Are you leveraging the Catering profit business model?
In this post, we will look at leveraging the Catering profit business model from the following angles:
- Diversity - Catering's strong suit
- Catering - a unique animal
- Low Price, High Volume Syndrome
- The Catering Volume Phenomenon
- Catering Pricing Power
- Catering Buffet Spreads - Profit Vehicles
- Catering Beverage Costs and Prices
- Catering Third Party Services / Equipment
- The Owner Perspective
On with the analysis..
Diversity - Catering's strong suit
The food and beverage operation which includes Catering is diverse.
It has a multitude of outlets each boasting a bewildering variety of permutations, combinations of food and beverage fares.
A restaurant outlet can be an All Day dining outlet, a bar, a fine dining outlet, a snack outlet, a lounge, a deli or gourmet shop, a patisserie, to name some types.
However, these are purely from the dining outlet operation category.
A major part of the food and beverage division is the catering or banquet operation, quite different from the dining outlet types.
It is thus apparent that diversity is indeed the strong suit of the food and beverage operation.
The types of outlets listed above are diverse not just in their nature. The diversity ranges from the kind of fare they serve, through to being food or beverage oriented or both, right down to customer profile and price points.
They differ in virtually every facet of their respective operations.
Catering - a unique animal
The Catering or Banquet operation provides yet another set of varied dimensions to the food and beverage operation.
The Catering operation is that chunk of the food and beverage operation, which is driven by market segments more than the traditional meal periods.
Although the Catering operation can and does support meal periods, its source of business is derived from market segments.
This is because the convention and meeting segments pre-dominantly drive the Catering operation.
Conventions and meetings are the bread and butter of the Catering operation.
The best way to distinguish conventions from meetings would be to simply call the former a mega meeting normally with a big chunk of rooms business at the forefront.
Conventions are big events - examples are conferences, workshops, retreats, and so on.
They may be held in city hotels which are convention oriented.
Or as is more and more the trend, at resorts away from the hustle and bustle of the offices.
Low Price, High Volume Syndrome
The food and beverage is (particularly when it is compared to the rooms operation, as it often is) a low price, high volume operation.
For example, make a broad comparison between the average room rate of a medium sized hotel and the average food and beverage check of its restaurant outlets and catering operation.
It is fair to say that the average room rate will be anywhere from 5 to 10 times that of the average food and beverage check.
It is also safe to say that this ratio could be higher in favor of the average room rate if not for the catering operation.
An explanation is in order.
The Catering Volume Phenomenon
The Catering operation is one that thrives on volumes.
It emphasizes the financial rule that low price high volume operations can bring in the same bottom line as low volume high price ones deliver.
How is this achieved?
It is through a universal principle that works with cost behavior.
This principle says that once fixed costs of an operation are covered, additional sales over and above the fixed costs will only incur variable costs.
This enhances profitability.
Conventions and meetings dominate the catering operation.
The minimum number of people involved in a meeting function could be 10.
Conventions can go right up to and sometimes more than 1000.
Most of the time, meetings, while providing function room space also serve food and beverage for the group.
This basically means that while a restaurant outlet serves individuals of one at a time, the catering operation serves a minimum of ten at a time.
Covering fixed costs is quicker in a Catering operation.
If fixed costs are covered faster, additional sales will only bring in variable costs.
This pushes up profitability.
Catering Pricing Power
While the regular dining part of the food and beverage operation is low price, high volume driven, the Catering operation can soon become a high price, high volume operation.
The Catering operation is one where pricing power rules.
By virtue of the enormous numbers that are served in this operation, significant economies of scale are achieved.
Often, once a hotel has built up a reputation of conducting events successfully with top-notch services, price points tend to become inelastic.
This combined with the huge volume pulled in boost the bottom line in a major way.
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Catering Buffet Spreads - Profit Vehicles
Most convention and meeting events are accompanied by food and beverage service.
Almost all these are buffet spreads.
Why are buffet spreads offered?
Tthe obvious reasons are ease of access to the customer or guest, quick turnaround, visual attraction, more choices and unlimited quantity.
However, there is a powerful principle at work relating to a sales mix.
- Instead of selling the salad, soup, entree, and dessert individually, in one shot, all items have been sold through a buffet offering. This has (as said before) powerful implications for the sales mix.
- Not all guests who choose buffet spreads consume every part of the meal.
- Some may just have the entree and dessert or the soup, entree and dessert and similar combinations that do not include all the items.
- This has implications too.
- The most immediate effect is that revenue contributions are higher when a buffet is sold than when individual a-la-carte items are sold.
- Simply put, revenues are higher with buffets sold.
- Apart from this increased revenues, there is a strong impact on margins and profitability.
- With a buffet laid out, the catering operation can operate with less number of service employees.
- This again reduces labor costs and boosts profitability
- With a buffet laid out, there is less movement in and out of the operating equipment (plates, dishes, chinaware, glassware and so forth) between banquet function room and the kitchen.
- This brings down breakages thereby also boosting profitability of the operation.
The increased revenue contribution from a buffet sales mix compared to individual a-la-carte items is clear from the above illustrations.
But that is not the only benefit.
A huge factor that boosts margins and profitability is when the buffet is sold as a bundle.
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The additional variable costs for the revenues achieved are lower thereby increasing profitability.
Finally, the most powerful implication on sales mix of the buffet spread offering is this.
More buffets sold result in higher profitability (owing to better contribution margins as seen earlier) than compared to individual items on a-la-carte basis.
Catering Beverage Costs and Prices
An example of economies of scale is a simple but a common one.
Soft drinks and juices are normally the staple beverages accompanying food items in a convention and meeting event situation.
This is because alcohol is normally not served as part of the beverages.
Sometimes beer may be included but almost always it is the soft drinks and juices that are featured.
ILLUSTRATION
- A 600 ML Bottle of Coca Cola costs approximately $3.50 at a retail shop and contains between 6 and 8 glasses of the soft drink.
- When this is served and charged per glass, it will be priced at a minimum of $1 per glass.
- At 8 glasses per bottle, the sales will be $8 compared to $3.50 cost.
- That works out to be more than 100% profit margin.
- This is a simplistic example but true with almost all types of catering events and it addresses just one soft drink item.
- Thus economies of scale are huge when it comes to beverages served in catering function.
Consider this kind of profit margin over an event with more than 1000 guests.
Beverage margins are another big reason why the catering operation has the potential to be a high volume, high price operation.
It is also the reason why the catering operation is considered the breadwinner for the normally high volume, low price food and beverage operation.
..
Catering Third Party Services / Equipment
Yet another area where the catering operation achieves a profit margin coup is in the provision of third party services.
This normally is for huge events where simultaneous electronic translation services, rentals of computers or servers and so on are arranged by the hotel through third parties.
The hotel normally charges a hefty margin while the third party vendor does all the work.
This boosts catering profitability even more.
The Owner Perspective
The Catering operation is thus a different kind of food and beverage operation.
It takes the normally prevailing low price high volume characteristic of the typical food and beverage operation and turns it on its head.
It thus becomes a high volume high price operation with enormous boosts to revenue and profitability owing to the numbers it manages to pull.
The high contribution margin it enjoys thus makes it the venerable breadwinner for the food and beverage operation.
Owners can laugh all the way to the bank for having the foresight in building a top notch offering of function rooms in the catering operation within their hotel premises.
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This article was first published for www.hotelexecutive.com
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