Apparently, the New York Hilton Midtown will no longer be offering room service. So customers will no longer have the option of ordering cookies and milk for $20. That’s got to be a lucrative business, right? Maybe not. Check out this report from Marketplace (How does a $25 room service burger not make money?, Jun 3).[audio http://download.publicradio.org/podcast/marketplace/segments/2013/06/03/marketplace_segment22_20130603_64.mp3]
This quote from the report gets to the heart of the problem.
“It’s very rare, if not impossible, for hotels to produce revenue in terms of room service,” says Mehmet Erdem, professor at the Harrah College of Hotel Administration at University of Nevada, Las Vegas.
Hotels typically lose money keeping a full kitchen and wait staff on standby. That’s the key reason hospitality watchers believe hotels are killing room service. In many cases, that means job cuts for hotel workers, 55 at the New York Hilton alone. For its part, Hilton says it’s ending room service because of declining demand.
In essence, an in-room dining operation suffers from being a small-scale queuing system that needs to deliver a high service level (and thus is not unrelated to our earlier discussion of Tesla’s charging stations). Queuing system’s benefit from economies of scale so as the arrival rate goes up the total capacity needed to deliver a desired service level increases but that capacity will be more heavily utilized. Going the other way, if the Hilton experienced decreasing demand, it could shed some workers but not enough to get the utilization level back up to what it once was. The cost of providing the service consequently increased. Thus it is not that it costs $20 to get a cookie up to a guest’s room but that it is expensive to have staff spending a lot of time not bringing cookies up to someone’s room. The unscheduled nature of room service further complicates the problem. A restaurant can smooth out the flow of orders by using reservations or strategically delaying moving patrons from the bar to a table. The in-room dining staff has to take the orders as they are called in.
There are a lot of (primarily local) services that face similar issues. Think about a plumbing emergency. If you call a plumber asking for immediate service, you will likely be quoted a very high rate. It is natural to surmise that the price is jacked up because you just told them that you are literally up shit creek, but except in the smallest of towns, plumbing is a competitive business (unlike room service at a particular hotel). One firm would presumably have an incentive to cut its rate a little, dominate the local plumbing emergency market, and probably win a loyal following for mundane, scheduled work. That doesn’t happen — presumably because having skilled tradesmen sitting around underutilized waiting for an emergency call is just too expensive.