Why Hotel Restaurants Struggle: Price vs. Reality
Hotel restaurants have long had the reputation for being overpriced and rightfully so. Most of them deserve it. Recently, several hotel companies have acknowledged this negative consumer perception of their restaurants and have made strategic moves to be more approachable in the pricing. Yet the question remains why do so many hotel restaurants still believe that they can charge top of the market prices without delivering a comparable experience and still expect to have a successful business? Are they being pushed by ownership, by the hotel General Manager to raise prices or are they just simply out of touch with reality?
Taking a closer look it’s important to acknowledge that hotel restaurants do, in most cases, pay higher wages and benefits and that this may influence the need for higher prices. But on the flip side they do not pay rent or utilities on their space as an independent restaurant would so this may be a wash. In many cases they also have the potential for banquet and event business that can provide a positive “cushion” to the operation. So why is pricing out of line?
Recently, I was visiting a hotel and the General Manager was very proud to share how they casually increased the menu prices in the restaurant and had seen a subsequent rise in average check. In reality this kind of short term solution for a quick increase in revenue quickly fades. Following price increases on the menu, guests may have a subtle case of sticker shock but continue on with the meal while looking to see what has changed to justify the price increase. Typically, unless something substantially has changed to improve the experience they may politely pay their bill, tell their friends about the increase and not return. A clear understanding of the value proposition being delivered to the guest is essential. Simply raising prices without improving on the guests experience, service delivery or quality levels erodes the guests’ perceived benefits driving current frequent guests to seek alternative choices.
The value proposition is the guests’ perception of the benefit the restaurant provides and does uniquely well. It is imperative to have a clear understanding of what makes a restaurant attractive to guests. Just because the hottest restaurant in town is charging $46 for entrees doesn’t permit a free pass for all restaurants in town to do the same. A thorough examination must be given to how their value proposition is being delivered taking into consideration ambiance, location, quality, service levels, design, crowd being attracted and reputation In addition careful scrutiny and understanding of what your guests are currently buying is imperative. Many operators conveniently ignore menu results if they are not telling the story they want to believe and negatively affect their perceived perception of the restaurant. A friendly hint, “you are not a hot cutting edge restaurant if you only do 30 covers a night”. As they say numbers don’t lie.
The same holds true when pricing and positioning beverage menus. We’ve all seen it on menus, the hotel lobby bar charging $375 for a bottle of Dom Perignon. This is fine if the hotel and lobby bar is positioned to draw that level of clientele, has the right vibe, is buzzing, and provides the appropriate service. However, if it is a typical hotel lobby bar, it would beg the question why is this being offered and who would buy it? Presumably, when that “once-a-year” order is placed, it takes twenty minutes to have it delivered because someone needs to find the manager to contact security to open up the storeroom to locate the bottle. . Sound familiar? Why have it? Does it improve the guest value proposition?
In the end, it all comes down to the elementary economic theory of margin vs. volume. Simply put, the lower the margin the higher the volume and vice versa. Operators need to clearly understand the optimal balance for the operation and where the breakeven point lies. Many operators will brag about high margins but a look in their restaurant is likely to reveal twice as many empty seats to occupied seats and low quality food to save costs. The goal should always be to find the optimal balance between margin and volume that ensures the operation is maximizing the opportunity of the space both in revenue, profit and guest experience. End of the day high margin on low revenue brings little dollars to the bottom line.
In many cases opting for a lower margin with higher volume is an optimal solution for several reasons. First, the higher volume provides better penetration into the market, capturing share and the opportunity to build reputation. Second, greater volume brings in more profit dollars, it will be at a lower margin but it is still more dollars. Additionally with the higher volume the fixed labor and set up costs are covered. Third, with higher volume product is moving faster, is fresher which hopefully results in less waste making the operation more efficient. Finally, with higher volumes, servers have the ability to make more tips which may ultimately reduce turnover and attract the best in the market to join your team.
In some cases a high margin, low volume strategy may be the right fit. However, this is for restaurants that provide a very unique product and are in markets that may have high barriers to entry. Regardless, there is a breakeven point that will need to be identified to know when fixed costs are satisfied and profit can begin to flow. Every restaurant, regardless of price strategy, should know exactly what revenue number must be achieved to begin the flow of profit. Keep in mind that a high margin, low volume operation may be an indicator that you are missing growth opportunities.
Each operation must decide with their leadership team and ownership group where the optimal balance falls within the margin volume conundrum. Once this is agreed upon, a clear strategic plan should be developed to achieve these goals. This requires defined goals for daily covers, quarterly or monthly sales/profit goals, reputation management and average check backed up with clear training programs to give the entire team the skills and tools to achieve these goals. In addition, verified analytical and business intelligence tools should be utilized to monitor the agreed upon metrics to identify positive and negative trends and take corrective action when necessary.
Many hotel or free standing restaurant operators fail to acknowledge that the single biggest cost in any restaurant is an empty seat. It is an extremely perishable product, every hour a seat sits empty is lost revenue never to be recovered. The pricing strategy you apply in the restaurant will have a direct correlation to number of empty or full seats. Consequently, the focus should be to ensure that each seat is filled, and turned as often as possible.
Many operators will reason that restaurant breakfast sales have dropped because of the “Starbucks” phenomenon which suggests that guests prefer a grab and go breakfast option. Is this really true, or is it more likely that guests can’t imagine paying $22 for eggs and toast? Or that they would rather leave the hotel than pay $46 for Sea Bass and $24 for a glass of Chardonnay? You will need to decide for yourself but those empty chairs are sure expensive!