- Email: [email protected]
Hotel—restaurant co-branding—a preliminary study
H0tel-l
I
,s and cons of hotels' abandoning ]cing them with chain-type
Co-branding is the pairing of two or more recognized brands within one space. The idea behind co-branding is that several brands can command more power through customer awareness and traffic than can a single brand-name operation (either a restaurant or hotel by itself) or an independent, "no name" operation. Many examples of cobranding arrangements between food and beverage and hotel operators exist, including:
Formerly a manager of contractfood services and now category marketing manager,globalfood and support services,for A R A M A R K Corporation, Juliette M. Boone holds a Master of Management in Hospitality degreefrom the Cornell University School of Hotel Administration. She thanks her honorsmonograph advisor, assistant professor Christopher C. Muller, Ph.D.,for his help and guidance with her research. © 1997, Cornell University
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• Starbucks coffee available at Sheraton Hotels I and California Pizza Kitchen pizza at Westin Hotels; 2 • Quick-service kiosks in lobbies (e.g., a Sara Lee cart or Pizza Hut kiosk at Marriott Hotels);3 • Restaurant space leased to established restaurant companies or franchisees;4 and • Purchasing rights to a branded restaurant franchise,s Co-branding between restaurants and hotels has existed in one form or another for many years, starting with Trader Vic's in the 1930s. The practice has been viewed more strategically for both restaurant and hotel operators in recent years. In 1986, for example, R e d Lobster opened two restaurants in Holiday Inn properties in Charlottesville, Virginia, and Texarkana, Arkansas. 6 Furthermore, co-branding's expanding popularity is evidenced by the number of brand-name restaurantand-hotel deals that have been negotiated over the past several years,v Clearly, some hotel and restaurant operators see co-branding as offering attractive benefits, not only as a way to minimize the problems associated with traditional hotel food and beverage operations, but also for chain-restaurant companies seeking to increase points of distribution and customer traffic. 1Margaret Littman,"Hotels Try to Hold 'em In" Restaurants & Institutions, July 15,1996, pp. 44-47. 2Cherie Hensdill,"Serving Up Excellence," Hotels, November 1996, pp. 115-118. 3Littman, pp. 44-47. 4james Scarpa,"Hotel Market Segment Report; Foodservice Strategies," Restaurant Business, Vol. 92, No. 2 (January 2,1993), p. 108. SCarolyn Walkup,"lKestaurants Check Into Hotels," Nation's Restaurant News,January 23, 1995, pp. 31-32. 6Denise Brennan,"Reinventing Hotel FoodService;' Restaurant Business, Vol. 86 (May 20, 1987), p. 208. VSee,for example, Robert W Strate and Clinton L. Rappole, "Strategic ALliancesbetween Hotels and Restaurants," Cornell Hotel and Restaurant Administration Quarterly, Vol. 38, No. 3 (June 1997), pp. 50-61.
A panel of operators at the 1996 National Restaurant Association (NKA) show in Chicago agreed that co-branding is responsible for substantially increasing restaurant sales as well as hotel occupancy.8 However, I have found no study or other empirical evidence to support that conclusion. That lacuna raises the question of whether it is possible to assess any substantive qualitative and quantitative value for either a hotel or a restaurant in a co-branding arrangement as compared with what each entity could achieve independent of the other. In this article I report on my exploratory effort to determine the synergistic value of pairing branded restaurants with chainaffiliated hotels Trade-journal articles and other literature discussing the benefits of co-branding back through 1987 have been mostly anecdotal in nature, and thus cannot facilitate assessment of the value of cobranding. Extant co-branding arrangements described in articles ranged from those in the economy, limited-service segment to the luxury, full-service segment. 9
The Hotel F&B Revolution For years hotel companies have struggled with unprofitable, oftentimes unmanageable food and beverage operations) ° Hotel operators essentially accepted an undesirable situation, although many experimented with ways to improve matters. Resignation ended with the 8pamela Parseghian,"Branding Offers Hotels Opportunity to Increase Food Sales," Nation's Restaurant News, Vol. 30, No 23 (June 10,1996), p. 96. 9For example, see: Wendy Tanaka,"Not So Strange Bedfellows," San FranciscoExaminer, August 11, 1996, p. B-1; and Frank Andorka,Jr., "High IKecognition Restaurants; Linking Successful Limited-Service Hotels with BrandName 1Kestaurant Chains Is Opening a Whole New Avenue to Success," Hotel and Motel Management, September 18, 1995, p. 44. l°Scarpa, p. 108.
recession of the early 1990s and the rise of limited-service hotels that operated without a restaurant. In recent years a variety of strategies for improving hotel food and beverage profitability have appeared, including downsizing or eliminating food and beverage operations, 11 developing proprietary concepts, 12 strategically locating hotels near commercial food and beverage operations, 13 leasing out space to local restaurateurs, franchisees, and restaurant companies, 14 or buying rights to a restaurant franchise to replace or supplement in-house food and beverage operations. 15 Such strategies are briefly outlined on page 40.
Co-Branding Co-branding is one of many strategies developed in response to the typically poor profitability of hotel restaurants. The idea behind cobranding is that a customer is more likely to choose a familiar restaurant over one that is unknown) 6 Marriott Hotels, for example, was cited as the first hotel chain in recent years to establish a nationally recognized restaurant brand in its hotels when it initiated a licensing agreement with Pizza Hut in 1989.17 One writer reported that a Best Western manager attributed a 10-percent increase in occupancy to the replacement of that property's self-operated restaurant with a Country Kitchen) s That nToni Giovanetti, "Hotel Chains Use Branded 1Kestaurants, Packaged Food to Boost l~_evenues," Hotel Business, Vol. 5, No. 14 (July 21-August 6, 1996), pp. 16-17 12Littman, pp. 44-47. 13Scarpa, p. 108. 14Scarpa, p. 108. ISCarolyn Walkup,"Cost-Cutting Hotel Chains Check In With New Brands, Value Formats," Nation's Restaurant News, August 7,1995, pp. 130-134. 16David Aaker, Managing Brand Equity: Capitalizing on the Value of a Brand Name (New York: The Free Press, 1991). 17Littman, pp. 44-47. 18Carolyn Walkup,"Carlson Launches TripleBranded Hotel Kestaurant Complex;' Nation's Restaurant News, October 9, 1995, p. 1.
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Exhibit 1 Alliances between hotel companies and national restaurant brands Carlson (Country Inn, Country Inn and Suites, Radisson) • TGI Friday's, Country Kitchen, Italianni's
~Me{mmedia Re~{aurant Gioup (Bennigaffs Bonanza) : : Choib~ PiCk~ (a foodcourt)~b~ands ava able inciude PizZeria U:no Nathan!s FamoUs Heaithy,,CBoiob De ace Nest e Toll:House Cafe; ; and Sarks Gourmet Coffees
Hospitality Franchise Systems (HFS) • Pizza Hut • Country Kitchen
....
::
500 hotels nationwide.
:
:
:
Hilton
• Benihana
Interstate, Richfield, Embassy Suites, Motel 6 • Pizza Hut and Pizza Hut's delivery program
sheraton .... • "Sheraton Cuisine": branded concept that includes Starbucks coffee, Vie de France baked goods, and Robert Mondavi wines. Sources: Frank H. Andorka, Jr., "High Recognition Restaurants: Linking Successful
Limited-Service Hotels with Brand-Name Restaurant Chains Is Opening a Whole New Avenue to Success," Hotel and Motel Management, September 18, 1995, p. 44; Denise Brennan, "Reinventing Hotel Food-Service," Restaurant Business Magazine, Vol. 86 (May 20, 1987), p. 208; CarN Casper, "Confirmed Reservations," Restaurant Business, November 20, 1995, pp. 104-118; Toni Giovanetti, "Hotels Team Up with F&B Brands," Hotel Business, September 21-October 6, 1995, pp. 1,8, and t0; Margaret Littman, "Hotels Try to Hold 'era in," Restaurants & Institutions, July 15, 1996, pp. 44-47; and Robert W. Strate and Clinton L. Rappole, "Strategic Alliances between Hotels and Restaurants;' Comelt Hotel and Restaurant Administration Quarterly, Vol. 38, No. 3 (June 1997), p. 52.
article, however, made no mention o f the extent o f the restaurant's success or the qualitative impacts o f the arrangement from guest, employee, and management perspectives. In another example, a Holiday Inn franchisee replaced the property's independent restaurant with a T G I Friday's and thereafter reported exponential restaurant sales growth. .9 T h e actual effects on occupancy or personnel are unknown, making it difficult to fully assess the actual overall effects o f that arrangement on b o t h the hotel and restaurant operations. Exhibit 1 summarizes some existing co-branding affiliations.
Benefits Study T h e purpose o f this study was to establish whether there is qualitative and quantitative value created for both a hotel and restaurant w h e n co-branding occurs as compared with what each entity could achieve independently o f the other. To focus the research I developed five criteria to provide a basis for comparison between co-branded properties: • T h e hotel property must be a full-service, mid-scale to firstclass nationally-branded hotel with at least a two-year operating history; • T h e hotel property must have had an unbranded or independent full-service restaurant operating for at least one year before replacement by a nationally branded restaurant targeted for the mid-scale to upscale-casual market segment; • T h e hotel property must share at least one wall with the branded restaurant concept; • Both the hotel and the restaurant must maintain separate profitand-loss statements; and 19Carol Casper,"Confirmed Reservations," Restaurant Business, November 20, 1995,
pp. 104--118.
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• The branded restaurant's parent company must generate at least $100 million in annual revenues.
Methodology An extensive literature review helped me to create a database of hotels, management companies, and restaurants currently involved in cobranding. That secondary research also aided in defining the study's scope and in designing its survey questions and documents. Those instruments consisted of a four-page questionnaire and a cover letter. The surveys led to the primary research that took the form of personal and telephone interviews with hoteland restaurant-company executives as well as property-level managers. Finally, surveys were sent to all the property-level managers who had agreed during the interviews to participate in the research project. Throughout the study I expanded the database of co-branded partners as I learned of more examples of such arrangements, and as a result additional property-level managers were added to the study after they had been interviewed. Questionnaire. The survey questions comprised six categories: (1) General information about the hotel and management firm; (2) Information about the existing branded restaurant including opening date, number of seats, and approximate square footage, as well as similar information about the independent restaurant that operated prior to the branded concept; (3) Information regarding the relationship between the hotel and the restaurant including leasing or franchising agreements; fees, rent, and other payments; and services provided by the restaurant; (4) Information regarding the financial performance of both the hotel and restaurant before
and after co-branding (e.g., A D R , occupancy, and average net income, as well as restaurant average annual revenue, check, and net income); (5) Subjective information about the complexity of managing or working alongside a branded concept and management's observations about guest perceptions of the branded concept; and (6) General information about the person completing the survey. I intended that the questionnaire be completed by the hotel's general manager or director of operations. In most cases hotel managers had restaurant operating figures available even if the restaurant was leased to an outside franchisee because payment to the hotel is typically contingent on the restaurant's financial performance. In some instances two managers filled out the survey; one from the hotel and the other from the restaurant. Cover letter. The questionnaire, accompanied by a cover letter, went to both property- and corporatelevel managers to enhance propertylevel participation. I promised confidentiality to encourage managers to submit as much data as possible and, as an incentive, I also promised managers a copy of the completed research study in exchange for their cooperation. Database. To locate and track study participants, I developed a database of hotel and restaurant owners and management companies, as well as hotel and restaurant franchisees, from primary and secondary research. Those individuals and properties included in the database represented various degrees of co-branding experience, from the property to corporate levels. Interviews. I interviewed both corporate-level and property-level managers. Examples of the issues I discussed with corporate managers
are proprietary hotel food and beverage brands, the relationships between chain restaurants and chainaffiliated hotels, and trade dress. Property-level managers provided information regarding tactical issues that arise from co-branding arrangements such as room-service responsibility, banquet service, financial management, staffing, training, accountability, and retrofitting branded restaurants into existing F&B space. Solicitation and response. I first telephoned all prospective study participants. 1 explained my project to corporate-level executives and asked about properties within the company where co-branding relationships were occurring. Those managers often agreed to an impromptu telephone interview. When a property-level manager agreed to participate, I sent the questionnaire with a postage-paid, self-addressed return envelope. Overall, I contacted a total of 26 properties. O f those, 20 managers agreed to participate in the project. O f the 20 who agreed to participate, 12 managers actually returned surveys. O f the 12 returned surveys, only five managers provided enough data in the quantitative section for sufficient comparative analysis while nine provided answers to the qualitative questions. Therefore, the ensuing discussion of quantitative results is based on data from five surveys whereas the discussion of qualitative results is based on data from nine surveys. Caveat. With such a small sample size, neither the quantitative nor qualitative results can be regarded as statistically reliable. However, the results do provide a basis to develop generalizations about co-branding relationships.
Insights from Corporate-level Managers As noted, I assured the hotel and restaurant managers interviewed that their identities and the information
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Exhibit 2 Pros and cons of co-branding according to managers According to corporateqevel represen~a¢ives from ho~el companies: Benefits of co-branding with national restaurant chains • Consumers like brands because they are viewed as low-risk. • National chains have efficiencies in operations as well as research and development expertise. • Chain restaurants generate traffic that can potentially offset hotels' traditional food and beverage losses. Difficulties of co-branding with national restaurant chains • Lack of flexibility and number of restrictions (e,g., trade dress, access, and parking requirements). • Many chain-restaurant concepts have difficulty accommodating breakfast and other auxiliary food and beverage functions for the hotel (e.g., room service, banquets). • Some restaurant companies aim to maintain system-wide average unit income for all stores, which can be unrealistic in a hotel environment.
According ~o corporateqevel repreaenta~i~ea from restaurant companies: Benefits of co-branding with national hotel chains • Helps to increase points of distribution for the restaurant chain, usually in good-quality locations. • Allows the restaurant to capitalize on the hotel's traffic in addition to local traffic. Difficulties of co-branding with national hotel chains • Hotel owners are often unwilling to make the necessary investment for development of a branded concept. • It is difficult to find sites that fit all the requirements for the concept (e.g., customer and purveyor access, visibility, size of facility, and operating space that is separate from the hotel's other food and beverage operations). • Many hotel operators haven't been trained as restaurateurs and therefore lack the ability to operate a hotel restaurant as though it were a real, freestanding, competitive entity.
they provided would remain confidential. The following is a description of the hotel and restaurant firms I contacted by phone. • Hotel Company A is a large, international company with lodging products in each market segment. • Hotel Company B is a large, international company operating in the full-service and resort segments. • Hotel Company C is a large, international company operating primarily in the full-service, midscale segment, and it also has several upscale properties in major metropolitan cities. • Hotel Company D is a large, international company operating in the full-service, midscale to first-class segments.
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• Restaurant Company 1 is a rapidly expanding, moderately large company with one casualdining, dinner-house concept. • Restaurant Company 2 is a large, mature company with several restaurant concepts in the casual-dining segment. • Restaurant Company 3 is a large, mature company with a family-style, coffee-shop concept in the midscale-dining segment.
Proprietary concepts versus national brands. Representatives from the different hotel and restaurant operations discussed the benefits and difficulties associated with developing proprietary concepts as well as those associated with aligning with national chain-restaurant companies. Here are some of their comments, followed by some of the
I~]RNE[L HOTELAND RESTAURANTADMINISTRATION QUARTERLY
findings gleaned from the completed surveys. • According to representatives from Hotel Companies A and B, proprietary brands are less expensive than national brands when evaluated according to capital investment and required fees (especially since there are no license fees for proprietary concepts). • A representative from Hotel Company A claimed that it costs considerably less to develop a proprietary restaurant than it does to retrofit a branded concept. Representatives from Restaurant Companies 2 and 3 confirmed this when discussing the strict requirements for implementation of their concepts, including issues involving trade dress, access and visibility, size of operating space, separation from the property's other food and beverage activities, and hours of operation. • A representative from Hotel A said that his company's proprietary concepts could be adapted to fit the available restaurant space in any of the company's existing properties. In addition, because all of Hotel Company A's operations appear on a common P&L statement, construction of separate storage spaces (to isolate costs) is unnecessary. Hotel Company A has already invested a considerable amount of money in the development of proprietary concepts and has implemented those concepts at most properties. Hotel Company A attempts to match its restaurants' prices to those of surrounding, freestanding restaurants and does not have any major changes in mind for its brands over the next five to seven years. • A representative from Hotel Company A stated that proprietary brands can be crafted to accommodate a hotel's needs for
breakfast and room service whereas national chain restaurants often cannot. This was confirmed by representatives from Restaurant Companies 2 and 3 who noted that their companies had strict rules for hours of operation and offered few, if any, options for auxiliary services. Representatives from all hotel companies agreed that the property design of old hotels makes it difficult to accommodate a national brand because of strict franchise or leasing requirements, or because it would be difficult to renovate the kitchen according to a branded restaurant's exact specifications. • Representatives from Hotel Companies A and B concurred that whether the proprietary brand has been implemented across an entire chain of hotels or just a handful of properties, a hotel company can exercise more control and consistency in pricing, product, and service if the restaurant is its own. Also, the restaurant space for such proprietary operations can be used for multiple functions, such as banquets or meetings, as demanded by the needs of the hotel. • Representatives from Hotel Companies C and D agreed that although there are many benefits to proprietary brands, national brands are superior because they are managed by professional restaurateurs who possess an indepth knowledge of the restaurant industry and invest heavily in research and development as well as advertising. • A representative from Restaurant Company 1 stated that his company allows hotel operators to operate smaller-than-usual versions of the concept depending on the size of the property, and also has very loose requirements regarding sharing space and stor-
age. This is the Exhibit 3 only restaurant company that took Summary of co-branding'sshort-term part in the study financial impact that allows major modification of its Average investment ............................................. $1,2go,o00 Average increase in hotel average daily rate ................ 13% concept to accomAverage increase in hotel occupancy .............................. 6% modate the needs Average increase in hotel net income ........................... 3.4% of hotel properties. Average increase in restaurant revenues ...................... 57% • Restaurant ComAverage difference in annual revenue between branded concept in hotel and system unit average ............... -27% pany 2 is currently Average increase in restaurant net profit after engaged in an allireplacement with branded concept ......................... 220% ance with a major Note: These data are not statistically significant due to the hotel-management sample size (N = 5). company to work together during the site-selection prothe branded concept. Exhibit 3 cesses. The two companies fresummarizes co-branding's impact on quently locate their respective businesses close to one another to hotel and restaurant financial performance, as given by this sample. share site-selection expenses and Required investment for thereafter to capitalize on the branded concept. In each case, the available business. When Restauowners of the property were rerant Company 2 finds a new site, sponsible for investment in the it alerts its allied hotel company branded restaurant concept. Investto any nearby opportunities. The hotel company provides the same ment costs ranged from as little as $700,000 to as much as $2,600,000. information to the restaurant The investment required for a fullchain. service proprietary concept, accordThe Prosand Cons ing to one of the managers in this study, is less than $750,000. The benefits and difficulties of coImpact on hotel operating branding from the perspectives of performance. The five qualifying corporate-level hotel manager and survey respondents experienced corporate-level restaurant manager increases in average daily rate and are summarized in Exhibit 2. occupancy after co-branding. InQuantitativeResults creases in average daily rate ranged I compiled data from the completed from 5 percent to 31 percent, with an average for the group of 13 persurveys using a spreadsheet. I used cent. Variance was greater for inbasic descriptive analysis for the creases in occupancy which ranged quantitative data, whereas I organized data from subjective responses from 1 percent to 17 percent, with an average for the group of 6 per(presented below) into matrices to cent. Average annual net income identify overall trends. increased an average of 3.4 percent O f the five responses tabulated after co-branding. for quantitative analysis, all branded Impact on restaurant operatrestaurants had been built to replace ing performance. All properties the non-branded concepts during experienced double-digit growth in the period of July 1993 to February restaurant revenues ranging from 25 1996. Only one property specified percent to 84 percent, with an averthe type and scale of restaurant in age overall increase of 57 percent. existence prior to replacement with
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Downsizing and Elimination
The emergence of the economy and limited-service hotel segments has already resulted in the elimination of on-property, full-service food and beverage operations in those industry segments. 1 Focusing on business travelers' needs such as a clean, simple room coupled with a $50-orless room rate, many of the economy and limited-service chains offer complimentary continental breakfast as their only food and beverage service, absorbing the cost into room expense? Many I midscale, first-class, and luxury operators are looking to implement a similar strategy to combat the operational Hotel companies and their proprietary restaurant brands obstacles and poor profitability associated with traditional Marriott hotel food and beverage operations. • JW Steakhouse and Allies AU American Grill, 30 percent of the menu Proprietary Concepts offerings are developed and determined regionally. Proprietary concepts are those that are developed in-house • Marriott introduced a new delivery service at its Courtyard properties called by the hotel company to suit the needs of the operation and Courtyard After 5 Quick Bites, consisting of ten menu items all priced at the guest. A range of hotel companies have developed $6.95. Formerly the hotel chain offered breakfast but not dinner. Currently, proprietary food and beverage brands to systematize their more than 100 Courtyard properties offer this dinner delivery service. F&B operations company-wide, as well as to compete with • Marriott is also experimenting with its own food-court concept, including its the growing number of freestanding restaurants that hotel proprietary coffee concept, Gourmet Bean, as well as Pizza Hut, Taco Bell, guests find attractive.3 Sheraton Hotels, for example, is TCBY, and Burger King. The food-court concept will be featured as an addition developing its own proprietary branding program called to Marriott's full-service restaurants. Sheraton Cuisine to standardize the food and beverage • Champion Sports Bars, Pitchers, Pugsley's, and Crossroads. process and develop brand loyalty with Sheraton guests. 4 Hyatt Other companies, such as Marriott Corporation, • Ciao Mein, an Italian-and-Chinese theme restaurant. Hyatt Hotel Corporation, Choice Hotels, and Holiday Inn • Stetson's, a steak restaurant; and Hemingways, a seafood concept. Worldwide, have also developed their own food and • Sarah's Pantry, a cross between a convenience store and coffee house. beverage concepts for their properties. The scope and • Cuisine Naturelle provides a series of "light" menu items for business style of these proprietary concepts vary from company travelers. to company. For example, Marriott has fully developed • Market Stand Cafe is an upscale, self-service food court. multiple food and beverage concepts for its properties,5 • Funpubs, available at many of Hyatt's Asian properties, combine food, drink, whereas both Choice and Holiday Inn have created food music, games, and dancing in one giant complex centered around a bar. courts that can be filled with several national quick-service brands.6 A comprehensive, although not exhaustive, list of Sheraton hotel companies and their respective proprietary restaurant • Sheraton Cuisine, a proprietary program, offers healthful recipes alongside brands is provided in the accompanying chart. such branded products as Starbucks Coffee.
Strategic Location Taking advantage of "strategic location" may be as simple as building a limited-service hotel close to existing freestanding restaurants.7 For example, Carlson Hospitality has a strategic partnership with Hospitality Franchise Systems (HFS) to operate TGI Friday's and Country Kitchens adjacent to HFS properties such as Ramada and Days Inn. 8
Leasing Space to Independents Leasing food and beverage space to independent restaurateurs capitalizes on the F&B operator's intimate knowledge of the local market. Benefits to the hotelier include reduced (or nonexistent) management frustration regarding F&B operations and investments and income from lease payments. Benefits to the restaurateur may include entry into the market at a relatively low capital cost while gaining market share via the hotel's guests in addition to walk-in customers.9--j.M.B.
Hilton • Intermezzo is a self-service restaurant that features "light" meals, beer, wine, and espresso. • Hilton is concentrating on making its restaurants more casual than before and adding more ethnic selections to its menus.
Westin • Prego Italian and Compass Rose. Westin shut down all its coffee shops and fine-dining restaurants and replaced them with these trendy, slightly up-market Mediterranean bistros. The company did away with property-level F&B directors and transferred responsibility for F&B profitability to the restaurant managers.
Holiday Inn • The HI Convenience Court concept combines convenience-store offerings (e,g., sundries, bottled beverages, snacks) with one or more branded QSR concepts (e.g., Mrs. Fields, Little Caesar's Pizza, Blimpie, Taco Johns, and Sara Lee). While the food court offers no F&B seating, as of July three Holiday Inn hotels were operating the food-court concept and had elicited enthusiastic responses from guests and managers alike.
Choice Hotels 1Carol Casper, "Confirmed Reservations," Restaurant Business, November 20, 1995, pp. 104-118. 2james Scarpa, "Hotel Market Segment Report; Foodservice Strategies:' Restaurant Business, Vol. 92, No. 2 (January 2, 1993), p. 108. 3Scarpa, p. 108. 4Margaret Littman, "Hotels Try to Hold 'em In," Restaurants & Institutions, July 15, 1996, pp. 41-44. 5Littman, pp. 41-44. 6Toni Giovanetti, "Hotels Team Up with F&B Brands:' Hotel Business, September 21-October 6, 1995, pp. 1, 8, 10. 7Scarpa, p. 108. ~Casper, pp. 104-118. eScarpa, p. 108.
4o
• Choice Picks Food Courts comprise a food-court layout offering various QSR concepts with seating. The concept features five to eleven brands that work off a centralized "equipment core" that can be installed for $90,000 to $140,000, and which can be operated by as few as one or two employees. The company is considering adding more and different food modules to its courts. Choice had 21 food courts open on August 30, 1997, and plans to open 400 within four years, including one for employees at its Phoenix reservations center. Sources: Caroi Casper, "Confirmed Reservations,"Restaurant Business, November 20, 1995; Toni Giovanetti, "Hotets Team Up with F&B Brands:' Hotel Business, September 21-October 6, 1995; Chefie Hensdihl,"Serving Up Excellence," ,Hotels, November t996; Judy Liberson, "Hyatt HoteJs Revamps F&B;' Market Watch, October 1996; Margaret Littman, "Hotels Try to HoEd 'era in," Restaurants & Institutions, July 15, 1996; end Beth Lorenzini, "The Hotel Restaurant Revolution," Restaurants & Institutions, November 1, 1995.
IOKNELL HOTELAND RESTAURANTADMINISTRATIONQUARTERLY
Co-branding's impact on check average was mixed: the average check decreased dramatically at two of the properties while increasing at the remaining three. Although the replacement of traditional hotel restaurants with branded concepts resulted in an overall increase in F&B revenues, four out of the five branded restaurants in this study had annual revenues lower than 1996 system averages. 2° Chain restaurants in hotels generated between 18 and 78 percent less than their system average counterparts. Interestingly, after replacing an unbranded concept, the hotels' branded restaurants generated a tremendous increase in profits ranging from 126 percent to 316 percent.
Qualitative Results Qualitative reactions to co-branding came from survey responses from property-level managers, presented below, and interviews with corporate-level managers, which were summarized earlier.
Hotel-restaurant relationship. Six out of the nine properties that completed the qualitative portion of the questionnaire used franchised restaurant concepts while the remaining three leased out space to independent F&B management companies. O f those six properties involved in franchising, franchise rights were owned by hotel owners at five properties while the remaining property's franchise rights were owned by the hotel's management company. For the four properties that provided information regarding lease and franchise fees, there was no standard structure. Six properties operated some food and beverage function apart from the branded restaurant concept (e.g., breakfast, room service). 201996 Tochnomic Top- 1O0 Update and Analysis and 1996 Technomic Second-l O0 Update and Analysis (Chicago: Technomic Information Services, 1996).
Auxiliary food and beverage functions. Arrangements for and the effectiveness of auxiliary services provided (or not provided) by the branded restaurant concept varied at every property. Breakfast service. Four out of nine respondents said that the branded restaurant provided breakfast service. Three properties offer breakfast service apart from the chain restaurant, either in a separate coffee shop or in a temporary area (e.g., lobby). One chain-restaurant company offers a standard breakfast menu at its hotel locations. Another chain offers a breakfast buffet at its hotel locations, although hotel managers expressed dissatisfaction with the quality of the buffet and lack of an h la carte menu. Another hotel cornparty is working directly with its cobranding restaurant partner to develop a breakfast and brunch menu suitable to the hotel guest's needs. At another property the branded restaurant does not provide breakfast but makes its kitchen available to the hotel for that purpose. These results suggest that breakfast is an area of opportunity for chain restaurants because of the high breakfast capture rates typical in a hotel. 21 Room service. The branded concept provided room service at eight of nine responding properties. At one property the branded restaurant provided room service for lunch and dinner while the hotel's own independent restaurant provided room service for breakfast. This arrangement was viewed as favorable, although the respondent felt that kitchen space in the branded restaurant was underused during breakfast and that not offering branded room service for breakfast caused some confusion for the guest. Another manager stated that the branded concept's room service 21Stephen Rushmore, Hotel Investments: A Guide for Lenders and Owners (NewYork: Research Institute of America, 1992).
was slow and that it frequently missed items. One respondent favored a room-service arrangement whereby guests could order from a limited version of the branded restaurant's menu. Such an arrangement could make the branded concept available for room service while the limited menu might improve service delivery to the rooms. Banquets and catering. Five out of nine respondents said that their property's branded concept provided the hotel's banquet or catering service. The other four hotels keep banquet operations strictly apart from the restaurant operations. Several managers commented that guests sometimes request restaurant items for hotel-run banquet functions. This poses revenue-reporting and operations difficulties. First, the hotel is required to pay royalties to the franchisor on revenues generated from the sale of the branded concept's products. This complicates accounting and is difficult to enforce. Second, the branded restaurant's kitchen usually must be used for production of the concept's signature items. Labor disputes can arise if the banquet department and branded restaurant employ two separate service and kitchen staffs. In addition, production flow in the kitchen is complicated. Survey respondents' experience with auxiliary food and beverage services provided by the branded restaurant concept is summarized in Exhibit 4.
Effect on Hotel Operations Hotel managers' perceptions of whether the hotel itself became more or less complicated to operate after co-branding varied across all responses. A majority, however, rated operations as "somewhat more complicated" after co-branding. This implies that from the hoteloperator's perspective, co-branding introduced new variables that made
October 1997 • 411
operating the hotel more difficult than before co-branding. Perhaps this reflects the relatively short time that co-branding has been in effect at most of those properties.
Exhibit 4
Typical arrangements for auxiliary F&B Auxiliary service arrangement
Breakfast • Branded concept is closed for breakfast and hotel runs breakfast out of lobby area or alternative food and beverage outlet • Branded concept offers breakfast buffet • Branded concept offers full ~/a carte breakfast menu • Branded concept is closed for breakfast; however, hotel staff prepares breakfast in branded restaurant's kitchen and serves guests in another area of the hotel
Room Service • Branded restaurant prepares food and hotel staff delivers it • If hotel owns franchise rights to the restaurant, then hotel staff prepare and deliver food
Banquets and catering • In most cases, chain-restaurant franchisors allow hotels to run food and beverage operations independent from the branded concept; however, the hotel cannot use any of the branded restaurant's resources such as purchasing, products, or staff without paying royalties • Hotel offers branded restaurant's signature dish(es) on banquet menu • Hotel uses part of branded restaurant's cooking battery to service banquet functions concurrent with regular restaurant service
Exhibit 5
Comparative benefits: branded versus unbranded restaurants
Effect on F&B Operations At properties where food and beverage space had been leased out to
branded concepts, hotel managers unanimously rated F&B operations as "simple after co-branding." Other responses (for non-lease co-branding relationships) ranged from "somewhat simpler" to "somewhat more complex," with no strong opinion emerging. This range of responses most likely reflects the varied and sometimes tumultuous nature of the relationship between the hotel operators as franchisees and the branded concepts' parent companies as franchisors.
Comparative Benefits The hotel operators were, for the
Benefits
Drawbacks
Unbranded • Complete control over situations that affect hotel guests • Flexibility with the menu and the concept
• Overcoming the public's poor opinion of hotel restaurants • Low revenues coupled with high expenses and payroll costs • Day-to-day operational problems
Branded • Guests' recognition and acceptance of the concept • increased revenues for both the hotel and food and beverage operations • Training and consistency offered by a well-established brand company • A national marketing effort for the restaurant • Decreased overall expenses, especially payroll and food cost
• inflexibility of concept specifications, product-purchasing policies, and menu offerings • Training programs that are long and costly • Lack of flexibility or coordination with hotel operations (the restaurant hours may not fit hotel guests' needs) • No cooperation from restaurant managers regarding reservations or customer complaints, and lack of control over operations and management* *Occurred in leased-out environment
42
I~N~]~ HOTELAND RESTAURANTADMNSTRATION QUARTERLY
most part, in agreement about what aspects pleased them the most and the least in both the unbranded and branded restaurant environments (see Exhibit 5). What hotdiers like the best about the branded restaurants at their properties reflects all the attributes that a brand-name restaurant promises its customer. In eight out of nine cases, hotel managers felt that their guests were more satisfied with a nationally branded dining alternative than an independent restaurant.
Limitations 0f the Study I encountered several challenges during the course of the project that increased the difficulty of data collection and may therefore have influenced the findings. First, it was difficult to locate properties where co-branding was occurring within the study's strict scope. Several properties had less than one year's worth of operating data because the co-branding rela-
tionship was still young. Other properties had branded restaurants on the same plot of land but the hotel and restaurant were not attached. Second, many properties did not maintain accurate records of historical operating data, making it difficult for respondents to complete the survey. Management turnover symptomatic of the hospitality industry also complicated data collection. For example, a general manager who has been at a property only for one year is not likely to have information about the previously existing non-branded restaurant or its performance. Third, sometimes multiple parties were involved in the data-collection process, especially for leased food and beverage space. It was more difficult to convince several busy people to participate and coordinate an effort to complete the survey. Fourth, it is difficult to attribute increases in occupancy and rate solely to co-branding arrangements. Many other factors could affect those figures, including supply-anddemand dynamics; renovations to the property; changes in the surrounding marketplace, such as construction of new hotels, restaurants, retail space, businesses, and institutions; and the general health of the national, regional, and local economies. In retrospect, some of those factors could have been accounted for had they been included in the survey. Fifth, managers at only one property completed information on the change in number of restaurant seats and square footage, making it difficult to assess the impact on revenue per seat, which is a better indicator of change in restaurant performance than is change in total restaurant revenues or net profit. Finally, the project sample size was limited from the start and therefore the results may not have
been statistically significant in any event. Now, however, enough examples of co-branding exist to perform a statistically based study.
Recommendationsto Restaurateurs
Possible courses of action for restaurateurs include the following: • Flexibility of a concept is the key to success in the hotel food and Recommendationsto Heteliers beverage environment. Develop a Based on this study, possible courses brand extension of the restaurant of action for hoteliers include the concept that suits the needs of a following: hotel's operating environment. • Develop and roll out a propriCreate standards with built-in etary brand, provided that the flexibility so that all of the company is of substantial size. For concept's components can be a small company, an option might tailored to the hotel restaurant's be to work with other hotel size, shape, hours of operation, companies to develop a joint training processes, auxiliary serproprietary brand. The concept vices, operating systems, and resshould suit the needs of a majorervation systems. ity of the hotel company's prop• Ally only with hotel companies erties and should be managed like that complement the restaurant's a restaurant brand rather than just brand image so as not to dilute a guest amenity. Invest in the the concept's visibility and power elements of a good brand: a qualin the marketplace. ity product, an appropriate and My research suggests that, if consistent service-delivery sysproperly implemented, co-branding tem, and an image or symbol that offers many opportunities for hotehas the power to elicit an emo1lets and restaurateurs to increase tional response from the conrevenues, profits, customer loyalty, sumer. 22 The hotelier who develand operating efficiencies. That is ops a proprietary brand perfectly especially true when the hotel comsuited to the hotel environment pany is of such a size that developcould also capitalize on the oping a proprietary brand is not feaportunity to sell that brand to sible. As more restaurant and hotel other hotel companies in search companies begin to explore coof a solution to food and beverbranding arrangements, further reage problems. search should be conducted to assess • Work with a restaurant company the performance of those alliances. to develop an extension of an A larger sample size, a more-tailored existing restaurant concept that would be suitable to the needs of survey, and more-detailed tracking of operating histories will provide a hotel operators. The customized concept should include a plan for broader, yet more targeted, basis for comparison. In addition, a larger flexible space arrangements, sample size will make regression hours of operation, training, and analysis possible and allow for the auxiliary services. development of a model to predict • Consider employing the services and further describe co-branding's of a consultant to recommend effects on hotels and restaurants. and negotiate an arrangement with a restaurant company that is In the short term, however, hotel flexible and applicable to the and restaurant companies should hotel chain's properties. capitalize on the opportunities to attract the fruit of the advertising industry's efforts: brand-aware and 22Christopher Muller, unpublished notes on branding (Cornell University lecture, April 1997). brand-loyal customers. CQ
October 1997 ,, 4.3
I
,s and cons of hotels' abandoning ]cing them with chain-type
Co-branding is the pairing of two or more recognized brands within one space. The idea behind co-branding is that several brands can command more power through customer awareness and traffic than can a single brand-name operation (either a restaurant or hotel by itself) or an independent, "no name" operation. Many examples of cobranding arrangements between food and beverage and hotel operators exist, including:
Formerly a manager of contractfood services and now category marketing manager,globalfood and support services,for A R A M A R K Corporation, Juliette M. Boone holds a Master of Management in Hospitality degreefrom the Cornell University School of Hotel Administration. She thanks her honorsmonograph advisor, assistant professor Christopher C. Muller, Ph.D.,for his help and guidance with her research. © 1997, Cornell University
34
CIIR~ELLHOTELANDRESTAURANTADMINISTRATIONQUARTERLY
MARKETING
• Starbucks coffee available at Sheraton Hotels I and California Pizza Kitchen pizza at Westin Hotels; 2 • Quick-service kiosks in lobbies (e.g., a Sara Lee cart or Pizza Hut kiosk at Marriott Hotels);3 • Restaurant space leased to established restaurant companies or franchisees;4 and • Purchasing rights to a branded restaurant franchise,s Co-branding between restaurants and hotels has existed in one form or another for many years, starting with Trader Vic's in the 1930s. The practice has been viewed more strategically for both restaurant and hotel operators in recent years. In 1986, for example, R e d Lobster opened two restaurants in Holiday Inn properties in Charlottesville, Virginia, and Texarkana, Arkansas. 6 Furthermore, co-branding's expanding popularity is evidenced by the number of brand-name restaurantand-hotel deals that have been negotiated over the past several years,v Clearly, some hotel and restaurant operators see co-branding as offering attractive benefits, not only as a way to minimize the problems associated with traditional hotel food and beverage operations, but also for chain-restaurant companies seeking to increase points of distribution and customer traffic. 1Margaret Littman,"Hotels Try to Hold 'em In" Restaurants & Institutions, July 15,1996, pp. 44-47. 2Cherie Hensdill,"Serving Up Excellence," Hotels, November 1996, pp. 115-118. 3Littman, pp. 44-47. 4james Scarpa,"Hotel Market Segment Report; Foodservice Strategies," Restaurant Business, Vol. 92, No. 2 (January 2,1993), p. 108. SCarolyn Walkup,"lKestaurants Check Into Hotels," Nation's Restaurant News,January 23, 1995, pp. 31-32. 6Denise Brennan,"Reinventing Hotel FoodService;' Restaurant Business, Vol. 86 (May 20, 1987), p. 208. VSee,for example, Robert W Strate and Clinton L. Rappole, "Strategic ALliancesbetween Hotels and Restaurants," Cornell Hotel and Restaurant Administration Quarterly, Vol. 38, No. 3 (June 1997), pp. 50-61.
A panel of operators at the 1996 National Restaurant Association (NKA) show in Chicago agreed that co-branding is responsible for substantially increasing restaurant sales as well as hotel occupancy.8 However, I have found no study or other empirical evidence to support that conclusion. That lacuna raises the question of whether it is possible to assess any substantive qualitative and quantitative value for either a hotel or a restaurant in a co-branding arrangement as compared with what each entity could achieve independent of the other. In this article I report on my exploratory effort to determine the synergistic value of pairing branded restaurants with chainaffiliated hotels Trade-journal articles and other literature discussing the benefits of co-branding back through 1987 have been mostly anecdotal in nature, and thus cannot facilitate assessment of the value of cobranding. Extant co-branding arrangements described in articles ranged from those in the economy, limited-service segment to the luxury, full-service segment. 9
The Hotel F&B Revolution For years hotel companies have struggled with unprofitable, oftentimes unmanageable food and beverage operations) ° Hotel operators essentially accepted an undesirable situation, although many experimented with ways to improve matters. Resignation ended with the 8pamela Parseghian,"Branding Offers Hotels Opportunity to Increase Food Sales," Nation's Restaurant News, Vol. 30, No 23 (June 10,1996), p. 96. 9For example, see: Wendy Tanaka,"Not So Strange Bedfellows," San FranciscoExaminer, August 11, 1996, p. B-1; and Frank Andorka,Jr., "High IKecognition Restaurants; Linking Successful Limited-Service Hotels with BrandName 1Kestaurant Chains Is Opening a Whole New Avenue to Success," Hotel and Motel Management, September 18, 1995, p. 44. l°Scarpa, p. 108.
recession of the early 1990s and the rise of limited-service hotels that operated without a restaurant. In recent years a variety of strategies for improving hotel food and beverage profitability have appeared, including downsizing or eliminating food and beverage operations, 11 developing proprietary concepts, 12 strategically locating hotels near commercial food and beverage operations, 13 leasing out space to local restaurateurs, franchisees, and restaurant companies, 14 or buying rights to a restaurant franchise to replace or supplement in-house food and beverage operations. 15 Such strategies are briefly outlined on page 40.
Co-Branding Co-branding is one of many strategies developed in response to the typically poor profitability of hotel restaurants. The idea behind cobranding is that a customer is more likely to choose a familiar restaurant over one that is unknown) 6 Marriott Hotels, for example, was cited as the first hotel chain in recent years to establish a nationally recognized restaurant brand in its hotels when it initiated a licensing agreement with Pizza Hut in 1989.17 One writer reported that a Best Western manager attributed a 10-percent increase in occupancy to the replacement of that property's self-operated restaurant with a Country Kitchen) s That nToni Giovanetti, "Hotel Chains Use Branded 1Kestaurants, Packaged Food to Boost l~_evenues," Hotel Business, Vol. 5, No. 14 (July 21-August 6, 1996), pp. 16-17 12Littman, pp. 44-47. 13Scarpa, p. 108. 14Scarpa, p. 108. ISCarolyn Walkup,"Cost-Cutting Hotel Chains Check In With New Brands, Value Formats," Nation's Restaurant News, August 7,1995, pp. 130-134. 16David Aaker, Managing Brand Equity: Capitalizing on the Value of a Brand Name (New York: The Free Press, 1991). 17Littman, pp. 44-47. 18Carolyn Walkup,"Carlson Launches TripleBranded Hotel Kestaurant Complex;' Nation's Restaurant News, October 9, 1995, p. 1.
October 1997 ,,, 35
Exhibit 1 Alliances between hotel companies and national restaurant brands Carlson (Country Inn, Country Inn and Suites, Radisson) • TGI Friday's, Country Kitchen, Italianni's
~Me{mmedia Re~{aurant Gioup (Bennigaffs Bonanza) : : Choib~ PiCk~ (a foodcourt)~b~ands ava able inciude PizZeria U:no Nathan!s FamoUs Heaithy,,CBoiob De ace Nest e Toll:House Cafe; ; and Sarks Gourmet Coffees
Hospitality Franchise Systems (HFS) • Pizza Hut • Country Kitchen
....
::
500 hotels nationwide.
:
:
:
Hilton
• Benihana
Interstate, Richfield, Embassy Suites, Motel 6 • Pizza Hut and Pizza Hut's delivery program
sheraton .... • "Sheraton Cuisine": branded concept that includes Starbucks coffee, Vie de France baked goods, and Robert Mondavi wines. Sources: Frank H. Andorka, Jr., "High Recognition Restaurants: Linking Successful
Limited-Service Hotels with Brand-Name Restaurant Chains Is Opening a Whole New Avenue to Success," Hotel and Motel Management, September 18, 1995, p. 44; Denise Brennan, "Reinventing Hotel Food-Service," Restaurant Business Magazine, Vol. 86 (May 20, 1987), p. 208; CarN Casper, "Confirmed Reservations," Restaurant Business, November 20, 1995, pp. 104-118; Toni Giovanetti, "Hotels Team Up with F&B Brands," Hotel Business, September 21-October 6, 1995, pp. 1,8, and t0; Margaret Littman, "Hotels Try to Hold 'era in," Restaurants & Institutions, July 15, 1996, pp. 44-47; and Robert W. Strate and Clinton L. Rappole, "Strategic Alliances between Hotels and Restaurants;' Comelt Hotel and Restaurant Administration Quarterly, Vol. 38, No. 3 (June 1997), p. 52.
article, however, made no mention o f the extent o f the restaurant's success or the qualitative impacts o f the arrangement from guest, employee, and management perspectives. In another example, a Holiday Inn franchisee replaced the property's independent restaurant with a T G I Friday's and thereafter reported exponential restaurant sales growth. .9 T h e actual effects on occupancy or personnel are unknown, making it difficult to fully assess the actual overall effects o f that arrangement on b o t h the hotel and restaurant operations. Exhibit 1 summarizes some existing co-branding affiliations.
Benefits Study T h e purpose o f this study was to establish whether there is qualitative and quantitative value created for both a hotel and restaurant w h e n co-branding occurs as compared with what each entity could achieve independently o f the other. To focus the research I developed five criteria to provide a basis for comparison between co-branded properties: • T h e hotel property must be a full-service, mid-scale to firstclass nationally-branded hotel with at least a two-year operating history; • T h e hotel property must have had an unbranded or independent full-service restaurant operating for at least one year before replacement by a nationally branded restaurant targeted for the mid-scale to upscale-casual market segment; • T h e hotel property must share at least one wall with the branded restaurant concept; • Both the hotel and the restaurant must maintain separate profitand-loss statements; and 19Carol Casper,"Confirmed Reservations," Restaurant Business, November 20, 1995,
pp. 104--118.
38
I~R[~tI[ HOTELAND RESTAURANTADMINISTRATIONQUARTERLY
M A R K E T I N G
• The branded restaurant's parent company must generate at least $100 million in annual revenues.
Methodology An extensive literature review helped me to create a database of hotels, management companies, and restaurants currently involved in cobranding. That secondary research also aided in defining the study's scope and in designing its survey questions and documents. Those instruments consisted of a four-page questionnaire and a cover letter. The surveys led to the primary research that took the form of personal and telephone interviews with hoteland restaurant-company executives as well as property-level managers. Finally, surveys were sent to all the property-level managers who had agreed during the interviews to participate in the research project. Throughout the study I expanded the database of co-branded partners as I learned of more examples of such arrangements, and as a result additional property-level managers were added to the study after they had been interviewed. Questionnaire. The survey questions comprised six categories: (1) General information about the hotel and management firm; (2) Information about the existing branded restaurant including opening date, number of seats, and approximate square footage, as well as similar information about the independent restaurant that operated prior to the branded concept; (3) Information regarding the relationship between the hotel and the restaurant including leasing or franchising agreements; fees, rent, and other payments; and services provided by the restaurant; (4) Information regarding the financial performance of both the hotel and restaurant before
and after co-branding (e.g., A D R , occupancy, and average net income, as well as restaurant average annual revenue, check, and net income); (5) Subjective information about the complexity of managing or working alongside a branded concept and management's observations about guest perceptions of the branded concept; and (6) General information about the person completing the survey. I intended that the questionnaire be completed by the hotel's general manager or director of operations. In most cases hotel managers had restaurant operating figures available even if the restaurant was leased to an outside franchisee because payment to the hotel is typically contingent on the restaurant's financial performance. In some instances two managers filled out the survey; one from the hotel and the other from the restaurant. Cover letter. The questionnaire, accompanied by a cover letter, went to both property- and corporatelevel managers to enhance propertylevel participation. I promised confidentiality to encourage managers to submit as much data as possible and, as an incentive, I also promised managers a copy of the completed research study in exchange for their cooperation. Database. To locate and track study participants, I developed a database of hotel and restaurant owners and management companies, as well as hotel and restaurant franchisees, from primary and secondary research. Those individuals and properties included in the database represented various degrees of co-branding experience, from the property to corporate levels. Interviews. I interviewed both corporate-level and property-level managers. Examples of the issues I discussed with corporate managers
are proprietary hotel food and beverage brands, the relationships between chain restaurants and chainaffiliated hotels, and trade dress. Property-level managers provided information regarding tactical issues that arise from co-branding arrangements such as room-service responsibility, banquet service, financial management, staffing, training, accountability, and retrofitting branded restaurants into existing F&B space. Solicitation and response. I first telephoned all prospective study participants. 1 explained my project to corporate-level executives and asked about properties within the company where co-branding relationships were occurring. Those managers often agreed to an impromptu telephone interview. When a property-level manager agreed to participate, I sent the questionnaire with a postage-paid, self-addressed return envelope. Overall, I contacted a total of 26 properties. O f those, 20 managers agreed to participate in the project. O f the 20 who agreed to participate, 12 managers actually returned surveys. O f the 12 returned surveys, only five managers provided enough data in the quantitative section for sufficient comparative analysis while nine provided answers to the qualitative questions. Therefore, the ensuing discussion of quantitative results is based on data from five surveys whereas the discussion of qualitative results is based on data from nine surveys. Caveat. With such a small sample size, neither the quantitative nor qualitative results can be regarded as statistically reliable. However, the results do provide a basis to develop generalizations about co-branding relationships.
Insights from Corporate-level Managers As noted, I assured the hotel and restaurant managers interviewed that their identities and the information
October 1997 ° 37
Exhibit 2 Pros and cons of co-branding according to managers According to corporateqevel represen~a¢ives from ho~el companies: Benefits of co-branding with national restaurant chains • Consumers like brands because they are viewed as low-risk. • National chains have efficiencies in operations as well as research and development expertise. • Chain restaurants generate traffic that can potentially offset hotels' traditional food and beverage losses. Difficulties of co-branding with national restaurant chains • Lack of flexibility and number of restrictions (e,g., trade dress, access, and parking requirements). • Many chain-restaurant concepts have difficulty accommodating breakfast and other auxiliary food and beverage functions for the hotel (e.g., room service, banquets). • Some restaurant companies aim to maintain system-wide average unit income for all stores, which can be unrealistic in a hotel environment.
According ~o corporateqevel repreaenta~i~ea from restaurant companies: Benefits of co-branding with national hotel chains • Helps to increase points of distribution for the restaurant chain, usually in good-quality locations. • Allows the restaurant to capitalize on the hotel's traffic in addition to local traffic. Difficulties of co-branding with national hotel chains • Hotel owners are often unwilling to make the necessary investment for development of a branded concept. • It is difficult to find sites that fit all the requirements for the concept (e.g., customer and purveyor access, visibility, size of facility, and operating space that is separate from the hotel's other food and beverage operations). • Many hotel operators haven't been trained as restaurateurs and therefore lack the ability to operate a hotel restaurant as though it were a real, freestanding, competitive entity.
they provided would remain confidential. The following is a description of the hotel and restaurant firms I contacted by phone. • Hotel Company A is a large, international company with lodging products in each market segment. • Hotel Company B is a large, international company operating in the full-service and resort segments. • Hotel Company C is a large, international company operating primarily in the full-service, midscale segment, and it also has several upscale properties in major metropolitan cities. • Hotel Company D is a large, international company operating in the full-service, midscale to first-class segments.
38
• Restaurant Company 1 is a rapidly expanding, moderately large company with one casualdining, dinner-house concept. • Restaurant Company 2 is a large, mature company with several restaurant concepts in the casual-dining segment. • Restaurant Company 3 is a large, mature company with a family-style, coffee-shop concept in the midscale-dining segment.
Proprietary concepts versus national brands. Representatives from the different hotel and restaurant operations discussed the benefits and difficulties associated with developing proprietary concepts as well as those associated with aligning with national chain-restaurant companies. Here are some of their comments, followed by some of the
I~]RNE[L HOTELAND RESTAURANTADMINISTRATION QUARTERLY
findings gleaned from the completed surveys. • According to representatives from Hotel Companies A and B, proprietary brands are less expensive than national brands when evaluated according to capital investment and required fees (especially since there are no license fees for proprietary concepts). • A representative from Hotel Company A claimed that it costs considerably less to develop a proprietary restaurant than it does to retrofit a branded concept. Representatives from Restaurant Companies 2 and 3 confirmed this when discussing the strict requirements for implementation of their concepts, including issues involving trade dress, access and visibility, size of operating space, separation from the property's other food and beverage activities, and hours of operation. • A representative from Hotel A said that his company's proprietary concepts could be adapted to fit the available restaurant space in any of the company's existing properties. In addition, because all of Hotel Company A's operations appear on a common P&L statement, construction of separate storage spaces (to isolate costs) is unnecessary. Hotel Company A has already invested a considerable amount of money in the development of proprietary concepts and has implemented those concepts at most properties. Hotel Company A attempts to match its restaurants' prices to those of surrounding, freestanding restaurants and does not have any major changes in mind for its brands over the next five to seven years. • A representative from Hotel Company A stated that proprietary brands can be crafted to accommodate a hotel's needs for
breakfast and room service whereas national chain restaurants often cannot. This was confirmed by representatives from Restaurant Companies 2 and 3 who noted that their companies had strict rules for hours of operation and offered few, if any, options for auxiliary services. Representatives from all hotel companies agreed that the property design of old hotels makes it difficult to accommodate a national brand because of strict franchise or leasing requirements, or because it would be difficult to renovate the kitchen according to a branded restaurant's exact specifications. • Representatives from Hotel Companies A and B concurred that whether the proprietary brand has been implemented across an entire chain of hotels or just a handful of properties, a hotel company can exercise more control and consistency in pricing, product, and service if the restaurant is its own. Also, the restaurant space for such proprietary operations can be used for multiple functions, such as banquets or meetings, as demanded by the needs of the hotel. • Representatives from Hotel Companies C and D agreed that although there are many benefits to proprietary brands, national brands are superior because they are managed by professional restaurateurs who possess an indepth knowledge of the restaurant industry and invest heavily in research and development as well as advertising. • A representative from Restaurant Company 1 stated that his company allows hotel operators to operate smaller-than-usual versions of the concept depending on the size of the property, and also has very loose requirements regarding sharing space and stor-
age. This is the Exhibit 3 only restaurant company that took Summary of co-branding'sshort-term part in the study financial impact that allows major modification of its Average investment ............................................. $1,2go,o00 Average increase in hotel average daily rate ................ 13% concept to accomAverage increase in hotel occupancy .............................. 6% modate the needs Average increase in hotel net income ........................... 3.4% of hotel properties. Average increase in restaurant revenues ...................... 57% • Restaurant ComAverage difference in annual revenue between branded concept in hotel and system unit average ............... -27% pany 2 is currently Average increase in restaurant net profit after engaged in an allireplacement with branded concept ......................... 220% ance with a major Note: These data are not statistically significant due to the hotel-management sample size (N = 5). company to work together during the site-selection prothe branded concept. Exhibit 3 cesses. The two companies fresummarizes co-branding's impact on quently locate their respective businesses close to one another to hotel and restaurant financial performance, as given by this sample. share site-selection expenses and Required investment for thereafter to capitalize on the branded concept. In each case, the available business. When Restauowners of the property were rerant Company 2 finds a new site, sponsible for investment in the it alerts its allied hotel company branded restaurant concept. Investto any nearby opportunities. The hotel company provides the same ment costs ranged from as little as $700,000 to as much as $2,600,000. information to the restaurant The investment required for a fullchain. service proprietary concept, accordThe Prosand Cons ing to one of the managers in this study, is less than $750,000. The benefits and difficulties of coImpact on hotel operating branding from the perspectives of performance. The five qualifying corporate-level hotel manager and survey respondents experienced corporate-level restaurant manager increases in average daily rate and are summarized in Exhibit 2. occupancy after co-branding. InQuantitativeResults creases in average daily rate ranged I compiled data from the completed from 5 percent to 31 percent, with an average for the group of 13 persurveys using a spreadsheet. I used cent. Variance was greater for inbasic descriptive analysis for the creases in occupancy which ranged quantitative data, whereas I organized data from subjective responses from 1 percent to 17 percent, with an average for the group of 6 per(presented below) into matrices to cent. Average annual net income identify overall trends. increased an average of 3.4 percent O f the five responses tabulated after co-branding. for quantitative analysis, all branded Impact on restaurant operatrestaurants had been built to replace ing performance. All properties the non-branded concepts during experienced double-digit growth in the period of July 1993 to February restaurant revenues ranging from 25 1996. Only one property specified percent to 84 percent, with an averthe type and scale of restaurant in age overall increase of 57 percent. existence prior to replacement with
October 1997 • 39
I
Downsizing and Elimination
The emergence of the economy and limited-service hotel segments has already resulted in the elimination of on-property, full-service food and beverage operations in those industry segments. 1 Focusing on business travelers' needs such as a clean, simple room coupled with a $50-orless room rate, many of the economy and limited-service chains offer complimentary continental breakfast as their only food and beverage service, absorbing the cost into room expense? Many I midscale, first-class, and luxury operators are looking to implement a similar strategy to combat the operational Hotel companies and their proprietary restaurant brands obstacles and poor profitability associated with traditional Marriott hotel food and beverage operations. • JW Steakhouse and Allies AU American Grill, 30 percent of the menu Proprietary Concepts offerings are developed and determined regionally. Proprietary concepts are those that are developed in-house • Marriott introduced a new delivery service at its Courtyard properties called by the hotel company to suit the needs of the operation and Courtyard After 5 Quick Bites, consisting of ten menu items all priced at the guest. A range of hotel companies have developed $6.95. Formerly the hotel chain offered breakfast but not dinner. Currently, proprietary food and beverage brands to systematize their more than 100 Courtyard properties offer this dinner delivery service. F&B operations company-wide, as well as to compete with • Marriott is also experimenting with its own food-court concept, including its the growing number of freestanding restaurants that hotel proprietary coffee concept, Gourmet Bean, as well as Pizza Hut, Taco Bell, guests find attractive.3 Sheraton Hotels, for example, is TCBY, and Burger King. The food-court concept will be featured as an addition developing its own proprietary branding program called to Marriott's full-service restaurants. Sheraton Cuisine to standardize the food and beverage • Champion Sports Bars, Pitchers, Pugsley's, and Crossroads. process and develop brand loyalty with Sheraton guests. 4 Hyatt Other companies, such as Marriott Corporation, • Ciao Mein, an Italian-and-Chinese theme restaurant. Hyatt Hotel Corporation, Choice Hotels, and Holiday Inn • Stetson's, a steak restaurant; and Hemingways, a seafood concept. Worldwide, have also developed their own food and • Sarah's Pantry, a cross between a convenience store and coffee house. beverage concepts for their properties. The scope and • Cuisine Naturelle provides a series of "light" menu items for business style of these proprietary concepts vary from company travelers. to company. For example, Marriott has fully developed • Market Stand Cafe is an upscale, self-service food court. multiple food and beverage concepts for its properties,5 • Funpubs, available at many of Hyatt's Asian properties, combine food, drink, whereas both Choice and Holiday Inn have created food music, games, and dancing in one giant complex centered around a bar. courts that can be filled with several national quick-service brands.6 A comprehensive, although not exhaustive, list of Sheraton hotel companies and their respective proprietary restaurant • Sheraton Cuisine, a proprietary program, offers healthful recipes alongside brands is provided in the accompanying chart. such branded products as Starbucks Coffee.
Strategic Location Taking advantage of "strategic location" may be as simple as building a limited-service hotel close to existing freestanding restaurants.7 For example, Carlson Hospitality has a strategic partnership with Hospitality Franchise Systems (HFS) to operate TGI Friday's and Country Kitchens adjacent to HFS properties such as Ramada and Days Inn. 8
Leasing Space to Independents Leasing food and beverage space to independent restaurateurs capitalizes on the F&B operator's intimate knowledge of the local market. Benefits to the hotelier include reduced (or nonexistent) management frustration regarding F&B operations and investments and income from lease payments. Benefits to the restaurateur may include entry into the market at a relatively low capital cost while gaining market share via the hotel's guests in addition to walk-in customers.9--j.M.B.
Hilton • Intermezzo is a self-service restaurant that features "light" meals, beer, wine, and espresso. • Hilton is concentrating on making its restaurants more casual than before and adding more ethnic selections to its menus.
Westin • Prego Italian and Compass Rose. Westin shut down all its coffee shops and fine-dining restaurants and replaced them with these trendy, slightly up-market Mediterranean bistros. The company did away with property-level F&B directors and transferred responsibility for F&B profitability to the restaurant managers.
Holiday Inn • The HI Convenience Court concept combines convenience-store offerings (e,g., sundries, bottled beverages, snacks) with one or more branded QSR concepts (e.g., Mrs. Fields, Little Caesar's Pizza, Blimpie, Taco Johns, and Sara Lee). While the food court offers no F&B seating, as of July three Holiday Inn hotels were operating the food-court concept and had elicited enthusiastic responses from guests and managers alike.
Choice Hotels 1Carol Casper, "Confirmed Reservations," Restaurant Business, November 20, 1995, pp. 104-118. 2james Scarpa, "Hotel Market Segment Report; Foodservice Strategies:' Restaurant Business, Vol. 92, No. 2 (January 2, 1993), p. 108. 3Scarpa, p. 108. 4Margaret Littman, "Hotels Try to Hold 'em In," Restaurants & Institutions, July 15, 1996, pp. 41-44. 5Littman, pp. 41-44. 6Toni Giovanetti, "Hotels Team Up with F&B Brands:' Hotel Business, September 21-October 6, 1995, pp. 1, 8, 10. 7Scarpa, p. 108. ~Casper, pp. 104-118. eScarpa, p. 108.
4o
• Choice Picks Food Courts comprise a food-court layout offering various QSR concepts with seating. The concept features five to eleven brands that work off a centralized "equipment core" that can be installed for $90,000 to $140,000, and which can be operated by as few as one or two employees. The company is considering adding more and different food modules to its courts. Choice had 21 food courts open on August 30, 1997, and plans to open 400 within four years, including one for employees at its Phoenix reservations center. Sources: Caroi Casper, "Confirmed Reservations,"Restaurant Business, November 20, 1995; Toni Giovanetti, "Hotets Team Up with F&B Brands:' Hotel Business, September 21-October 6, 1995; Chefie Hensdihl,"Serving Up Excellence," ,Hotels, November t996; Judy Liberson, "Hyatt HoteJs Revamps F&B;' Market Watch, October 1996; Margaret Littman, "Hotels Try to HoEd 'era in," Restaurants & Institutions, July 15, 1996; end Beth Lorenzini, "The Hotel Restaurant Revolution," Restaurants & Institutions, November 1, 1995.
IOKNELL HOTELAND RESTAURANTADMINISTRATIONQUARTERLY
Co-branding's impact on check average was mixed: the average check decreased dramatically at two of the properties while increasing at the remaining three. Although the replacement of traditional hotel restaurants with branded concepts resulted in an overall increase in F&B revenues, four out of the five branded restaurants in this study had annual revenues lower than 1996 system averages. 2° Chain restaurants in hotels generated between 18 and 78 percent less than their system average counterparts. Interestingly, after replacing an unbranded concept, the hotels' branded restaurants generated a tremendous increase in profits ranging from 126 percent to 316 percent.
Qualitative Results Qualitative reactions to co-branding came from survey responses from property-level managers, presented below, and interviews with corporate-level managers, which were summarized earlier.
Hotel-restaurant relationship. Six out of the nine properties that completed the qualitative portion of the questionnaire used franchised restaurant concepts while the remaining three leased out space to independent F&B management companies. O f those six properties involved in franchising, franchise rights were owned by hotel owners at five properties while the remaining property's franchise rights were owned by the hotel's management company. For the four properties that provided information regarding lease and franchise fees, there was no standard structure. Six properties operated some food and beverage function apart from the branded restaurant concept (e.g., breakfast, room service). 201996 Tochnomic Top- 1O0 Update and Analysis and 1996 Technomic Second-l O0 Update and Analysis (Chicago: Technomic Information Services, 1996).
Auxiliary food and beverage functions. Arrangements for and the effectiveness of auxiliary services provided (or not provided) by the branded restaurant concept varied at every property. Breakfast service. Four out of nine respondents said that the branded restaurant provided breakfast service. Three properties offer breakfast service apart from the chain restaurant, either in a separate coffee shop or in a temporary area (e.g., lobby). One chain-restaurant company offers a standard breakfast menu at its hotel locations. Another chain offers a breakfast buffet at its hotel locations, although hotel managers expressed dissatisfaction with the quality of the buffet and lack of an h la carte menu. Another hotel cornparty is working directly with its cobranding restaurant partner to develop a breakfast and brunch menu suitable to the hotel guest's needs. At another property the branded restaurant does not provide breakfast but makes its kitchen available to the hotel for that purpose. These results suggest that breakfast is an area of opportunity for chain restaurants because of the high breakfast capture rates typical in a hotel. 21 Room service. The branded concept provided room service at eight of nine responding properties. At one property the branded restaurant provided room service for lunch and dinner while the hotel's own independent restaurant provided room service for breakfast. This arrangement was viewed as favorable, although the respondent felt that kitchen space in the branded restaurant was underused during breakfast and that not offering branded room service for breakfast caused some confusion for the guest. Another manager stated that the branded concept's room service 21Stephen Rushmore, Hotel Investments: A Guide for Lenders and Owners (NewYork: Research Institute of America, 1992).
was slow and that it frequently missed items. One respondent favored a room-service arrangement whereby guests could order from a limited version of the branded restaurant's menu. Such an arrangement could make the branded concept available for room service while the limited menu might improve service delivery to the rooms. Banquets and catering. Five out of nine respondents said that their property's branded concept provided the hotel's banquet or catering service. The other four hotels keep banquet operations strictly apart from the restaurant operations. Several managers commented that guests sometimes request restaurant items for hotel-run banquet functions. This poses revenue-reporting and operations difficulties. First, the hotel is required to pay royalties to the franchisor on revenues generated from the sale of the branded concept's products. This complicates accounting and is difficult to enforce. Second, the branded restaurant's kitchen usually must be used for production of the concept's signature items. Labor disputes can arise if the banquet department and branded restaurant employ two separate service and kitchen staffs. In addition, production flow in the kitchen is complicated. Survey respondents' experience with auxiliary food and beverage services provided by the branded restaurant concept is summarized in Exhibit 4.
Effect on Hotel Operations Hotel managers' perceptions of whether the hotel itself became more or less complicated to operate after co-branding varied across all responses. A majority, however, rated operations as "somewhat more complicated" after co-branding. This implies that from the hoteloperator's perspective, co-branding introduced new variables that made
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operating the hotel more difficult than before co-branding. Perhaps this reflects the relatively short time that co-branding has been in effect at most of those properties.
Exhibit 4
Typical arrangements for auxiliary F&B Auxiliary service arrangement
Breakfast • Branded concept is closed for breakfast and hotel runs breakfast out of lobby area or alternative food and beverage outlet • Branded concept offers breakfast buffet • Branded concept offers full ~/a carte breakfast menu • Branded concept is closed for breakfast; however, hotel staff prepares breakfast in branded restaurant's kitchen and serves guests in another area of the hotel
Room Service • Branded restaurant prepares food and hotel staff delivers it • If hotel owns franchise rights to the restaurant, then hotel staff prepare and deliver food
Banquets and catering • In most cases, chain-restaurant franchisors allow hotels to run food and beverage operations independent from the branded concept; however, the hotel cannot use any of the branded restaurant's resources such as purchasing, products, or staff without paying royalties • Hotel offers branded restaurant's signature dish(es) on banquet menu • Hotel uses part of branded restaurant's cooking battery to service banquet functions concurrent with regular restaurant service
Exhibit 5
Comparative benefits: branded versus unbranded restaurants
Effect on F&B Operations At properties where food and beverage space had been leased out to
branded concepts, hotel managers unanimously rated F&B operations as "simple after co-branding." Other responses (for non-lease co-branding relationships) ranged from "somewhat simpler" to "somewhat more complex," with no strong opinion emerging. This range of responses most likely reflects the varied and sometimes tumultuous nature of the relationship between the hotel operators as franchisees and the branded concepts' parent companies as franchisors.
Comparative Benefits The hotel operators were, for the
Benefits
Drawbacks
Unbranded • Complete control over situations that affect hotel guests • Flexibility with the menu and the concept
• Overcoming the public's poor opinion of hotel restaurants • Low revenues coupled with high expenses and payroll costs • Day-to-day operational problems
Branded • Guests' recognition and acceptance of the concept • increased revenues for both the hotel and food and beverage operations • Training and consistency offered by a well-established brand company • A national marketing effort for the restaurant • Decreased overall expenses, especially payroll and food cost
• inflexibility of concept specifications, product-purchasing policies, and menu offerings • Training programs that are long and costly • Lack of flexibility or coordination with hotel operations (the restaurant hours may not fit hotel guests' needs) • No cooperation from restaurant managers regarding reservations or customer complaints, and lack of control over operations and management* *Occurred in leased-out environment
42
I~N~]~ HOTELAND RESTAURANTADMNSTRATION QUARTERLY
most part, in agreement about what aspects pleased them the most and the least in both the unbranded and branded restaurant environments (see Exhibit 5). What hotdiers like the best about the branded restaurants at their properties reflects all the attributes that a brand-name restaurant promises its customer. In eight out of nine cases, hotel managers felt that their guests were more satisfied with a nationally branded dining alternative than an independent restaurant.
Limitations 0f the Study I encountered several challenges during the course of the project that increased the difficulty of data collection and may therefore have influenced the findings. First, it was difficult to locate properties where co-branding was occurring within the study's strict scope. Several properties had less than one year's worth of operating data because the co-branding rela-
tionship was still young. Other properties had branded restaurants on the same plot of land but the hotel and restaurant were not attached. Second, many properties did not maintain accurate records of historical operating data, making it difficult for respondents to complete the survey. Management turnover symptomatic of the hospitality industry also complicated data collection. For example, a general manager who has been at a property only for one year is not likely to have information about the previously existing non-branded restaurant or its performance. Third, sometimes multiple parties were involved in the data-collection process, especially for leased food and beverage space. It was more difficult to convince several busy people to participate and coordinate an effort to complete the survey. Fourth, it is difficult to attribute increases in occupancy and rate solely to co-branding arrangements. Many other factors could affect those figures, including supply-anddemand dynamics; renovations to the property; changes in the surrounding marketplace, such as construction of new hotels, restaurants, retail space, businesses, and institutions; and the general health of the national, regional, and local economies. In retrospect, some of those factors could have been accounted for had they been included in the survey. Fifth, managers at only one property completed information on the change in number of restaurant seats and square footage, making it difficult to assess the impact on revenue per seat, which is a better indicator of change in restaurant performance than is change in total restaurant revenues or net profit. Finally, the project sample size was limited from the start and therefore the results may not have
been statistically significant in any event. Now, however, enough examples of co-branding exist to perform a statistically based study.
Recommendationsto Restaurateurs
Possible courses of action for restaurateurs include the following: • Flexibility of a concept is the key to success in the hotel food and Recommendationsto Heteliers beverage environment. Develop a Based on this study, possible courses brand extension of the restaurant of action for hoteliers include the concept that suits the needs of a following: hotel's operating environment. • Develop and roll out a propriCreate standards with built-in etary brand, provided that the flexibility so that all of the company is of substantial size. For concept's components can be a small company, an option might tailored to the hotel restaurant's be to work with other hotel size, shape, hours of operation, companies to develop a joint training processes, auxiliary serproprietary brand. The concept vices, operating systems, and resshould suit the needs of a majorervation systems. ity of the hotel company's prop• Ally only with hotel companies erties and should be managed like that complement the restaurant's a restaurant brand rather than just brand image so as not to dilute a guest amenity. Invest in the the concept's visibility and power elements of a good brand: a qualin the marketplace. ity product, an appropriate and My research suggests that, if consistent service-delivery sysproperly implemented, co-branding tem, and an image or symbol that offers many opportunities for hotehas the power to elicit an emo1lets and restaurateurs to increase tional response from the conrevenues, profits, customer loyalty, sumer. 22 The hotelier who develand operating efficiencies. That is ops a proprietary brand perfectly especially true when the hotel comsuited to the hotel environment pany is of such a size that developcould also capitalize on the oping a proprietary brand is not feaportunity to sell that brand to sible. As more restaurant and hotel other hotel companies in search companies begin to explore coof a solution to food and beverbranding arrangements, further reage problems. search should be conducted to assess • Work with a restaurant company the performance of those alliances. to develop an extension of an A larger sample size, a more-tailored existing restaurant concept that would be suitable to the needs of survey, and more-detailed tracking of operating histories will provide a hotel operators. The customized concept should include a plan for broader, yet more targeted, basis for comparison. In addition, a larger flexible space arrangements, sample size will make regression hours of operation, training, and analysis possible and allow for the auxiliary services. development of a model to predict • Consider employing the services and further describe co-branding's of a consultant to recommend effects on hotels and restaurants. and negotiate an arrangement with a restaurant company that is In the short term, however, hotel flexible and applicable to the and restaurant companies should hotel chain's properties. capitalize on the opportunities to attract the fruit of the advertising industry's efforts: brand-aware and 22Christopher Muller, unpublished notes on branding (Cornell University lecture, April 1997). brand-loyal customers. CQ
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