Higher wages are tied to higher efficiency, data shows
Higher wages are tied to higher efficiency, data shows
18 NOVEMBER 2019 9:09 AM

Countries with higher minimum wage show lower labor ratio to sales, which seems to justify that well-paid employees are more efficient and ultimately more profitable for the hotel.

LONDON and BROOMFIELD, Colorado—Labor has always been a hot topic in the hospitality industry. It is one of the highest expenditures for hotels, representing, on average, 31% of total revenues or 49% of total costs (using our 2018 consistent sample for worldwide data). Managing labor cost efficiently is critical—in terms of profitability to maximize the flow through, and in terms of customer experience to retain and attract clients.

In recent years, hotel operators have faced increasingly challenging conditions for hiring and retaining quality employees to fill all level positions, especially line-level positions. Some reasons are:

  • decreasing unemployment rates;
  • legislation to increasing minimum wage;
  • workers leaving the hospitality industry for less demanding jobs in other sectors; and
  • stricter immigration policies, which are reducing a significant source of labor.

This labor shortage is also contributing to increasing costs of retention and recruitment, which now must include more competitive salaries and benefits packages to attract the best candidates. Minimum wage has also been increasing, thus becoming a relevant factor behind increasing labor costs.

To better understand these trends, we decided to run an analysis using the P&L data collected through STR’s P&L program and data on macroeconomic drivers from Oxford Economics. We narrowed the analysis to three similar, strong and stable economies: the United States, Germany and the United Kingdom.

For this first installment of a two-part series, we will look at the trends of hotel-level data; for our second installment, we will analyze the dynamics of hotel performance and macroeconomic factors.

Labor impacts bottom line
Throughout 2018, hotels have reported slowing growth in total revenue per available room (TRevPAR) compared to previous years. Hotels in the U.K. recorded the strongest increase of 2.9%, followed by the U.S. (+2.7%) and Germany (+1.1%). However looking at absolute values, both the U.S. and U.K. maintained strong TRevPAR of $193.86 and $182.73 respectively. Germany lags behind with a TRevPAR of $127.77.

The trend is rather similar with labor per available room (LPAR). The U.S. yields the highest absolute value, followed by the U.K. and Germany. Yet, when looking at this in terms of ratio to sales, the performance appears more even. Labor represents 33.1% of total revenues in the U.S., compared to 30.7% in Germany and 27.4% in the U.K. Those ratios are aligned with the worldwide average of 31%, though not as high as it is in countries such as France (38.4%). Looking at percent changes, we notice a stronger growth across labor costs than across total revenues.

Ultimately the U.K., which has the lowest labor ratio to sales, yields the best profit margin at 39.5%. The U.S. has the highest labor ratio to sales and the lowest profit margin of 33.6%, which demonstrates how labor impacts the bottom-line.

Revenue and labor: A strong correlation
Room revenue and labor costs are strongly correlated when the data for all three countries (R square = 0.87) is aggregated. This is expected as when you have more guests in your hotel, you need more staff, thus driving labor costs up.

This data by country shows a similar trend, with slightly lower R-square values (>0.75) due to the amount of data available. The U.S. has the steepest curve, which means that revenue increases have a greater impact on labor cost for the U.S. market than they do for the Germany market.

The minimum wage (r)evolution

  • The UK celebrated its 20th anniversary on 1 April 1999 of introducing a minimum wage for workers ages 22 and over. Minimum wage is revised every year, and by 2019 it had been set at £8.21 ($10.59).
  • Germany did not establish a statutory minimum wage until 2015 when it was set at €8.50 ($9.40). Since then, there is a German national minimum wage and individual regions are allowed to set higher local rates.
  • In the U.S., a minimum wage was established in 1938. Having undergone several amendments, the current federal minimum wage of $7.25, was set in 2009. Starting in January 2019, cities and states were allowed to set their own minimum wage limits. So far, 29 states have established wages above those at the federal level, and this is particularly the case for employees working in hotels, restaurants and bars.

Investing in our people …
There is an interesting relationship between minimum wage and labor ratio to sales. Countries with higher minimum wage seem to report lower labor ratio to sales. This is not to imply the existence of any correlation between metrics, but it seems to prove the famous saying by Richard Branson: “Take care of your employees, and they will take care of your business.” Workers are more efficient when they feel they receive fairer wages. Improvements in workplace satisfaction lead to higher job retention levels.

It is worth noting that there has been some effort across the U.S. to increase the minimum wage specific to the hospitality industry. Some states pay a premium over the federal minimum wage, and the number of states scheduling those increases in the hospitality industry keeps rising (for example, in Illinois which is set to raise the minimum wage to $15 by 2025). Actions taken by workers’ union, such as strikes, also have a direct impact on labor costs nationwide as we have seen recently. This could partially explain why the U.S. has the higher labor ratio to sales.

… can yield positive results for the industry
Finding the right balance between profitability and employment competitiveness can be tough. Yet, the numbers show that if hotels dedicate more funds to labor costs, they will eventually be able to reap the benefits through enhanced employee performance—as seen in lower labor ratio to sales and higher TRevPAR numbers—and lower recruiting and new-hire training costs.

Lucie Geffroy is Junior Analyst at STR. Claudia Alvarado is Analytics Manager at STR.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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