Article
How Independent Operators Partner with Hotels as a Growth Strategy
At the corner of Corcoran and West Parrish streets in downtown Durham, North Carolina, is the third location of Neomonde Mediterranean restaurant. While the menus and fast-casual ser vice are the same as Neomonde's other two locations, the third is the only one born of a partnership with Unscripted Durham hotel, a 74-room boutique hotel property renovated and opened in 2017.
The Inn Crowd. Hoteliers are working with local operators to bring interesting foodservice concepts in house. As a Durham, NC operator found, there are significant mutual benefits for both hotelier and restaurateur, as long as you know how to sidestep the pitfalls.
It might seem an unlikely location for Neomonde, which started as a bakery in 1977 before opening freestanding restaurants in Raleigh and Morrisville. They own those buildings instead of leasing. But while scouting for a third location, Neomonde's owners, the Saleh family, were approached by an agent for Unscripted Durham's owner and developer, Austin Lawrence Partners. They asked if the Salehs would be interested in leasing streetside space at the newly revamped hotel, which is also home to two other independent restaurants operating around Unscripted's perimeter.
"We decided this was the right fit for us at the right price," says Christopher Saleh, Neomonde's VP of retail and marketing. "It fit the demographics we were looking for, especially since there are a lot of businesses in the area and we do a lot of catering, and it fit from a brand perspective because we're located on a busy corner in Durham's Center City, which has a growing residential presence as well."
The decision to open Neomonde at Unscripted has worked out well for the Salehs, but the process of partnering with a hotel has its pros and pitfalls for independent restaurateurs. Here, we'll take a closer look at each step and decision Saleh made, and hear from two hospitality industry veterans who have opened and operated multiple independent restaurants in hotels over the years: Jim Henning, founder and COO of United Restaurant + Hospitality Group, and Tom Kelley, president, AccessPoint Hospitality Group.
Why Should Your Independent Concept Partner with a Hotel?
The first question an independent restaurateur should ask when considering a hotel partnership is, what are the benefits compared to a freestanding location?
"From a customer standpoint, if it's a successful hotel, you're guaranteed a base number of heads in beds every night that could frequent your restaurant, and cover your slower days when there isn't as much local traffic. It's not guaranteed business, but it can make things easier from a revenue standpoint," Kelley says.
Another benefit is the restaurant becomes part of the property's infrastructure for utilities and maintenance. "If we need help with a repair, Unscripted will send one of their on-site maintenance crew to fix it," says Saleh. "We're in an older building (the property was originally the Jack Tar Motor Lodge built in 1962) so there may be leaks or other issues. In a freestanding restaurant, we'd have to take care of those repairs ourselves."
The hotel can also market the restaurant in-house and to the public via social media and other outlets, and a property usually has a sales team booking big groups for meetings and conventions for two or more days at a time. "Those attendees become extra business for an in-house restaurant, and that's a huge advantage most freestanding restaurants don't have," notes Henning.
Which Hotel Should I Choose?
Just like the restaurant industry, the hotel industry is segmented into sub-categories depending on level of service, price, urban or suburban location, and target demographics. Restaurateurs looking to partner with a hotel would likely have the best chance of success connecting with an independent property or boutique brand (like Neomonde did with Unscripted) since there are fewer (if any) corporate brand standards in place.
"With the larger hotel brands, a restaurateur may not be operating as a true independent, because of the corporate standards imposed on them for things like breakfast service, staffing, uniforms, pricing, and more. That can dilute the original concept significantly," says Kelley.
Saleh adds, "You don't want to feel like you're a small fish in the relationship. You want to feel like it's a partnership all the way. Running a business is hard enough, but having somebody constantly imposing rules, and telling you what you can and can't do in your own restaurant, would be very challenging. Finding a smaller boutique hotel like Unscripted where we can grow together instead of the hotel being our big brother, so to speak, is the right situation for us."
Is This the Best Location?
Once a restaurateur identifies a hotel as a potential partner, the next step is to look at the space the restaurant will occupy at the hotel. Neomonde at Unscripted has prime corner streetside access, which was an attractive selling point for Saleh, since locals don't need to go through the actual hotel to get to Neomonde.
"About 70% of our customers are locals and the other 30% are hotel guests," Saleh says. "We're also right across the street from a small park where the city has its annual Christmas tree lighting, and there's an outdoor yoga series there as well, so we get a lot of promotion and foot traffic with new customers from events held there."
Henning says one aspect often overlooked when considering a hotel partnership is the due diligence necessary to ensure your concept isn't duplicated nearby, and verifying there's a need for your concept in the area.
"Just because you found a great streetside space at a hotel doesn't mean you automatically put your concept in there, because it might not work based on the demographics of the area and the hotel. You have to study the demographics of the brand and the surrounding area first, then you'll know who your true customer is, and you can tailor your restaurant around those people,- he says.
So, What's the Deal?
Once a decision has been made to move forward with a hotel partnership, every single want, need and detail related to the restaurant needs to be put in writing. Saleh strongly recommends hiring a lawyer to negotiate the contract. "You need a good lawyer because you don't want to negotiate directly with your partners - it can sour your relationship. Let all the negotiating stay between lawyers," he says.
The fundamental details of the contract should contain: the length of the lease; what the monthly or annual rent is; what percentage (if any) the hotel will take from restaurant revenues per month or year; whether staffing will be handled by the restaurant or the hotel; how much of the restaurant marketing (in-room, social media, website, etc.) will be handled by the hotel; and whether the restaurant will also oversee room service, breakfast, amenities and/or catering for guests.
Saleh's contract with Unscripted includes a 20-year lease and a three-year startup period to grow the business, after which the hotel will take a small percentage of revenues - about 5% annually. Neomonde also hires and trains its own staff for the restaurant, and executes all room service for the hotel.
"Unscripted didn't have room service, so that was fortunate for us, because it's an easy way to get Neomonde to the in-house guest," Saleh says. Neomonde's room service model is similar to many current low-cost room service operations, where food is packaged in to-go containers and delivered to the door of the guest without any face-to-face interaction required. "It's worked well so far. We charge a small fee, and delivery is easy because the rooms are right above us."
While Saleh's deal was structured to be a win-win for Neomonde and Unscripted, with a long-term vision of each brand growing together in downtown Durham, Henning says independent restaurateurs need to be wary of hotels looking to unload a money-losing restaurant space to take it off their P&L statement. However, he says that can also work in favor of the restaurateur if they know that hotel's financial situation before negotiating.
"I would tell the hotel if I break out their food and beverage statement, odds have they just handed me the most glaring financial loser on that statement. Let's assume their restaurant consistently loses $100,000 a year, and I take over the space with my restaurant. I just saved that hotel $100,000. That's great negotiating leverage. I'll tell the hotel I'm not paying any rent for the first few years, or I want a lot of financial help with the buildout of my restaurant to take that deal," says Henning. "My advice is secure the best agreement you can, or don't do it. I often say the best deal is a bad deal you did not do."
Some other areas Henning says should not be negotiable are the menu offerings and pricing, since that's the domain of the independent restaurateur and the reason a hotel would partner with them in the first place.
"You have to have it in the contract insisting 'this is my restaurant, and I will decide what my staffing levels are, what goes on the menu, and how much I charge', which is almost always less than what a hotel would charge. If the hotel GM comes in and says we're charging too much for a burger, for example, my response would be that it has nothing to do with them, frankly, and I'm going to charge what's best for my business on a day-to-day basis," he says.
One of Henning's biggest successes has been Jimmy V's Osteria + Bar at the Sheraton Raleigh Hotel, which consistently generates around $4 million annually in revenues. Since the restaurant opened in 2013, the hotel has changed hands twice, and both times Henning has been asked to return to correct issues created by hotel executives infringing on the original independent concept.
"Two different hospitality groups have bought that hotel since we opened Jimmy V's, and both groups called me after they raised prices and lost customers, presumably to be in line with what they think hotels should charge for food and drinks," he says.
How Much Money Do I Need?
Once it's time to start building out the space, a restaurateur should be prepared to spend $400,000 to $600,000 to pay for the cost of installing their concept. "Generally speaking, you can't really touch anything without having about a half-million to spend," Henning explains. "Make sure you have the capital in hand before diving in. Some restaurateurs say, 'I can't wait to get my restaurant opened in this hotel,' and they're rubbing nickels together. It can take years to make up for it financially, if they break even at all."
Saleh adds that Neomonde Durham cost approximately $400,000 to build out the 3,000-square-foot space at Unscripted. "We had a lot of custom work done, and we had help from the hotel as part of a tenant improvement plan in our contract. We even installed components we don't have at our other restaurants, like a marble-top serving line - that alone cost us $150,000. Overall, the buildout cost was reasonable. I know guys that spent $1 million to build out their restaurants, but I think that's nuts. They might be three years into their business before they see a dollar of profit."
Finding a Partner
An independent restaurateur can't connect with a hotel unless they know which properties are looking for partners. Saleh says networking is crucial, and advises attending City Council meetings regularly and joining the local Chamber of Commerce, because, "a lot of times you'll hear about a hotel's plans first there," he says.
Overall, Saleh's advice to other restaurateurs is to have at least one other location open before partnering with a hotel. "You have to know your business first, and if you've succeeded with a restaurant concept at a different location, then you can start working with a hotel," he says. "I wouldn't advise opening your first restaurant in a hotel, because a hotel is a risky place to experiment with a restaurant, especially if you're in a high-rent environment. You need your core skills as a restaurant and a brand perfected first before expanding into a hotel location."
