Should Your Hotel Run Its Own Restaurant?

Good hotel restaurant strategy starts with one rule: run your own restaurant only if it has a job to do for the rooms, and you can staff and manage it to do that job well. Profit on its own is a weak reason. Hotel restaurants rarely earn spectacular margins, and the ones that look unprofitable on paper may still be the reason guests book.

So the first question is what the restaurant is for, before whether it makes money. Answer that plainly, and the model almost chooses itself.

What does hotel food and beverage really earn?

Modestly, and unevenly. An analysis by PKF Hospitality Research of full-service hotels over 2000 to 2010 found an average F&B departmental profit margin of 26.4%, ranging from 21.6% at the low point in 2009 to 32.6% in 2000. Labour alone took 43.4% of department revenue.

Later UK data tells a similar story. HotStats found that regional UK hotels had F&B profit conversion of 33.8% in 2015, down from 39.2% in 2000, while London held steady at 37.0%.

These are older, region-specific numbers, with different definitions, so treat them as a shape and not a benchmark. Rooms revenue is typically far more profitable per pound or dollar. F&B earns its place in other ways.

Where does the revenue come from?

Often not from the restaurant. In the PKF study, banquet-related revenue was 55.5% of F&B in 2010, restaurants 30.2%, lounges 5.6% and room service 4.4%. A 2016 CBRE analysis cited by an HVS executive search chief put banqueting at 36.5% of F&B revenue, with other food venues at 21.1% and beverage venues at 11.9%. The HotStats study found conferences and banqueting were about 30% of F&B in both London and the regions.

The mix depends on the hotel, but the lesson is stable. In many properties the restaurant is the smaller part of the F&B business. If you run conferences and weddings, the kitchen's real customer may be the events team.

A hotel restaurant is a promise to the rooms upstairs, and it is paid for in more ways than the till.

What jobs can a hotel restaurant do?

Four, and most hotels need only one or two:

1. Breakfast engine. Breakfast is guaranteed demand every morning. A restaurant that feeds guests well is doing a core hotel job.
2. Reason to book. For some properties, the table is why a guest chooses you over the competition.
3. Local anchor. Locals fill seats in quiet midweek periods and make the lobby feel alive. The PKF study credits the ability to draw local patrons for part of F&B's stability through recessions.
4. Events kitchen. The restaurant's brigade and stores support banquets and meetings.

Write down which jobs yours has to do. A restaurant doing none of them is a cost with a view.

What are the four models?

The contracts differ, but the options are familiar. A law firm overview of hotel F&B arrangements describes leases, management agreements and consultancy agreements, and the fourth option is to offer less.

An HVS executive search column notes that outsourcing offers expertise and steady income but risks losing control over concepts, marketing and profitability. It also says outsourcing should not be a way to get rid of a problem. It should improve accountability.

What must a contract protect if you hand it over?

Breakfast and brand come first. The same overview of F&B agreements lists the issues that usually need a clear answer: who provides breakfast and room service to hotel guests, quality standards, reporting lines, liability for shared spaces, control of branding and pricing, and use of guest data.

Guest breakfast is the one that trips people up. If the restaurant operator earns nothing from serving hotel guests at 7 a.m., service will drift. Agree a service level, a way to measure it and a remedy.

This is general information, not legal or tax advice. Lease and management terms vary by country, so check current local rules with a qualified adviser before signing.

What does this look like for a small hotel?

Take a 40-room city hotel with a 60-seat restaurant that loses money on paper. The numbers invite closing it. But suppose it serves every guest breakfast, hosts the small meetings that fill midweek rooms, and gives the lobby its evening life. Closing it would remove all three at once.

Now take a 15-room coastal inn whose restaurant opens four nights a week and needs a chef the hotel cannot keep. Here a partner restaurant down the road, a good breakfast and a short bar menu may serve guests better, and cost far less in management attention.

Same question, different answers. The facts that matter are the jobs, the people and the cost of failure.

How do you price the restaurant on the whole hotel?

Add up what the hotel would lose, and what it would save, if the restaurant closed tomorrow. That net figure is the decision. The restaurant's own profit and loss account is only one line of it.

An illustrative case, in invented units a year. The restaurant shows a loss of 40. But the hotel would still have to serve breakfast, and doing it through a stripped-down alternative would cost 30. The kitchen supports events and meetings that earn a profit of 25. And suppose guests who book partly for the dining room bring 15 of room profit. Put together: minus 40, plus 30, plus 25, plus 15 is a hotel-level contribution of 30. Take away the guesswork in each estimate and the figure moves, but the method shows why the outlet alone misleads.

Be hard on the estimates. Count only the rooms and events you can tie to the restaurant, for example from booking notes or event enquiries, and halve anything you cannot. If the net is still positive, keep the restaurant and judge its manager on that number. If it turns negative once you are strict, the restaurant makes a case for a lease or a smaller offer.

Reversibility is the last filter. A smaller offer can grow into a restaurant later, but a closed kitchen with its team dispersed is costly to rebuild, and a long lease is slow to unwind. When the numbers are close, prefer the model you can change your mind about.

What are the common mistakes?

• Judging the outlet alone. Fix: report the restaurant's own result and its contribution to rooms and events side by side.
• Copying a famous hotel's dining room. Fix: start from your guests and your town.
• Leasing without a breakfast clause. Fix: write the guest service level into the agreement.
• Opening a restaurant to lift the brand, then starving it. Fix: fund the team, or choose a smaller offer and do it well.

How do you decide?

Use three questions, in this order.

1. What job does the restaurant do for the rooms? If you cannot name one, close it or shrink it.
2. Do we have the people to run it well? A strong head chef and a restaurant manager who can lead a team are not interchangeable with a hotel department head. If not, lease or partner.
3. What would we lose if it failed? If a failure would hurt reviews, rooms or events, keep control through a management agreement or a tight lease. If not, give the operator room.

Then price the answer on the whole hotel, not the outlet. Include rooms revenue it supports, events it enables and local demand it brings. The morning numbers in 10 numbers every hotel owner should read each morning help you see whether the answer holds up.

If you do run it, the concept deserves real work. See restaurant concept development, and think about how dining fits the wider hotel guest journey.

Key takeaways

• Decide by the job the restaurant does for the hotel, not by its own margin.
• F&B margins are modest in the data, and much of the revenue often comes from banqueting and events.
• Four models exist: run it, lease it, a management agreement, or a smaller offer.
• Whatever you choose, protect guest breakfast, brand standards and guest data in writing.
• Judge the result on the whole hotel and revisit the decision when the mix of guests changes.