Relevance of Revenue Management for F&B sector in post-Covid times

Revenue Management as a practice has been around for multiple decades now, starting with an airline-centric adoption initially, it was soon deployed by the Hotel industry in the developed world and over a while globally, including developing economies like India. The adoption by the hostel industry too saw a more ‘accommodation centric’ utilisation rather than a holistic one that would involve the F&B segment as well. While there is evidence to suggest that F&B (Food and Beverage) focused RM (Revenue Management) practice has gained traction in recent years, especially with hotels having significant F&B revenue spread, the gap persists.

While there can be multiple reasons for the lag in deployment and focused utilisation of the practice of revenue management specific to the food and beverage service segment in India, some of the key contextual aspects that need to be recognised and given due attention are as below:

1. Traditional revenue drag and lower profitability profile

The hotel industry in India has traditionally logged a revenue spread that has always been tilted towards the ‘room segment’ as against the ‘F&B’ segment, while a few decades back the split was around 70:30, in more recent years the same has become almost 55:45 and in some case, even a 50:50 even split. Even within the varying hotel segments, this trend holds for the most part. Despite the growth in revenue pie share growing over the years, from a profitability impact aspect, the contribution margin for F&B typically being weaker by nearly 30 per cent or even more when compared to the ‘room division’ at a gross margin level, explains the natural focus of RM on rooms.

2. Revenue Management application for the F&B segment is more complex

While the F&B service segment lends itself to the application of revenue management principles akin to a ‘room’ product, the much more complex food and beverage product and its service implications at an operational level make it harder to apply RM concepts. A cover in a restaurant can be turned multiple times, room service operation has RM implications that are different from a restaurant setting, banquet and catering events are different as well, pricing implications for F&B menus are way different than that for rooms, varied F&B service segments would bring their unique differences at an operational level, hence requiring a much larger effort to effectively apply RM approaches.

3. Cost control centric approaches in the Indian context

Given the potential complexity around the application of RM practices in the food and beverage domain, for the longest time, the hospitality operations have tried to look at the F&B segment with a ‘cost control’ lens as against a ‘revenue’ centric strategy that drives rooms segment for the most part. This is evidenced by the presence of the ‘cost control’ function set up and staffed by businesses based on their size and requirement. Interestingly the function is part of the finance department and thus rather limited when it comes to an understanding of F&B operations. In effect beyond some aspect of establishing checks and balances, ensuring inventory audits etc. there is little else that the function brings to table, clearly lacking any progressive orientation towards building actual cost efficiencies. Purchase function too is a part of the finance department and again while the function offers checks and balances, it has largely remained unaffected by changes in the form of tech-driven online purchase options.

4. Service Quality focus of operational leaders

The operations management teams for the longest time have worked towards providing high-quality service and product, their training too has been oriented to deliver just this, the financial analysis skills are often not factored in. Hence no surprise that data analysis beyond ensuring that food cost targets are met finds few takers, the service end focus too has remained confined to looking at MIS data/reports to reflect on average checks, covers served metrics etc. and maybe some data analysis of customer segmentation and feedback.

The Shift

Often big shifts in business processes and approach are a direct result of macroeconomic changes or organisation-specific compulsions or even a combination of both.

That might just be the case with the F&B service industry in India, with inflation on one hand and a Covid has driven demand correction on the other, the operators have a tough line to tow to survive. Covid restrictions have impacted capacity utilisation as well as non-food related operational costs, this is in addition to any food cost-related inflationary pressure already stated above.

Initiative at Vedatya

The complex nature of F&B operations at Vedatya Institute, given that the ‘self op’ approach which requires us to manage the 24*7 cafeteria operation that serviced employees and hostel residents, varied events (students managed as well as otherwise), practical food service linked with the curriculum of varied programmes of study being offered, made it an imperative to deploy process and tools to validate the expenses for each category.

 While we recognise the competitive advantage of cost reduction and revenue optimisation that a data-driven approach brings towards operational decisions, it was more of a compulsion to start with as our budgeting process was chronically disconnected with actual spends for each of the operational segments mentioned above.

Our store operation is currently centralised and that too was a factor which made it necessary to deploy tools to enable us to analyse our direct costs periodically.

1. Deploying a POS- regardless of the format (multi-unit restaurants, standalone restaurants, hotel F & B outlets, etc.), most professionally run F&B operations rely on a point of sale (POS) management application. However, the sheer amount of data/reports generated by the POS remains largely underutilised, at best. This was exactly our experience when we deployed RISTA as our POS system.

The reason is that output from the POS, for the most part, doesn’t answer operations specific questions that professionals may have from time to time. In other words, it is quite limited in scope from the perspective of practical use by the F&B teams.

The data dump in the forms of various daily, weekly, monthly reports that the POS generated was a step forward, but still way too limited in its ability to give us clear guidance on how we were managing our food and beverage service operations, we knew we needed more, more ability to analyse and reflect.

2. ‘Zoho Analytics’, a Business Analytics Tool

Data from Vedatya’s F&B operations generated by our POS –Rista was further subjected to analysis through a tool called Zoho Analytics to generate reports that answer key questions that we had concerning our operations.

Correct data from the POS system is a key pre-requisite for any system to provide meaningful information. Data that has errors or is incomplete, i.e. ‘dirty data’, is not use worthy and therefore needs to be fixed first. We too had our work cut out in this respect, the implementation phase took almost a year by when the operating teams were trained and primed to input raw data into the POS that could be relied upon for analysis and potential decision making.

3. Cost Management Implications through a Three-Tier Approach

Our approach was focused on strengthening cost management efficiencies for our F & B operation from three aspects-

• Purchase Management Efficiency,
• Inventory Management Efficiency
• Production Management Efficiency.

Live data through a range of sample reports is shared to establish a massive opportunity for businesses to save cost by following a data-driven approach. The critical role of end-users is to ask relevant questions and make valid decisions based on the outcomes. The array of business analytics reports will provide the operations team with a perspective on how their specific questions can be answered effectively through the appropriate use of data. This real-time ability to conduct a diagnosis of the issues or challenges and then take corrective actions as a dynamic process is a key take away of this initiative. Today we use the tools and approach to planning our budget with a level of accuracy that was not possible earlier; we can monitor costs for each of the operational components, hold individuals accountable for their expense budgets.

We anticipate a cost savings of at least 25% coming through for us in the current year due to the transparency, accountability and analytical strength of the approach. This is not just about cost efficiencies alone, but equally relevant for efforts to grow the revenues and meet revenue forecast projections.

4. Dynamic F & B Revenue Management

Reviewing performance data (sales trend, covers, revenue per cover, etc.) to identify opportunities to improve revenue performance is a periodic activity. The approach has made ‘menu engineering’ a dynamic activity with routine actions to push the agenda for revenue optimisation for higher profitability.

The strategic approach wherein data-driven tactics and strategies are drawn from three categories -(1) all-purpose strategies, (2) strategies to use when a restaurant is busy (hot), and (3) strategies to use when an F&B service point of sale is not busy (cold) - can be put in place based on the analysis of the current performance indices. While we have more work to do in this respect in the coming year, we are already drawing benefits of a pricing approach that allows to look at ‘gross margins’ regularly and make price changes as required. In coordination with the culinary team, the service team can argue their case for pricing, portion control and even changes in recipes.

Way forward

In addition to the cost benefits already mentioned and showcased, the following are actions emanating from our initiative

1. Students are learning to use the tool(s) during their training, allowing them to analyse financial data, understand financial statements and the inherent performance question through real-time application
2. We are delivering workshops for industry partners to showcase the research, our experience and also sharing information and data on how this can be deployed by them
3. For students who are specialising in F&B operations, we now offer an elective that draws from this research and thus allows us to share our knowledge and experience for their professional development
4. Consultancy assignments, wherein our team is helping industry partners deploy the tools and transition to a data-driven F&B cost and revenue management approach towards running the food and beverage operations.

There is more potential for us to learn and reap benefits that help us manage our operations efficiently and also transfer the research knowledge to students and industry at large in years to come.

The current economic scenario makes it rather critical for the business to build strategic capacity to manage their costs and potentially generate savings, ignoring this imperative has potential to render many a business uncompetitive and unprofitable, this research should be seen as a call for action given the ground realities and will hopefully find more takers in time to come.

As has been our experience, this shift will need focus and perseverance from top managements for it to be accepted and implemented.

About the author:

Sanjay Sharma is an Associate Professor and Head at School of Culinary Excellence, Vedatya Institute, Gurugram. He is a certified hospitality professional from Oxford Brookes University, UK and has over 15 years of work experience in the hospitality industry and academia. A graduate from Institute of Hotel Management, Lucknow, he brings rich national and international work experience. He upgraded his education and honed management skills through an MBA from Birmingham City University, Birmingham UK and subsequently worked with Whitbread, UK at various positions. Some of the prominent names that he was associated with include Taj Hotels, The Park, IHM PUSA, IIMT Oxford Brookes University, Premier Inn, UK and Whitbread, UK. He is also a certified food handler from Whitbread academy, Birmingham, UK. Sanjay Sharma is also an avid researcher, published books, presented papers in International conferences and has published widely in the area of gastronomy, culinary heritage, slow food and culinary tourism.

Note: The views expressed in this article are solely author’s own and do not reflect/represent those of Shiksha