This article is written by Mithi Jaiswal pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from Lawsikho.
The food and beverage industry is one of the most dynamic sectors in the Indian market. Till 2020 it accounted for almost 3% of India’s GDP with almost 7.3 million workforces. According to the Indian Brand Equity Foundation, till 2017, the contribution of the hospitality sector to India’s GDP was approximately 234.03 billion USD.
However, both these industries suffered a setback in the backdrop of COVID-19 and Government imposed lockdowns. However, the hospitality industry and the food and beverage industry are intertwined with each other for collective growth.
The food and beverage industry is very enormous especially in India, various cuisines and tastes for them are different which makes it distinctive from other countries. But in today’s era where the competition is so high that every single entity is trying to get into this industry as it is a free entry industry one need not be a professional to start but as nowadays things are changing rapidly so with that one has to match the steps to be clearer on the aspect, we need to explore more information to not only do the hard work but also a smart work, as the competition here is high.
With this in mind, this article is going to analyse the important terms in a contract between the food and beverage industry and the hospitality industry. In modern times, the aspect of food and beverage has become an integral aspect of the hotel’ earnings and revenue. It catalyses hospitality branding. Now, with this, the owners are now in the face of a complex scenario of how to enhance revenue and consumer footfall. So, some of the hospitality brands collaborate with the food and beverage industry to increase their customer base. Thereby it becomes imperative to look into the integrities while planning and drafting a “food and beverage” agreement.
These agreements are drafted and crafted in a variety of forms and structures. Some of the important structures are discussed below.
Pure third-party agreements
These are no less than pure “lease agreements” which are completely independent of the “hotel management agreement” and the overall functioning and operations of the hotel. For a third-party lease to function, the demolished premises must contain a kitchen and all utilities required to run the business.
In these types of agreements, there is no element of an independent contract. The hotel manager is the sole responsible person to coordinate the food and beverage systems associated with the management of the hotel. This is encompassed within the hotel management agreement.
In this, the food and beverage portions of the hotel may be considered as “separate” from the hotel manager’s portion of the property and instead overseen by the food and beverage manager. In this third case, a separate third-party food and beverage agreement is required.
When there are numerous operators involved, it’s critical that the hotel manager and food and beverage manager’s branding match. In many cases, the hotel management will want some approval powers over the brand and service requirements placed on the food and beverage manager, while in other cases, approval of the actual food and beverage operator choice would be required.
While it is critical that the two operators collaborate and that the brands appear to be one, the parties are frequently hesitant to discuss the details of their agreements (which are typically secret) with the other management. The food and beverage agreement should specify the level of service to be provided, the hours of operation and room service operations, if any, odour and noise levels, reservation availability, loading dock and maintenance requirements, and other similar requirements to ensure that each manager has express obligations to the other.
The hotel management agreement should specify the number of approval rights over food and beverage operations as well as the minimum requirements to fulfil the hotel manager’s brand standards. In the case of a disagreement between the parties, each agreement should incorporate mutual collaboration and dispute resolution methods.
Some of the integral aspects of a food and beverage agreement are discussed comprehensively below.
This includes the term or period for which the contract will be in force. This is very significant for the reason to gauge the performance of the collaboration. Looking at the performance criteria for the original and renewal periods might assist mitigate some of the danger of being tied into a nonperforming or failing brand or restaurant. Another factor to examine is if the owner is effectively “supporting” the brand’s development. The length of the agreement will be shorter with more possibilities to renew if the owner is taking a perceived “risk” in an unknown brand or chef.
Owners have recently begun demanding threshold criteria or “renewal performance tests,” in which the food and beverage manager must meet a net income or profit level before exercising the renewal term option. When a threshold is utilised, it’s common for managers to want an automatic renewal or the exclusive authority to extend the contract. Managers believe that if they fulfil the owner’s necessary return expectations, they should not be denied the ability to continue to perform. Instead of a criterion being reached or surpassed for each year of the original term, the performance test might be limited to the previous 12 or 24 months in some cases.
Incentives and management terms
The more typical management and incentive fees approach is similar to a hotel management agreement, with a fixed percentage based on gross revenue and an incentive fee based on net revenue (and often only after an owner’s desired return has been satisfied). In most cases, the gross revenue computation includes all income earned by food and beverage activities, including on-site or off-site catering and in-room dining. The terms “gross revenues” and “operational costs” should be defined specifically to include or exclude products sold on or off the premises, as well as the names under which they will be sold and for how long. Allocated costs, imputed rent, and other expenditures should be included (or excluded) in the concept of “net profits.”
When the hotel manager is not in charge of all food and beverage activities, the hotel manager may negotiate a management fee based on the revenues or profits earned by the food and beverage operations.
Termination clauses based on performance
The real intention behind the testing performance is to draw a “line” that, if crossed, allows the owner to cancel the agreement and deprive the management of the remaining term due to poor performance. Food and beverage agreements, like hotel management agreements, should include a stability period before the performance test begins. The parties must strike a balance between safeguarding the owner from a non-performing operation and preventing the management from being deprived of the contracted term due to events beyond the manager’s control.
Key managerial terms
Food and beverage personnel are generally employed by the food and beverage operator, and the owner will demand approval powers over the employment of certain essential jobs, similar to hotel management agreements. The food and beverage director (or manager) is the most important job, followed by the executive chef, food and beverage marketing director, and events coordinator director. The majority of these roles require permission from the owners, whereas the management prefers to restrict the number of positions that require approval to one or two.
All of these concerns should be addressed in the food and beverage agreement in some way. When negotiating a food and beverage agreement, other factors to consider include the availability of room service, the ease of making and accounting for portfolio charges, the accessibility of restaurant or banquet space reservations, special or “set-aside” restaurant or hotel room reservations, and “hotel package rates.”
The food and beverage and the hospitality industry are not only integral to the Indian economy but also a catalyst to GDP growth. A harmony between the two is the most sought after proposition dreamt by every entrepreneur in these fields. So, to attain this element of harmony and synergy in a collaborative environment, the author emphasizes a crystal-clear consensus on the vision, terms and operational clauses in their mutual agreement so that they can reach their desired goal of mutual business growth and profitability.
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