TOUGH TALK: Killing the bottom line
Mike Scully warns against inappropriate benchmarking
Seven Tides Hospitality managing director Mike Scully warns against inappropriate benchmarking and unrealistic GOP percentage targets
The disastrous mistake of rewarding hotel management companies on the basis of increased Gross Operating Profit (GOP) percentages is leading to management companies cutting food and beverage in order to minimise costs, while increasing the flow through to increase their own profits and bonuses — all at the expense of the owners’ take.
There are millions of square feet of unprofitable and under-utilised restaurant and public areas in all major hotels around the world, particularly those which are managed by the international hotel chains, as a result of this fundamentally flawed policy. This is particularly so where food and beverage plays a significant role in driving bottom line revenue, but in doing so, drops GOP margins.
I am a strong advocate that events and F&B drive room sales, and that F&B is also a significant driver of bottom line revenue. However, the high profit percentages requested by operating companies from their food and beverage outlets is the biggest killer of restaurant trade within hotels. The point is proven by the international restaurant brands operating in this market, which are able to attract significant covers into hotels as they are not restricted by percentage restraints. They normally pay rent to the hotel which can be booked into the hotel’s P&L at 100% and this, therefore, does not affect the managing companies’ beloved GOP percentages.
This bias against F&B is causing owners to lose significant amounts of bottom line revenue. In today’s market, with ever-increasing competition, the independent operators who do not have percentage management constraints are in a position to make a better success of their very often popular restaurants.
To put this right, hotel operators have got to throw out the old style, negative percentage restrictions and look at ways of being far more competitive in their food and beverage delivery. We all know that for bars, restaurants, nightclubs and entertainment venues to drive business it is imperative that your entertainment budget be more imaginative than that of your competitor. In saying this, it is also imperative that your special offers such as ‘two for ones’, ‘ladies drink free’, among others, are also innovative enough as these can drive significant trade to your establishment and in turn, bottom line. The cost of delivery is increasing significantly in order to tap into sales and in turn, bottom line profit.
Flow-through is another misused benchmark which constrains business, and is as inappropriate as percentage management. Flow-through has become the operator’s new benchmark in trying to be clever and drive bottom line. We all accept that flow-through, if properly attributed, can be used as an effective tool in benchmarking. However, when used inappropriately — where it is not attributed correctly according to the specific hotel, its market and product mix — flow-through benchmarking can be negative and seriously impact owner’s revenue and bottom line profit.
We all understand that a city centre hotel relying predominantly on rooms revenue with little chance of improved F&B, when increasing its room rate, needs to convert this to anything up to 80% flow-through. However, a hotel with F&B possibilities, opening restaurants and driving business at a cost, should not be benchmarked on those specific flow-though percentages.
I believe operators who look only at fees and drive head office costs down by reducing staff are not able to appropriately manage the benchmarking controls they have initiated. If an operator who generally receives substantial fees from a hotel is not able to manage benchmarks according to that specific hotel and its make-up, they should be very careful before initiating them and owners must be very careful before allowing them to be used.
We all know that volume sales brings down costs and, therefore, we should all be driving the top line. We are not saying sell cheap but in this market, the cost of sales can rise to achieve market share, and this must be driven to increase profits.
Mike Scully has worked for some of the leading hotel management companies worldwide — Sun International, Holiday Inn, Accor and Starwood — as well as developing and managing properties for the Dubai Government. He is currently managing director of Seven Tides — Hospitality, which will be opening four luxury properties in Dubai within the next 12 months and which also owns Dukes Hotel in London.