GOP and NOI are at risk – what is your plan?

Last week, HotStats released its hotel profitability snapshot for the USA for January.  The story is grim.  RevPAR is growing more slowly (up 0.8% year-over-year) but Labor expenses are up by more than 4X that amount (up 3.4% vs January 2018).  This is going to get a lot worse before it gets better.  22 states are planning to increase minimum wage this year, some by massive amounts — Hawaii may go up to $17/hour — and decreasing unemployment rates will continue to add even more wage pressure throughout the year. 

So what is the right move?

We see two behaviors at this time of year: 

  • “Stick to the plan”
  • “Figure out how to make our budget numbers”

The first of these, “Stick to the Plan,” is the strategy of focusing on discretionary line-item expenses and effectively giving in to market forces for the variable drivers of success.  In this strategy, topline revenues and labor expenses “just happen,” and focusing on fixed costs, like FF&E, vendor expenses, and commissions takes on an importance that far exceeds the reason these line items exist in the first place.  Some management contracts actually encourage this strategy, rewarding operators who hit discretionary spend targets and effectively ignoring the variable elements of the plan.   Hotels using this approach do fine in good markets (with rising occupancy and low labor costs), but they only lead their competitors if their location is dramatically superior.  

In the second strategy, “Figure out how to make our budget numbers,” operators focus on the bottom line metrics that really indicate hotel performance – GOP, GOPPAR (per available room), and Net Operating Income (NOI) – and explore any and all tactics which will improve the likelihood of hitting these numbers.  On the revenue side, these operators experiment aggressively with distribution channels and sales tactics, seeking premium rates and new sources of occupancy even if these come at a variable cost (commission) that was not budgeted.  The argument here is that such actions either pay for themselves or don’t cost much (because the associated revenues do not materialize).  

On the cost side, labor is the first item that should be examined.  EVERY hotel has inefficiencies in its labor expense.  For most hotels, overscheduling, excessive overtime, and over-use of contractors is commonplace.  The challenge is that these excesses are hard to see from a top-down, periodic perspective.  Housekeeping is commonly overscheduled by 10-20% on a daily basis.  Most overtime costs are spread across a large number of employees in very small amounts (1-3 hours per week) with no real connection to changing business needs.  Contractor management often offers low visibility of scheduling, and associated costs are billed so far in arrears that excess is impossible to avoid without better controls.  For all of these drivers of labor expense excess, a solid labor management program with actionable, property-level controls and tools, is the answer.  Select Service hotels using labor management are reducing labor costs by 4% to 6% in the first year, and Full Service properties are saving as much as 12% to 15%, depending upon the complexity of their operations.  

With this kind of saving potential, successful managers (pursuing the “Figure it out” strategy) are asking themselves, “what is it costing me to NOT do these things?” while their more passive counterparts are only looking at the vendor costs and how they fit into the annual spending plan.

What strategy do you think an owner prefers?  In our experience, no owner has ever been upset about increasing profits.  We have also never heard of an owner who awarded bonuses to an underperforming hotel that managed to avoid the cost associated with increased revenues or reduced expenses.  What are your thoughts?  Are we right?  Or are there owners out there who care more about discretionary line items than overall performance relative to budget?  

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