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Cost containment continues to drive profits
October 5 2011

Several hoteliers are continuing measures installed during the downturn, and data from PKF Hospitality Research shows muted expense growth through 2012.

  • After two years of declining revenues and profits, U.S. hotels achieved 4.8% growth in total revenue and 9.8% in profits in 2010.
  • A relatively limited 3.4% growth in expenses from 2009 to 2010 was “very impressive,” especially compared to previous recoveries.
  • Forty-six cents of every US$1 spent to operate a hotel goes to salary, wages and benefits.
By Jason Q. Freed
HNN contributor


REPORT FROM THE U.S.—Although hotels typically struggle to control costs during the early stages of an economic recovery because amenities and services are quickly reinstated, the industry seems to be doing a better job this time around.

Several hoteliers told revenues continue to outweigh expenditures, and data from PKF Hospitality Research showed little expense growth in 2010 and muted expense growth projected through 2012.

“Hotel managers did do a better-than-expected job of controlling costs and how revenue grew,” said Robert Mandelbaum, director of research Information services at PKF. “Revenue grew in 2010 driven by occupancy. When revenue is driven by occupancy, it’s usually less profitable because you’ve got extra rooms to be serviced. We didn’t see that in 2010.”

After two years of declining revenues and profits, U.S. hotels achieved 4.8% growth in total revenue and 9.8% in profits in 2010, according to data from PKF. The greatest gains in profitability were achieved by hotels with the highest average daily rates.

A relatively limited 3.4% growth in expenses from 2009 to 2010 was “very impressive,” Mandelbaum said, especially compared to previous recoveries.

“While overall expenses did grow 3.4%, occupied rooms grew by 6.2%,” Mandelbaum said. “Thus, expenses measured on a dollar-per-occupied room basis actually declined in 2010, indicative of productivity enhancements and cost controls.”

“We’re definitely seeing the hotels are performing from a revenue perspective stronger than they have,” said Mary Beth Cutshall, VP of acquisitions and business development at Hospitality Ventures Management Group. “Expense-wise we’ve been called ‘nimble’ because we don’t have a lot of heavy fat layers.”

Owners are particularly stringent in evaluating management companies today, and, if the operators aren’t able to control costs, the owners will make a switch. Therefore, many third-party operators have become skilled at taking over an underperforming hotel and evaluating the best strategies to “trim the fat” without cutting into the muscle and bone.

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Controlling costs
According to Mandelbaum, the biggest expense for hotels by far is labor. Forty-six cents of every US$1 spent to operate a hotel goes to salary, wages and benefits, he said.

“In 2010, it was management’s ability to control labor cost that was the main reason for profitability growth,” he said.

Mandelbaum said a stubborn unemployment rate led to a lack of pressure on operators to increase wage rates, which helped control costs.

At Hotel Asset Value Enhancement, an independent hotel real-estate asset management firm, wage rates are increasing 3% to 4% and bonuses are back in 2011. President Michelle Russo said larger operators have returned benefits to employees, such as reinstating a 401(k) match program.

“With that said, we did see several brand managers modify their benefit plans to be more in-line with market, a long-term positive for those brand-managed hotels,” Russo said.

Outside of labor, management companies are getting creative with cost containment. The food-and-beverage departments at Hospitality Ventures Management Group hotels, for example, are shrinking menus and instead offering “complimentary items” that help reduce the cost and the inventory.

Cutshall said there is a delicate balance between reducing costs and not affecting guest-satisfaction scores. “One of the things that helps manage that balance is that we are constantly—daily—forecasting our properties,” she said. “The booking pace has really shortened, so we don’t have the lead time we used to. You have to be quick to evaluate the business and react to it.”

Technology also has played a role in cost-cutting strategies. Hospitality Ventures Management Group has its own propriety program that helps evaluate like-branded properties against each other, helping determine quickly if a cost or expense margin is out of line.

“I can even evaluate the current management of an acquisition to see where they fall in line and where the opportunities are. It’s helpful because you can compare apples to apples,” said Cutshall, who will oversee the addition of six to 10 properties to the company’s portfolio in the near future.

Russo said HotelAVE is ramping up its technology to assist in cost-containment but that “it’s still a people business.”

“Examples of where technology has been particularly useful include two-way interfaces for a (property-management system) that reduces the need to manually input (online travel agency) and wholesaler reservations received via fax and the labor-management software,” she said.

Moving forward
Based on a June 2011 forecast, PKF expects revenues will increase by 7% in 2011 and 8% in 2012. Operating expenses will rise, but expense growth will be relatively moderate, Mandelbaum said.

For 2012, the goal at HotelAVE is to “avoid unnecessary cost creep” as cuts made in 2009 and 2010 are proving to be sustainable.

“Truly, the theme for 2012 is continuing to drive revenue,” Russo said. “Not just rooms revenue growth, but also ancillary revenue, such as reclaiming historic ratios of banquet revenue per square foot and meeting room and (audio-visual) rental as percentage of F&B sales.”  

“As far as the budgeting process and the guidance we’re giving GMs, it’s probably about a 5% (revenue per available room) growth,” Cutshall added. “We are pretty positive about 2012; we think it’s going to be a good year.”


10/5/2011 3:51:00 PM
I think it's funny to see this news. As Mr. Joel Ross's views from an article or two ago point out, a few other major things point to hotels not doing so well. another thing I would expect is to see hotel REITS at least having a hold or buy rating. I was looking at a broker's analysis (which I know is not infallible and probably has dozens of assumptions) and their expectations are that these reit's share values will still go down in the fourth quarter.
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