may be keen to attract non-hotel customers), the guests of the hotel cannot be forgotten. The Owner will likely want to make sure that the outsourced F&B operation will provide breakfast and room service for hotel guests, backed up by a service level agreement with the F&B Operator. If the Owner/Manager offer breakfast as part of the room rate, then a mechanism will need to be agreed to compensate the F&B Operator for providing this; similarly they will want to ensure the cost of ordering room service is not disproportionate to the price-point of the hotel rooms and other services provided by the hotel.
   
   
3. Liability - If they have to share the same space, the Manager and F&B Operator will each want to ensure that the other is held accountable, and that they will not be blamed for the other's actions. The Owner will also want to make sure that if any issue arises, it knows at whom to point the finger. But it's not always as simple as drawing a line between the respective areas of the Hotel and allocating liability accordingly. Say, for example, a mouse is found in the hotel reception – the Manager will not want to be held in breach of the HMA if the mouse came from the kitchen, where the F&B Operator had left food on the floor. Conversely, say a mouse is found in the kitchen – the F&B Operator will not want to be liable if the mouse came from the basement of the hotel, where the Manager failed to lay adequate rodent traps. Meanwhile, the Owner will not want the Operator and the F&B Operator pointing at each other while the mice eats all the cheese!
   
   
4. Reputational matters – The agreement with the F&B Operator will naturally contain quality-control provisions relating to the F&B operations at the hotels (often involving a service level agreement setting out food, service, and presentational requirements) to ensure consistency of quality between the F&B and the hotel. But if the F&B Operator is a celebrity chef or a restaurant brand, then the management and conduct of its wider business may have an impact on the reputation of the hotel restaurant (and possibly the reputation of the hotel). What if the F&B Operator wants to fundamentally change its branding, its pricing, or its offering? The Owner and the Manager will want to ensure any such changes remain consistent with the standards and positioning of the hotel itself (a luxury hotel would not, for example, want its restaurant to become a fast-food outlet ) – but conversely the F&B Operator will not want the tail to wag the dog (and allow the hotel's requirements to fetter its wider business and branding decisions).
   
   
5. Data – Data is a key asset to many businesses, and the Owner, Manager and F&B Operator will inevitably vie over the right to collect, receive and use the data of guests of the hotel's F&B facilities. These creates some interesting questions. Should the Owner and the Manager have the right to cross-market to the F&B Operator's customer database, and vice versa? Is a walk-in guest at the hotel restaurant a guest of the hotel (and therefore a customer of the Owner or Manager) or a guest specifically of the hotel restaurant (and therefore a customer of the F&B Operator)? Should the F&B Operator be able to cross-market its other businesses to guests of the hotel restaurant? Whatever practical arrangement the parties come to, it is paramount that the requisite consents are obtained, and that all data is gathered and process in accordance with data protection laws.

Engaging an F&B Operator to run a hotel's F&B operations offers clear benefits and opportunities to all parties involved. But establishing and agreeing the various rights and responsibilities that underpin the arrangement can be complex, particularly where an existing Manager is in place.