Hotel Service Charges

Rising room rates aren’t the only plague meeting planners have been battling in the current seller’s market. The mandatory hotel service charge on group food and beverage events has been inching steadily upward, frustrating and angering many planners, particularly those who have had to work within the constraints of stagnant year-over-year budgets.

“Back in the 1990s, I paid anywhere from 11 to 18 percent, now I’m routinely seeing 23 to 25 percent,” says Jennie Campbell, CMP, CMM, chief executive officer and president of Metairie, La.-based Meet Your Market, a meeting planning firm. “Not only are hotels bumping up their F&B prices, they are going up on their service charge percentage. You don’t put your price and your percentage up -- that’s double-dipping, pure and simple.”

Passing the bucks

From a hotel’s perspective, there are several operational justifications for the service charge. According to Ty Helms, senior vice president of revenue for Chicago-based Hyatt Hotels Corp., the breakdown of both the percentage charged and what it covers varies across the country, from market to market and from chain to chain, depending on company policy, which makes it inherently inconsistent and therefore difficult to pigeonhole into a precise equation.

Following are some of the most common reasons given for imposing a service charge.

* Administrative costs. This umbrella term means something different to every hotel. According to Mike Beardsley, chief executive officer of Ashburn, Va.-based site-selection firm Inn Fluent and former longtime Marriott International sales executive, a service charge is used to offset the cost of items not included in the F&B price that was quoted to the planner, such as audiovisual services and room setup and breakdown.

“The reason hotels don’t roll these charges into the F&B price is because they want to keep similar menu items competitive,” says Beardsley. “Customers tend to look just at the F&B price when comparing hotels against each other. So, if one hotel quotes an inclusive charge of $33 for a deli lunch buffet and another hotel offers a noninclusive quote of $30, they won’t at first glance appear very competitive.”

* State and union requirements. “Some union contracts call for certain percentages to be assigned to different job classifications, such as wait staff and bar staff,” says Ty Helms. “Some states, like Massachusetts and Minnesota, have very specific laws that regulate the percentage.” Some states, he adds, also regulate how service charges are communicated to clients.

For example, on July 22, 2007, the Washington state legislature unanimously passed law SHB 1583, requiring hotels, restaurants, stadiums and convention centers to provide customers with an itemized receipt detailing what percentage of any automatic service charge goes to the employees who were involved in the service. In making a case for the new law, legislators noted: “It is increasingly common that employers give none of the service charge to the employee. Customers don’t understand, and employees don’t, either. This bill would make it clear who gets what.”

While Hyatt does not have a companywide policy regulating service charges, says Helms, “we expect our local operations teams to understand their market with an obvious eye to being competitive and in compliance.”

* Escalating labor costs. Planners need to keep two essential elements in mind when analyzing F&B. First, F&B represents the second-largest revenue-generating department for hotels, after rooms, reaping as much as a 40 percent profit in full-service convention center properties. Furthermore, the F&B division is the second-largest operating department for hotels, after room operations, with labor representing the bulk of costs. In fact, labor-related costs make up 45 percent of the total operating expenses of a typical hotel, and they will continue to increase year-over-year, primarily because of major union gains at the bargaining table in 2006 and 2007 in key convention cities such as Boston, Los Angeles, New York City, and Washington, D.C. For example, in June 2006, some 100 hotels in New York City inked a six-year contract with the New York Hotel Trades Council that called for a 4 percent increase in employee wages for the first three years and 3.5 percent for the following three years, plus higher pension and health-care contributions.

According to a March 2008 report by Atlanta-based PKF Hospitality Resources, hotel operational costs, which increased 4.7 percent in 2007, are expected to grow another 3.5 percent on average in 2008, exceeding the pace of inflation. In order for hotel managers to keep property owners happy, they need to post healthy profit-margin gains. And to do that, they need to find ways to offset those increasing operational costs.

And the charges are only going one way -- up. New York City-based PricewaterhouseCoopers estimates hotel fees, which grew by 7 percent in 2007, will generate $2 billion in 2008, up from $550 million in 2003. Among the fee-based items cited by PWC were increased bartender fees and automatic gratuities.

What about service?

What especially roils many planners about the escalating service charge is the fact that many feel good service is actually slipping in the industry. “It irritates me that hotels set the service charge percentage ahead of time, because they’re saying this is what the service they will deliver is worth,” says Jennie Campbell of Meet Your Market. “Personally, I feel the level of customer service has gone down. When I don’t get good service, I get hammered by my client.”

When the service isn’t up to par, there is little recourse, notes Jennifer Brown of Meeting Sites Resource. “In a seller’s market, luxury hotels will politely acknowledge they might not have given the service expected and say they will certainly let their staff know, but offer no compensation,” she says. “We have a situation like this now, and the hotel is making no effort to take care of the client.”

Carla Harbour, CMP, a continuing education specialist with the Tampa-based Moffitt Cancer Center, who says she routinely is quoted a 22 percent service charge, agrees: “If I get bad service, I complain, but no one cares or says they will take a percentage off your service charge. What gets me is you have to pay tax on the service charge, then on top of that the planner is expected to tip the service people.”

Yet, planners aren’t completely powerless. Julie Lindsey, director of corporate events for San Francisco-based Gap Inc., has had success lowering the F&B service charge in a roundabout way. Instead of trying to get hotels to reduce the service charge percentage, she negotiates out certain cost items contributing to her total F&B bill, such as chef attendant, carvers and bartender fees, to which the service charge is applied. “They can run between $75 to $150 a staff member, so I try to get those waived with the attainment of a predetermined F&B minimum,” says Lindsey.

Inn Fluent’s Mike Beardsley expects a revolution of sorts -- eventually. “I believe service charge is an issue that some day will hit the fan,” he says, “but it won’t come down until planners start resisting and pushing back.”