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Driving Operational Efficiency Not Always A Labor of Love

Not unlike death and taxes, costs are inescapable in managing a hotel. The goal is to ensure revenues outdo costs in order to drive a solid gross operating profit margin. It’s an aim that is easier said than done, but one that is essential toward operating an efficient, cash-flowing, profitable hotel. Without it and with ever-advancing expense creep and slowing fundamentals predicted near-term, a hotel can quickly founder.

“Operational efficiency is critical,” said Michelle Russo, founder and CEO of asset manager hotelAVE. “Generally, hotel budgets include 3-percent expense growth. Therefore, if a hotel projects less than 3-percent TRevPAR or revenue growth, then the budget will show profit-margin erosion.”

One of the most critical issues impacting the hotel industry is labor; it’s why automation is a frequent topic of discussion in hotel circles. With an unemployment rate hovering around 3.9 percent in the United States, finding good employees, at a digestible wage, is no easy task. And in the hotel industry, which relies heavily on human workers, there is no escaping its hefty impact on a hotel’s bottom line.

“There is a huge war on talent at every level,” said Nick Kellock, COO of Concord Hospitality, citing “huge wage pressure” caused by the likes of Walmart and Target raising their own minimum wages. In January, Walmart, on the back of U.S. tax reform, raised its hourly minimum wage to $11. In March, Target raised its minimum wage for workers for the second time in less than a year, hiking it to $12 per hour. The big-box retailer said it planned to further raise starting hourly pay to $15 an hour by 2020.

The hotel industry isn’t only fighting among itself, it is competing against other industries for talent, “so you have to be competitive,” Kellock said.

Labor shock is all too real. According to HotStats, labor costs as a percentage of total revenue amounted to 34.3 percent in the U.S. this year through August. The percentage was 33.8 percent for the same period last year, illustrating the 5-percentage-point uptick. By department, labor costs as a percentage of rooms revenue were 15.8 percent and 47 percent as a percentage of F&B revenue.

Payroll as a percentage of total cost comes to 56.4 percent, according to HotStats data.

How to Deal

Hoteliers employ similar tactics to counter labor creep. At Hilton, labor management analysis is core to the success of the company’s managed portfolio, assessed on a regular basis by its operational effectiveness team, which was launched five years ago. The core of their job is to optimize hotels, allowing them to meet specific GOP margins. They study properties, including benchmarking best performance and practice, and construct a list of initiatives and ideas, which they then share with Hilton departments, such as finance.

Staff optimization is key to all of this, said Anand Naimpally, Hilton’s SVP of Global Operations Finance, and includes myriad focuses, such as seasonality and how to staff up or down depending on the time of the year.

“We are constantly looking at productivity,” Naimpally said. One heavy area of labor impact is housekeeping—the foundation of a well-oiled, well-run hotel. It’s also a considerable expense and how its mixed and supervised can swing costs by multiples in either direction.

For the sake of example, Naimpally demonstrated housekeeping management through a simple, but overlooked part of a hotel: water bottles. “Are they are spending too much time on putting bottles of water in the rooms? And if that is taken away, maybe you save four minutes per room. That can translate into needing 18 and not 20 full-time employees on an annual basis.”

Labor productivity is central to running a cost-effective operations, said Russo. “There is always a more efficient way to clean guestrooms,” she said, noting, for example, different cleaning procedures for stayovers versus checkouts. “There is a huge focus across hotels to scrutinize labor productivity,” she added, and also cited strategies such as using an employee across properties within a managed portfolio.

For REIT Ashford Hospitality Trust, wages, too, are a big obstacle, according to Chris Stevens, VP of Asset Management. That challenge varies by market, he said. “Base salary aside, when you layer on benefits and pensions, the challenge is what are the levers we can pull?”

For Ashford, minimum wage isn’t so much a threat since the company, by and large, pays employees above the minimum wage. However, the increasing expenses of running a hotel can lead to those costs being passed onto the customer, whether in the rate they pay or on-property services.

On the room side, Ashford is smart about where it cuts and where it spends money. “Expense controls have to be sustainable,” Stevens said. “You can’t be shortsighted.”

Like room rates, Stevens believes in measuring expenses versus peers on a year-over-year basis. Some things, he said are non-starters, especially since a majority of Ashford’s portfolio is upscale and upper-upscale hotels. That means not mean skimping on quality and being parsimonious. “You can’t cut back on linens, on china,” he cited. “From the expense side, it comes down to a per-occupied-room basis and spending wisely. We have to be smart where we cut or spend.”

Because the bottom line never lies. For hoteliers, that means constant focus on flow and flex—the former the percentage of incremental profit that “flows” to the bottom line from each incremental dollar of top-line revenue; flex, meanwhile, is a term used when revenues decrease relative to budget or the previous year and can be defined as the amount of profit that is “flexed” or saved as revenue declines.

Expressed more simply: For every dollar lost on the top, manage costs effectively so that you only lose 50 cents of it at the bottom.

Achieving sustainable profit margins comes down to finding the right mix of occupancy and rate. What’s the better strategy: sacrificing occupancy for a higher rate or dropping rate in order to boost occupancy?

In this scenario, almost always, rate trumps occupancy. “Rate hits the bottom line at a 90-percent clip, or so,” Stevens said.

Higher occupancy equates into higher staffing, a cost that bites into the bottom line. Normally, an incremental percentage uptick in rate should equate into higher GOP margin.

“That’s where GOPPAR keeps you honest,” Stevens said. “It's an all-encompassing metric because it takes the entirety of operations into consideration.”

Beyond Labor

Labor is not the end-all of hotel expenses. The cost pie is divided into other slices, including operating expenses, cost of sales and other fees such as management fees and distribution costs.

Procurement is high on the list and contracts between a hotel and vendors who provide things like operating supplies and equipment (OS&E) and furniture, fixtures and equipment (FF&E) can be the difference between losing and saving thousands of dollars per year. Bidding out all contracts—large and small—and revisiting them on an annual basis is advisable say most, including Russo.

“If you can reduce your contracts by 10 percent, that is big savings with no impact to guests or employees,” she said.

Russo said getting three bids automatically makes it more competitive. And if you aren’t revisiting contracts regularly, you could be vulnerable. “A lot of these that are maybe month to month—no one is bidding them out on a regular basis, so the vendor just keeps raising rates or even raising prices more than they should and the bill keeps coming and keeps getting paid,” Russo said.

The larger the organization, the higher the economies of scale, the better a procurement platform—a triad enjoyed by a company like Ashford, whose portfolio consist of more than 115 hotels and 25,000 rooms. Such breadth of inventory gives Ashford bargaining power that some others with smaller portfolios don’t necessarily enjoy.

Managing utilities is more problematic since prices are typically outside the locus of control. On this front, there is growing concern of many utility expenses growing faster than inflation. Still, there remain ways to overcome costly bills, with energy high on a hotel’s list. Through August, energy, as a percentage of total utilities, was 56.8 percent.

“It’s been a focus for us,” said Stevens. To blunt energy costs, Ashford turns to strategies that include water-recycling programs, increasing the effectiveness of its HVAC systems, moving to LED lighting and incorporating, where it can, room sensors.

At Concord, energy maintenance and vigilance are so serious that the company engages an expert in collective buying and sourcing “to lock in energy contracts across the U.S.,” Kellock said.

Concord has also found savings by focusing on worker safety, which Kellock said has helped to reduce workers’ comp claims over the past four years, bringing insurance premiums down in the process.

For F&B, a sprawling operation in many full-service hotels, automation can help improve labor effectiveness. Tools such as mobile POS can potentially allow servers to do more covers per meal service, for example, and man hours per cover served is an increasingly important benchmark to seek out best practices and optimize efficiency.

Other F&B-related decisions can find easy revenue gains where there weren’t any before. Consider this example from Russo pertaining to a resort with eight F&B venues that she worked on. They compared coffee pricing at each outlet and found that they were all different, even though the coffee product was identical at every venue. The decision was made to take the second-highest price and apply it across the resort.

“It generated another $150,000 in coffee revenue, which was 100-percent profit,” Russo said.

Driving operational efficiency is not a one-size-fits-all approach and there is no silver bullet for success, but benchmarking against similar product and locating ways to drive margin are the first steps toward cost savings and being an effective manager.

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