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Room Service More Than a Revenue Generator?

August 06, 2013
David J. Sangree, MAI, CPA, ISHCHotel News Now

Thinking about that breakfast you just ordered at your hotel, delivered to you on a cart and white tablecloth by a smiling waiter? Think again, as some hotels are considering eliminating this loss leader department. Hotels are constantly transforming in order to keep up with the ever-changing needs and expectations of guests. One of the newer trends some hotels are exploring to meet today’s guest needs is to eliminate room service at full-service hotels and collaborate with local delivery restaurants or add their own ‘grab-n-go’ cafeteria-style eateries. Some large hotels have already started testing out this new trend. The most recent one is the upper upscale full-service New York Hilton Midtown, the largest hotel in New York City, with almost 2,000 rooms.

Trends in Hotel Room Service

The New York Hilton Midtown has decided to discontinue room service effective August 2013. In lieu of room service, the hotel will open a grab-n-go, cafeteria-style restaurant called Herb n’ Kitchen. It will offer breakfast, lunch, and dinner, with menu options such as seasonal salads, artisanal sandwiches, and brick oven pizza.  It also features a barista area to prepare specialty coffee. Guests can pick up an order to bring back to their rooms or as they are heading out for the day, or they can enjoy their meal in the lobby lounge. According to a Hilton Midtown hotel representative, it is still in discussion whether or not they will deliver food from Herb n’ Kitchen to the guest rooms.

The New York Hilton Midtown isn’t the first hotel to change its room service model, and it is not the only one. Some of the other hotels that have a similar grab-n-go eatery or have reduced their room service hours are: 

  • Hilton Hawaiian Village in Honolulu was among the first to eliminate room service back in October 2012. It implemented a new concept called “Fresh Connection”. Guests have the option to order online, by phone, or from a smartphone app and can have their food delivered to their room or be picked up. 
  • DoubleTree by Hilton in Tulsa, Oklahoma, launched the very first “MADE Market”, which offers homemade-style classics and specialty made-to-order dishes. Guests have the option for dine-in, take-out, or delivery. 
  • The Hudson Hotel in midtown Manhattan has reduced room service hours and launched the “Hudson Common Express”, which is a beer hall and burger joint that offers take-out and delivery items including local craft beers, egg & maple braised bacon sandwich for breakfast, and kale Caesar salad with asiago cheese for dinner.
  • The “Public Express” at Public Chicago serves gourmet meals for breakfast and lunch, and dessert made by the famous French chef, Jean-Georges Vongerichten. Guests can either pick up the order or have it delivered to the guest room in a brown paper handle bag within 10 minutes at no delivery charge. 
  • The Grand Hyatt in New York City reduced its room service hours to be closed at 11:00 PM  when it opened the 24-hour grab-n-go market.

Room Service Revenue Trend

Studies from Smith Travel Research HOST Report and PKF Consulting have both showed a constant decline in room service revenue since 2007. In 2012, room service revenue was down to 1.2% of total revenue, compared to 1.3% in 2011, and 1.52% in 2007. We have also analyzed the amount of revenue generated from room service in a group of urban, suburban, and resort hotels, which we have appraised in recent years. Based on our analysis of the financial statements for these hotels, there was a mixture of profitability as approximately 20% of our sample showed a loss while the majority of the properties reported a profit.  Hotel properties account for expenses differently in the room service department, with some properties charging various allocations to the department and others solely showing payroll and not even food and beverage costs.

Many full-service hotels offer their room service department to guests 24 hours a day, which results in particularly inefficient labor management. We have analyzed the room service departmental revenues and expenses of a group of hotels and resorts, which we have previously appraised. We found that many properties indeed suffer from high payroll expenses in this department with some properties achieving losses.

Room service appears to be less favored by hotel guests as revenues have been in a downward trend since 2007. A 2012 PKF chart on U.S Hotel Room Service Revenue in Dollars Per Available Room shows that last year’s revenues averaged $866/room compared to $1,157/room five years ago, which represents a decrease of 25.1%.

 

Evolving Expectations of Guests
 

For many hotels, the amount of revenue generated can barely cover the cost to run the service.  For urban hotels with high labor costs, the properties frequently lose money in the department. However, financial concerns are not the only reason hotels want to cut this service. Room service was very popular ten or more years ago, but today, fewer people actually take advantage of this luxury service. Hotels are trying to keep up with the way guests’ expectations are evolving. Today, many guests like their stays to be technology-oriented with little human interaction. This is why more hotels are incorporating kiosks for self check-in/check-out, and iPads where they can order food, check out all the services the hotel offers (such as concierge), and control room facilities such as room temperature, TV guide, and room lighting.

Many guests prefer to utilize their Smartphone apps or iPads rather than pick up the phone and speak to a representative at the concierge desk or room service. They want a faster, more casual way of dining; a quick bite on their way to their meetings or simply a sandwich that won’t burn a hole in their wallets and take almost an hour. TripAdvisor recently launched its “TripIndex”, a new study to compare room service prices. TripIndex indicated a club sandwich delivered to your room can cost up to $24 in the U.S. and $30 in Switzerland. Cutting room service not only will save costs for the hotels but also for the guests. By offering simple gourmet-style items on the menu and/or delivering food to guests in brown paper bags, hotels can cut labor costs. Thus, guests will no longer have to pay for the high delivery fees and service fees.

Keeping the Diamonds

For some hotels, room service is not meant to make profit. It is a brand standard and an important amenity for those guests who still value the luxury of having room service. Some guests expect to be able to order a meal at 3:00 AM or have breakfast in bed if they are paying a high rate. Even if they have to pay for the high priced service, given that they are staying at a 4- or 5-star luxury hotel, these guests are usually there to pamper themselves. If a 4- or 5-diamond AAA rated hotel wants to keep its diamonds, it will have to keep offering room service. AAA diamond rating standards indicate a 4-diamond hotel is required to have room service available for breakfast, lunch and dinner, while a 5-diamond hotel is required to have room service available 24/7.  We project AAA will continue to maintain the standards for 4- or 5-diamond hotels to provide room service.

Summary

Should full-service hotels eliminate room service? Many hotels are already testing the waters by changing their room service practices. While studies show that in 2012 only 1.2% of total revenue was generated from room service, it could certainly make sense for some hotels to remove the service, but for other hotels not having room service would turn away some guests. When it comes down to making a decision regarding service and amenity changes, guest expectations and a hotel’s status level should be the main focus.

At properties where guests want to take advantage of being pampered with breakfast in bed or a meal in the room, and at properties that want to keep their 4- or 5-diamond AAA ratings, room service should be available. For those properties in a market that does not offer many nearby casual eateries, with guests arriving at all hours (such as airport areas), room service would be an essential service. Even if it does not generate profit, it is an important amenity that is part of the guest’s experience.

On the other hand, for the properties that are in a market with high demand that isn’t very volatile, like New York City with countless casual eateries around every corner, it would make sense for these hotels to replace room service with a casual grab ‘n go eatery or by allowing restaurant delivery, since this department can be a money-loser.

Author: David J. Sangree, MAI, CPA, ISHC is President of Hotel & Leisure Advisors, a national hospitality consulting firm. He performs appraisals, feasibility studies, impact studies, and other consulting reports for hotels, resorts, waterparks, golf courses, amusement parks, conference centers, casinos, and other leisure properties. He has performed more than 2,000 hotel studies and more than 400 indoor and outdoor waterpark resort market feasibility and/or appraisal studies across the United States and Canada.  Mr. Sangree received his Bachelor of Science degree from Cornell University School of Hotel Administration in 1984.  He became a certified public accountant in 1989.  He became an MAI member of the Appraisal Institute in 1995 and a member of the International Society of Hospitality Consultants in 1996. Since 1987, Mr. Sangree has provided consulting services to banks, hotel companies, developers, management companies, and other parties involved in the lodging sector throughout the United States, Canada, and the Caribbean. He has spoken on various hospitality matters at seminars throughout the United States and on Good Morning America and CNBC. The author wishes to thank Ms. Ya Liu, our 2013 summer intern from Michigan State University's School of Hospitality Business, for her assistance on the article.

This article was originally published on Hotel News Now


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