Cost Control F&B Hospitality

Breakfast An Important Event # 3 – Pricing

I share with you the third and last article devoted to breakfast. This is a twofold challenge and sometimes paradoxical: the breath of commercial margin and the positive image that we wish to send back to guests. In a more global way, how do we decide on a price? How do we estimate, among different criteria, the right price?

• • • • • • • • •

As far as prices are concerned, there is no dogma, maybe a few rules. The value of our breakfast requires two levels of decision: first our pricing strategy, then the operational translation of the designated strategy, our “rate”.

1. What should be our pricing strategy

Fundamental strategies

We have available articles on pricing strategy. The four fundamentals are as follows:

In premium pricing strategy, or luxury strategy, we develop products of excellence and match it with a prestige price, with high marketing support. We find it in luxury hotels in differentiation strategy (luxury by service, conceptual luxury).

In economical rates, the issue is to practice a constantly low rate while limiting ancillary costs, to attract price-sensitive guests. This is the price positioning of budget and affordable hotels.

In market penetration strategy, or gift strategy, we start below the competition. Once the market has been penetrated and the guest segment secured, we raise our prices to the level expected by the demand.

When an establishment opens in a difficult (remote location, unfavorable economic conditions, etc.) or highly competitive environnement, it uses mainstream distribution channels (one-off sales on OTAs, private sales, etc.) to create notoriety and then returns to respectable price levels.

The skimming strategy, or operating strategy, consists of introducing new products by selling them at high prices to early adopters and then reducing prices as competitors enter the market to attract other price-sensitive consumers. This is the case of atypical and concept hotels (boutique hotels), that charge higher prices than the market. As the concept becomes more mainstream, the product decreases in price claims.

Complementary strategies

There are other complementary strategies, such as the psychological pricing strategy, which addresses emotion rather than reason. This is the case, among other things, for pricing breakfast at 9.5€ or 9€ instead of 10€.

We can also mention the strategy of lump-summing, which can be found in all-inclusive hotels. The objective is to sell different unit elements together at a lower rate (room/breakfast/spa at 300€, instead of the room at 250 €, breakfast at 20 €, spa at 60 €). Like romantic or seasonal packages. There is also the strategy of optional price (breakfast included or not), and that of the promotional price.

What fundamental strategy could you identify with? They are all feasible. I have to say, I’m a moderate fan of market penetration, if this strategy proves to be permanent; it breaks the market instead of animating it. If these strategies exist, it is because they each have their own reason to. The best strategy is the one that best fits you, the best jeans are the ones that fit you and make you feel good. The most important thing is that all your decisions are in line with your core strategy.

Breakfast is an integral part of the pricing strategy. If not, it creates friction with guest expectations and crushes image consistency.

In any case, breakfast is qualitative (#2 Quality). Our raison d’être and our reputation are at stake. If you orchestrate a luxury strategy, you are required to practice a high value-added breakfast (offering exceptional products) to support your strategy. Your breakfast should be indeed as exceptional as your accommodation. If not, the effect will be disappointing for your demanding clients in search of astonishment.

If you decide on an economic strategy, while providing quality products, your product ranges are less expensive but more restricted. Your pricing should be in line with the economic expectations of your guests. Compared to the global market (from 1* to 5*), where you are positioned neither on the high range, nor on the middle range, but on the low range, hence in coherence with your economical hosting pricing.

Case STUDY

This is from a personal experience.

Before it became a magnificent renovated establishment, I operated in the Cardinal Hotel in the 5th district of Paris, that was transitioning from closure. The establishment had been renovated 8 years earlier yet kept its rustic image. Room prices were high (equivalent to the renovated 3* market) and breakfast was 15€.

Eight years later, everything was in a state of disrepair. Rooms and living spaces were no longer worth renovating (worn and stained carpets, busted walls, worn bedding). We were clearly suffering (very different from the economic standard). The market of the 5th district in 3* was positioned at a high range of 15€ and our non-renovated product offered a breakfast at the same price.

Our e-reputation breakfast was disastrous . I lowered the breakfast rate to low bracket of 10€. A re-evaluation of costs after calculation was necessary as the 15€ rate was too high and unjustified. Our capture rate went from 40% to 80% and the morale of our breakfast staff was optimistic to get back to work. We simply became consistent with our pricing strategy. Ideally, I  don’t recommend lowering rates and practicing low-cost. I recommend offering the best, from affordable to high-end, with renovated and/or well-maintained products. Nevertheless, during intermediate periods of renovation or innovation, I recommend to being consistent with the supply and pricing strategy.

My small regret about this industrial breakfast is that we did not redefine it in terms of our quality criteria. An example of a quality offer would contain the required ranges of 3* (10 ranges). If I was to do this exercise again, I would have included the required

  • hot drinks (coffee, chocolate, tea, etc.),
  • two fruit juices.
  • two types of fresh fruit
  • two types of cereals,
  • two types of jam and butter, compote and dried fruit
  • two types of dairy products including fresh cheese, two types of bread and pastries
  • two types of low-fat products, all organic, of controlled origin and rich in energy (except for pastries, etc.).

I would have excluded, given my price, the more expensive ranges, since they must be of high quality if they are presented: cold meats, hot dishes, and cheese. I would have opted for sliced bread, dried fruit in bulk, fresh cheese and compote not packaged in order to contain my costs without reducing my quality. A breakfast at 10€ can be 100% qualitative.

Therefore, since this quality breakfast existed only in one’s imagination, the criticism related to the supply persisted despite the price. Price criticism had almost disappeared, but just because our guests paid less, didn’t mean that they didn’t expect quality. Quality is an essential part of our service identity. When we took over the establishment, we decided not to disrupt staff habits, as some were resistant to change. Following the takeover of an establishment in a forced economic situation, the urgency is to close as quickly as possible and withdraw it from the market that it’s pulling down.

2. What is the market

Evaluate the competing market

Nowadays, a simple click is enough to evaluate five competitors near you (perimeter of about 10km). Establish your list of real competitors, i.e. those who practice the same strategy as yours, according to your classification. On this basis, establish a median breakfast rate.

If you are 1*? Economic strategy, if you are a real 5*, luxury strategy. You know better than anyone where you stand on strategy. You know what price your direct competitors charge and you have precisely analyzed the content of their offer (content, quality). You established in the benchmark the top of the class by reading their customer reviews on online review sites. Once the exercise is finalized, determine the price in two ways:

  • A reasonable percentage increase (I recommend a maximum of 20% because the elasticity of breakfast remains low), in case your offer is better quality and/or more diversified of one or two ranges. This is ideal in case of a luxury strategy. The more luxurious the proposal is, the better it will sell to the customers for whom it is intended.
  • An alignment (you charge a price equivalent to the median price and not the average price), if your offer is equivalent in quality and ranges. Nevertheless, be sure to differentiate your offer to keep the market alive and oxygenate it. For example, if your competitor does not offer hot dishes, offer hot dishes. You broaden the choice of your common guests in good intelligence.

If you charge a lower rate, you would break the market. You would certainly hurt your competitors, but more importantly you would hurt yourself, in terms of image, margin and opportunities for improvement. It is possible that a competitor is charging too much for breakfast compared to guest expectations, and it is also possible that a whole market is wrong, i.e. totally out of touch with demand. But devaluation is not the right answer. It alters your image (the guest considers that you are selling) and your market (the guest considers that the market is swindling them).

My advice is to take advantage of this delta to establish a better alternative offer (gluten-free menu, exceptional cheese and charcuterie, hand-picked hot dishes…). For the same price, you offer much better, so you capture the demand without overvaluing the offer. In some cases, this attitude will positively challenge your competitors and create emulation, for better competition. In any case, you will be and remain the best, so you always win.

Calculate your margins

Thanks to your market and your analysis, you defined your price. Now you can see the impact of your rates and your capture rate on your operating account.

What are the fundamental ratios to monitor for optimal management control?

Our colleagues in the restaurant business have asked themselves this question and have noticed, on the basis of their declarations, a distribution of these ratios, which vary from traditional, fast food and gastronomic restaurants. There is a statistical void concerning hotel catering and its breakfasts. The approach is most often empirical and I submitted a delta approach based on the existing ranges:

  • The delta material ratio from 20% to 30%.
  • The delta salary ratio of 30% to 40%.
  • The operating ratio and the overhead expense ratio delta from 20 to 27%.
  • EBITDA (gross operating income) ratio delta from 15% to 25%.

Case Study

Every month, I invest an average of €4,000 in purchase for my breakfast. I estimated my initial stock + my deliveries – my final stock = 4,000€ of monthly purchase (used and loss purchases).

I estimate that I sell 15,000€ worth of my breakfasts each month. All my amounts are exclusive of tax, including my turnover (intermediate VAT applying to breakfast: 10%). In my breakfast turnover, I include all breakfasts (including those broken down by tour operators, wholesalers and more generally inclusive packages, as well as those offered).

My material ratio is 4,000€ (breakfast purchases) / 15,000€ (breakfast turnover) = 27%.

I take the basis of the salaries of the cafeteria staff: 5,000 € of gross salaries charged (salaries and wages, social charges, paid vacations). I take into account in this calculation the additional costs, to be quantified on a case-by-case basis according to the fluidity and F&B organization (the time of the day receptionist who registers breakfasts in the PMS, the time of the night receptionist, the time of counting the tablecloths and towels for the laundry, etc.).

My staff ratio is €5,000 (salaries and wages) / €15,000 (breakfast turnover) = 33%.

Occupancy and overhead costs are difficult to isolate in a hotel structure. For the occupancy cost, I evaluate the rent in proportion to the total surface area of the hotel. For overhead costs, I ignore the depreciation of dishes and utensils, breakage… I deduct the water, heating and electricity consumption from the detailed bills on my meters. I total €1,500 in costs on these two items.

My occupancy + overheads ratios in my establishment are €1,500 (occupancy costs and overheads) / €15,000 (breakfast turnover) = 10%.

After deducting all costs from my sales:

15,000 €

– 4,000 €

– 5,000 €

– 1,500 €

= 4,500 € of Gross Operating Income

My EBITDA ratio is €4,500 (EBITDA) / €15,000 (breakfast turnover) = 30%.

If your breakfast positions itself radically out of these ranges, you can analyze the reason line by line. Before confirming your breakfast rate, you can use the ratio deltas, detect malfunctions and adjust your cost breakdown.

Finally, thanks to this monthly global calculation, you will be able to easily deduct your unit breakfast cost, by dividing each line by the number of place settings served. If you identify that the cost of a breakfast is on average 8 €, and you wish to apply a margin of 30%: 8 € / 0.70 = 11.4 HT + 10% VAT = 12.5 € TTC, customer displayed rate.

Adjust the perception of value for money

This is normally the very first criteria, but it is difficult to ask clients to give an opinion on a moment they have not experienced. The satisfaction survey is again useful to ask the customer about his level of satisfaction:

“How would you rate our breakfast” : Excellent – Good – Average – Poor – Bad.

If it is mediocre or bad, improve your offer until it is at the level of good and excellent. If it is at the right level, maintain your equivalence with your strategic competitors. If it is excellent, increase your prices beyond the market. Guests will agree if they feel it is excellent.

The Musts

On a daily basis (we can monitor them ideally on a weekly basis), two indicators are valuable to track the impact of guest satisfaction in your hotel and to set our operating matrix.

The breakfast capture rate is the indicator that divides the total number of breakfasts served by the total number of overnight stays over the same period. If 2,000 covers are served in the month of February 2019, and the total number of overnight stays (guests present) over the same period is 3,000.

2,000 place settings / 3,000 guests present = 66% capture rate.

The capture rate allows you to measure the success of your breakfast offer among present guests.

The average breakfast price is the total turnover divided by the total number of covers over the same period. If a turnover of €20,000 is generated in February 2019, and served 2,000 breakfasts.

20,000 € of turnover for breakfast / 2,000 covers = 10 € average price.

The average price allows to measure the possible degradation of turnover, due to too many inclusive offers or freebies. This data is important because, if anticipated and corrected, it allows the right balance of ratios.

See you soon!

Laisser un commentaire