Industry prognosticators continue to revise the U.S. lodging outlook downward. In a declining economic period like the one currently underway, hoteliers—including owners, asset managers, and operators—need to proactively develop and implement strategies that preserve both top and bottom lines, and best allow them to successfully navigate lean times.
Here, we present and discuss a number of specific revenue – and expense-related strategies that can help hotels outperform industry outlooks amidst declining market trends.
Grow up – It’s all about the base!
Focus on base business to hedge the hotel’s risk against market downturns. Reconsider customers that in previous years may have been deemed too low rated to create a viable base. Whether it is “grouping up,” securing an airline crew, or partnering with a wholesaler, guaranteed room blocks allow operators to figuratively reduce the size of their hotel, and ultimately yield an average rate.
An independent hotel secured a contracted rate for 80 rooms per night below the hotel’s actualized average daily rate (ADR). Despite the rate discount, the hotel was able to maintain relatively flat revenue per available room (RevPAR), outpacing the STR competitive set RevPAR declines.
Create a low-demand room revenue checklist
Create a low-demand checklist that enables the hotel team to implement strategies immediately to maximize business. The checklist should include the following strategies:
- Ensure that the tiered best available rate – (BAR – ) pricing levels drive demand. If they don’t, re-evaluate and set new BAR levels that include smaller pricing modifiers between rate categories.
- Analyze price shops and positioning against competitive hotels based on market demand levels. Market demand tools such as OTA Insights, Travelclick’s Demand360 or Agency360, and corporate negotiated-rate shops are essential to understanding the hotel’s positioning.
- Review lower-rated market segments such as Government, AAA, AARP, and Advanced Purchase rates. Ensure that all channels are open and priced competitively.
- Consider packages that drive new customer segments to the hotel’s website, because low-demand periods generally correlate with higher cancellation rates. Packages could include, for example, local offers, free parking, or breakfast rates that attract non-refundable customers.
Implement destination fees
Destination fees—also called facility or resort fees—are a highly profitable revenue stream that has a superb flow-through of about 90% towards the bottom line. The typical value proposition for the fee is four times the value of the fee (e.g., $120 value for a $30 facility fee). Although these fees are controversial, some of the contentiousness and risk associated with them can be mitigated if disclosures are clearly stated up front—especially for independent or non-affiliated properties.
A New York City hotel implemented a $40 resort fee, which included a daily F&B discount, a welcome cocktail, Wi-Fi access, a mini-bar credit, and other services. The fee generated over $900,000 of annual incremental revenue with a gross operating profit (GOP) margin of 60% yielding an incremental $540,000 of GOP.
Create a profit preservation plan
During declining economic periods when revenue weakens, managing expenses is critical. A formal profit preservation plan (see example, Figure 1) created specifically for your hotel will clearly outline potential cost-saving strategies by department. Implementing these strategies will help you to offset the top-line shortfalls and achieve appropriate GOP and net operating income (NOI).
- Success is best achieved when responsibility is assigned to the department lead of each specific profit preservation item for maximum accountability—that is, the General Manager, Director of Finance, Director of Engineering, and so on.
- The plan should be a living document – it should be monitored and measured monthly, with potential savings highlighted so that the impact of NOI is easily understood in advance for cash management purposes.
- As a rule of thumb, the variance in actual GOP compared to the budgeted GOP divided by the variance in actual revenue compared to budgeted revenue should be 50 percent or greater, except in hotels that have union labor, where a lower 40 percent may be acceptable. 50 percent of GOP to revenue flex to last year and budget is expected (except in union environments where 40 percent may be acceptable due to difficulty in adjusting labor closer in).
Prioritize savings in non-guest impact items
Focus first on areas that do not negatively affect overall guest experience when cutting costs. Do this by reviewing in detail all hotel revenue and expense contracts, as well as select undistributed and fixed expenses. Examples of potential non-guest impact items include landscaping, waste management, Sales & Marketing partnerships with no associated economic or strategic value, technology, copier leases, and off-site storage. You can also contract third-party companies to provide audits of various expenses for a cut of the actualized savings uncovered from, for example, utility bills, Expedia bills, and real estate taxes, to name a few.
A luxury hotel began to closely monitor all income, service and equipment-rental contracts via a contract-tracking spreadsheet that detailed associated monthly and annual fees, start and end dates, scope of services, and so on. The hotel identified a specific contract to rent artwork that cost the property more than $10,000 each month. The hotel trimmed this $120,000 annual expense by terminating the contract and purchasing $15,000 of artwork as a one-time expense. The hotel also identified an expense line item for off-site storage that incurred monthly rental fees. The hotel eliminated those fees by paying once to create useful storage areas onsite and moving the stored materials onsite.
Ensure all F&B outlets are profitable
Complete a break-even analysis of the hotel’s F&B outlets to ensure each makes money. Bring the analysis to the NOI line by including the fees paid on revenue. These typically average 10 percent, plus additional deductions from departmental profits for items such as management, furniture, fixtures and equipment reserve, and centralized brand fees. If the outlets are not profitable, seek out areas that could provide expense opportunities—for example, cost of goods, labor, and operating expenses. Be sure to review hours of operation to ensure sales volumes correspond to business hours.
Combine job classifications
Review staffing levels to see if opportunity exists to consolidate
job functions wherever possible in specific labor areas. Common
successful consolidations include Front Desk with switchboard,
In-Room Dining Order reception with switchboard, and Security
with Operations. Focus on overnight staffing, as this workshift
often has more labor and capacity to take on additional tasks,
due to the reduced amount of supervisory duties required in
these low-demand hours.
A hotel was able to consolidate positions of in-room dining order taker and switchboard. By understanding the job duties undertaken on each shift and the hotel’s needs, the labor consolidation optimized efficiency and eliminated 4.5 employees, thereby yielding significant savings.
Despite a declining economy, hotel operators can deploy a number of strategies to outperform market trends. In order to ensure they have appropriate time to implement contingency plans to mitigate shortfalls, we recommend that hoteliers seek always to proactively identify emerging and future trends and risks and to develop risk-management and mitigation plans before the need becomes urgent.