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).
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.
When they said they had 55 staffers devoted to room service, and claimed that the number of room service orders could be counted on one hand, that absurd mismatch is your clue that we’re being conned by their supposed justification. They may have good reasons, but the one they offer is bogus.
Interesting post. I guess all infrequently-used specialist services that incur “ongoing” costs have this problem.
Very Interesting. But shouldn’t capacity lead to price competition. At least before closing the service down, room service price should have been $2 rather then $20
This is an interesting pricing conundrum. If the firm has economies of scale, its marginal cost will fall as volume increases. Thus if it cut prices to boost volume, its margin might actual increase. Emphasis there is on might. I suspect that it’s a tough sell with management to argue for slashing in-room dining prices in order to drive volume.
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Good article, but rather than cutting on services hotels should try to focus on managing funds & resources on a more efficient way.. read on ways how hotels enhance productivity & revenues here
What about the items in the room that are not complimentary? In Shangri La hotel in Suzhou that I just stayed, Evian water bottle is 78 Yuan–about $13! Are these also not profitable?
Suresh,
I’ve got to think that bottled water and other minibar items are profitable. The hotel does not have to maintain on-call capacity for those items as they can be restocked by housekeeping later. Still the hotel is going to have somewhat higher costs than, say, a grocery store since many minibar items will turnover very slowly.
In the food business, food cost is usually the biggest line item but the slow pace of business has really taken it off the podium in this case. All concepts have a shelf life in their existing form but never thought that I will see the demise of the room service.
Just a thought, which may already be in practice or thought about as most ideas are usually thought about (if not, should look for a VC post haste and get into the biz 🙂
In most major cities, hotels are usually clustered within a 2km radius. So why not have a common kitchen which services the hotels in the vicinity 24×7 which will reduce the overall costs, create economies of scale, retain most of the work force and most importantly serve the cravings of the midnight snacker. . … yours truly included….
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Marriott has a “Grab and Go” Mini Market at the Lobby – from where the Guest can purchase the guest room requirements and Stock the Room Mini Bar themselves – No admin and restocking overheads other than the running of the “Grab and Go”