Hotel Food and Beverage Cost

Hotel Food and Beverage Cost Control

An Examination of Effective Hotel Food and Beverage Cost Control Methods Today

Effective cost control techniques are absolutely essential in today's hotel industry. It is also critical to use the best tools that are available to help hotel managers implement these techniques; however, because every hotel setting is unique, it is vital to understand what approach is best suited to which situation. To this end, this paper provides an examination of basic hotel management food and beverage cost control techniques, including organization, profit planning, sales and break even analysis, menu pricing, food purchasing, storeroom control, food production, beverage and bar control laws and food service. A summary of the research will be provided in the conclusion.

Review and Discussion

Overview of Basic Hotel Management Food and Beverage Cost Control Techniques. In coming years, hotel managers will be in great demand for two fundamental reasons: 1) more large hotels and motels are being constructed today; and 2) business travel continues to increase along with rising domestic and foreign tourism. In this environment, "The hotel manager with an eye for the bottom line -- one who knows accounting and understands cash management -- and an eye for the amenities that give the hotel's customers the best value for their money will be much sought-after in this decade" ("Boom careers for the coming years" 79). In his essay, "Turn a Bankrupt Hotel into a Successful One," Jerry Morrison (1991) suggests that hotels may be losing money because their expenses exceed their revenues. According to Hayes and Miller (1995), in order to control costs more effectively, food service managers must have a confident command of accounting, marketing, and legal issues, as well as food and beverage sanitation, production, and service methods.

Organization. In virtually every type of organization, responsibility and accountability are inextricably related. According to Loren E. Newland (1997), "This concept is no less true in the lodging industry. For example, the food and beverage manager is responsible for ensuring that quality meals are served to guests. If guests are satisfied, the food and beverage manager receives the credit. If the guests express dissatisfaction with their dining experience, the same manager is subject to criticism" (45). For any hotel manager today, then, an essential part of the strategic approach to identifying more effective food and beverage cost control techniques is to refine existing approaches as well as determine superior techniques when possible to better address shifts in the needs of customers. In fact, customer satisfaction is the ultimate goal of total quality management efforts of all service industries (Randall & Senior 74). Generally, these techniques either increase a hotel's penetration of its current market base or extend it into related segments. "By introducing playgrounds, for example," Calkins and his colleagues report, "McDonald's encouraged families to come more often and to stay longer and purchase additional beverages and desserts" (Calkins, Eagle, Farello, Horn & Loch 134).

Profit Planning. Effective profit-planning techniques allow restaurant managers to understand the effects of planning decisions on the organization's financial returns and profitability; the process includes the preparation of planned (budget) profit and loss statements and balance sheets (Mcmenamin 524). According to this author, "The objective of profit planning is to show the effects of planning decisions on the firm's expected level of financial returns and profitability over the planning period" (Mcmenamin 559). The primary difference between profit planning and cash planning is that profit plans must taken into account all revenues and expenses that are related to the planning period, regardless of whether they are to be paid during the period or not; therefore, profit and loss statements will include non-cash items such as depreciation (Mcmenamin 559).

Such profit and loss statements are prepared on an accruals/matching basis, a process that requires the matching of all revenues earned, or expected to be earned, during a defined accounting period, with all the expenses incurred, or expected to be incurred, in generating those revenues during the identical period (Mcmenamin 559). Consequently, managers will have to ensure that profit and loss statements are adjusted to account for accruals and prepayments; in this regard, accruals can be viewed as those amounts that are owing at the end of an accounting period as to the goods or services that were actually consumed during the period (such as food, beverages, heat and light). According to Mcmenamin, "Prepayments are amounts paid in advance during one accounting period which relate to the next accounting period, e.g. insurance premiums" (559). In addition, and perhaps most importantly, keeping food costs down and waste to a minimum is essential to this profit planning and making process (Baird & Rasmussen 673).

Sales and Break-Even Analyses. In their book, Capital Budgeting: Financial Appraisal of Investment Projects, Dayananda, Harrison, Herbohn, Irons, and Rowla (2002) note that measuring the opportunities and risks that are associated with the expected cash flows of any endeavor and incorporating these factors into the determination of the net present value (NPV) is essential for any real-world project evaluation. "There are various ways in which risk can be incorporated into the NPV computation and capital budgeting decision support," they advise. "These include the risk-adjusted discount rate, the certainty equivalent, sensitivity and break-even analysis and simulation" (114). The process involved in break-even analyses serves to provide hospital managers with a determination of how low an income variable can fall, as well as how high a cost variable can rise, before the project breaks even at a net present value of zero. "For example," Dayananda and his colleagues say, "management may wish to know how low a product's price could go in a price war before the project becomes uneconomic. Information about the critical variables allows management to make decisions at two points in time in the investment analysis" (133). During the planning phase of the break-even analysis, hotel managers can allocate additional resources to develop more reliable forecasts for variables which will be critical to a given project's success. The decisions made by the hotel manager or others involved in the decision-making process during this stage are known as ex-ante (before the event) decisions (Dayananda et al. 133).

During the operational phase of the break-even analysis, managers can focus on the specific aspects of the identified critical variables so that the project continues to achieve the hotel's goals; the decisions made during this phase are called ex-post (after the event) decisions (Dayananda et al. 133). These break-even analyses can then be applied to a wide range of economic and human resource variables to help identify optimum pricing and staffing levels; certainly, though, one of the most important of these variables will always be at what level to set menu prices based on these constantly changing variables, but there are other factors that should be taken into consideration in this analysis that transcend a simple break-even analysis and these are discussed further below.

Menu Pricing. According to Kreul (1982), a growing body of research suggests that menu prices that that fall just below a round number result in more sales. As a result, many menus will feature prices that use the digit 9 among the rightmost (or ending) digits of a price, as in 99-ending prices such as $17.99. This author notes that while these studies have clearly demonstrated that the use of the 99 price ending (as opposed to the 00 ending) can significantly increase sales, it remains unclear how such an effect occurs. "One possible source of a sales effect is the image, or impression, that the 99 price ending may communicate to consumers. If the 99 ending communicates a favorable price image that is not counteracted by also communicating an unfavorable quality image, then an enhancement of sales might result" (Kibarian & Schindler 95). Menu pricing decisions can be seasonally influenced, and just as the break-even analysis must taken into consideration a wide range of variables in determining a final answer, food purchase decisions for any given menu item must be based on a range of factors, not the least of which are quality and price; these considerations are discussed further below.

Food Purchasing. According to Neely (2002), the food margin of any given menu item represents the difference between its sales price and the cost of its component raw materials. This author reports that, "Individual restaurant budgets were built up from assumptions about targets for covers, sales, and food margin. Margin is calculated by dividing food purchases (adjusted for changes in inventory) by actual sales" (252). Unlike many industries in which break-even analyses and other management tools are commonly used, though, restaurants are faced with a highly complex situation characterized by razor-thin profit margins and demanding clientele.

In this dynamic environment, planning for the food purchases to achieve optimum food margin targets must start over with the introduction of a new menu item. The final decision to include or exclude a menu item will largely depended on its ability to be satisfactorily integrated into the menu as a whole based on the availability, quality and prices of the ingredients required. In this regard, Neely advises that a "Menu has to deliver the desired target food margin percentage whilst offering a variety of tastes across a range of price points, and conform to the expectations of the brand concept" (252).

Storeroom Control. Clearly, without adequate security procedures in place, a hotel's storeroom can turn into a major center for pilferage and other shrinkage. Key control is essential to this security if electronic locks are not in place (Sunstrom 59). If physical keys are used, or a combination of approaches is elected, Sunstrom recommends that the key numbering system follow that recommended by the American Hardware Association (AHA). Under the AHAs system, the grand master key is designated with a single upper-case letter; the next level of master keys would be the previous letter designation and another letter. Change keys (these are single keys that operate a single door) are designated with a combination of letters and numbers. Special purpose keys, such as A1, A2, are used when it is desirable for the grand master and a change key to both operate a door; Sunstrom points out that this type of locking arrangement might be used on a storeroom or private office (59).

This author also recommends that the security manager know all personnel who have access to key cutting equipment located on the property because, "Most common key blanks can be purchased at a local hardware or discount store. An employee may purchase blanks and then use the property's equipment to cut the keys. This is especially likely if the property has an effective key control program where keys cannot be taken off the property and where all blanks are controlled" (Sunstrom 60). Ideally, the equipment used for key cutting should be kept in a locked cabinet; if this is not possible, Sunstrom suggests removing a critical part of the key cutting equipment, such as the drive belt, and securing it elsewhere (60).

At any rate, "A problem faced by most security professionals in the lodging industry is the question of who gets to take keys for the property home and who has to turn keys in daily. The number of employees authorized to take keys off the property must be kept to an absolute minimum," and comparable security measures must be taken for electronic key cards as well (Sunstrom 60).

Food Production. For example, Gary Alan Fine (1996) reports that, "In particular, chefs, because of the managerial demands made of them, must be skilled in many different types of tasks. This range is exemplified in a phrase, often repeated, that 'a chef is many things,' claiming multiple intelligences necessary for occupational success" (91). Because each hotel setting is unique, food production management requirements will vary; furthermore, depending on the type and quality of food under production, portion control and food costs may become problematic. In this regard, Fine points out that: "Professionalism is embedded in the choices of work. Cooks take professional pride when experience and expertise permit them to cook without relying on recipes, using approximate amounts. To an observer, their informal judging of ingredients is impressive and to a diner, worrisome. The cooks at the better restaurants taste their creations and correct them if needed" (91). Further complicating the management of food production in some hotels is that fact that many management-chef relationships are anecdotally problematic as a result of the independence and power of top chefs in the hotel hierarchy (Atkinson & Butcher 25).

Beverage and Bar Control Laws. These laws vary from state to state, so it is important for the management of any hospitality establishment that serves alcohol to be aware of the controlling legislation in their state and locality. Indeed, those in the hospitality industry who seek to serve alcoholic beverages can be held liable for what happens to their clientele. For example, in his essay, "One for the Road," Mark H. Beaudry (1997) points out that:

Hotels and restaurants put themselves at risk each time they serve a customer beer, wine, or liquor. An intoxicated patron can slip and fall, get into a car accident, injure another guest, or get involved in any number of altercations that could lead to a costly lawsuit against the company. In many states, restaurants and hotels can be held liable for an intoxicated customer's actions, even if those actions occur off the company's premises. The result can be the loss of millions of dollars and the business's liquor license. (80)

Notwithstanding the risks involved, the profitability of alcoholic beverage sales and the investment made in the infrastructures required to serve it means that most hotels and restaurants cannot afford to discontinue its sales. Therefore, it is the responsibility of hotel security manager to ensure that procedures are in place to help minimize the risk of alcohol-related incidents. According to Beaudry, alcohol awareness training programs are a valuable technique that a hotel's management can use to educate workers about how to prevent and recognize intoxication as well as how to handle an already intoxicated customer before someone gets injured. Today, the majority of states leave it up to the individual hotel or chain to decide whether to conduct an alcohol awareness program for their employees; however, the trend is that more and more state and local governments are beginning to require that companies provide such awareness training for bartenders, waiters, waitresses, and other employees involved in the sale of beer, wine, and liquor (Beaudry 80). The Educational Foundation of the National Restaurant Association reports that alcohol awareness training is now required in Alaska, Delaware, Hawaii, Maryland, New Mexico, Oregon, Tennessee, Utah, Vermont, and Washington state; of these states, Oregon, Delaware, and Hawaii have developed specific state-developed programs that must be used, while Utah has adopted standards that must be included in a company's training program.