Hotel operating departments can be divided into two main groups: those that generate revenue and those that don’t. Typically, hoteliers focus on the first group when analyzing financial performance— after all, that’s where the money comes from!
Thus, departments such as rooms, F&B and spa are put under the microscope, and departmental key performance indicators (KPIs) are thoroughly studied and benchmarked.
The second group consists of the undistributed departments, namely Administrative & General (A&G), Information & Telecommunications systems (I&T), Sales & Marketing (S&M) and Property & Maintenance (P&M). Even though these are not profit centers, their financials should not be overlooked.
According to HotStats data, in 2019, total undistributed expenses accounted for 24% of total revenue in the United States, climbing to 26.6% in January 2020—too significant a portion to leave unchecked. Furthermore, undistributed expenses directly affect your gross operating profit (GOP), and can therefore make or break your property’s flow-through.
Here are three trends in undistributed expenses to keep an eye on:
1. Credit Card Commissions
Credit cards are often a preferred payment method in hotels, especially for travelers who like to rack up points. All this credit card usage takes a toll on profitability. Per HotStats data, in the United States, credit card commissions increased by 1.9% in 2019 compared to the previous year. Total revenue, on the other hand, grew by only 1.8%. Even though credit card commissions are expected to climb when revenue expands, it’s the spread in growth rates that can prove troublesome.
This trend was furthered in January 2020, as credit card commissions recorded a 6.4% YOY upswing against a 3.2% YOY total revenue increase. As this A&G expense continues to outpace revenue generation, hoteliers are vulnerable to profit margin shrinkage.
2. Loyalty Programs
Loyalty programs play a pivotal role in guest retention and brand allegiance. However, the perks offered by brands come at a cost, and it’s hotel owners who have to pick up the check. But how much bang for their buck are owners getting?
In 2019, the cost of loyalty programs went up by 5.2% in the United States compared to 2018, according to data reported by HotStats. Moreover, January 2020 recorded a 10.4% YOY surge in this metric.
As is the case with credit card commissions, this expense line is outstripping its revenue counterpart and further impairing profit conversion. To make sure that this financial effort is worth it, hotel owners need to assess the benefits of loyalty programs according to their properties’ characteristics and how they cater to the needs of their specific customer base.
Energy management has been an ongoing concern for the lodging industry. Over the years, the development of greener technologies—from smart thermostats to motion sensors and energy-efficient lightbulbs—has helped hoteliers save on costs and reduce their environmental impact. We know that every penny counts, but how much are these energy-saving strategies actually adding to the bottom line?
HotStats reports a 1.9% decrease in electricity expenses for hotels in the United States for the year 2019 compared to 2018. Furthermore, gas expenses also decreased during that period by 1.2%. Savings continued through January 2020 for both expense lines, recording 3.8% and 10.6% YOY drops, respectively. With this efficiency boost in the use of energy, hoteliers are better equipped to flex costs in the face of receding revenue.
The tendency in the lodging industry to measure financial success by focusing on top-line results often sidelines undistributed departments. Yet these departments are critical for the operation of a hotel because they provide support services to all profit centers.
Undistributed expenses provide relevant insights into how business is conducted, such as the level of waste at your hotel, the financial trade-off of opting in or out of loyalty programs, the changes in consumer payment preferences or the evolution of franchise fees over time.
The end goal for both managers and owners is to optimize profitability, and that can never be achieved without a thorough understanding of both profit and cost centers. Thus, undistributed expenses should be measured, tracked and benchmarked, just as diligently as top-line metrics.