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For Hotels, Restaurants a Cautionary Tale

Vulnerability and loss of control are two of COVID-19’s biggest lessons. Unlike past threats, this one was unique in its ability to deliver damage under the guise of invisibility. It couldn’t be seen; it couldn’t be heard; it couldn’t be smelled; it couldn’t be touched. But its impact was like a Category 5 storm: deadly, destructive, leaving nothing unaffected in its path.

The tempest has simmered, but in the clearing is no rainbow. Instead, hotels are saddled with a host of new challenges: labor woes, supply chain worry and other P&L headaches.

It’s a hurdle restaurants know all too well and a warning for hotels.

Profit margins at restaurants—F&B generally—are historically slight. Now, restaurants are contending with a labor shortage of their own and rising food prices that are ballooning menu prices and denting diners’ wallets.

Supplies and labor costs are rising in the restaurant segment; it’s a similar story for hotels. Meanwhile, inflation in May is expected to hit an almost 30-year high. The fear is that a jump in prices will raise costs further for hotels, which is doubly significant since hotels—especially city-center properties highly dependent on group and corporate business—are still not close to being back to pre-pandemic business. The one thing in hotels’ favor is that it sells nightly leases, allowing it to raise or decrease prices dynamically; however, are prospective customers willing to pay higher rates just because the supply chain is more expensive? Unlikely.

Source: U.S. Department of Labor

Restaurants are a different business and real estate operation than hotels. It’s a singular business (food and beverage) with oftentimes razor-thin profit margins. In fact, approximately 60% of restaurants fail within the first year of operation and 80% fail within the first five years. And this was before COVID-19.

Though restaurants and hotels operate different business models, they tend to perform poorly or successfully due to similar debilitating factors, including: location, inexperienced or unseasoned staff, high costs, poor revenue and inventory management (pricing food, pricing rooms), lack of marketing, to name some.

Staffing is unquestionably a hotel’s largest current concern. In a twist, jobs are available, but finding people to fill them is becoming increasingly difficult due to myriad factors (more on those later). According to the American Hotel & Lodging Association, 2021 is expected to end down 500,000 jobs.

Job openings, especially in hospitality, are flourishing in the U.S., but there isn’t a large pool of takers. According to the Department of Labor, as of April, there were 9.3 million unfulfilled positions, the highest level on record since 2000. In May, the greatest gains were in hospitality and leisure, according to job site Indeed.

According to the U.S. Department of Labor, total nonfarm payroll employment rose by 559,000 in May, and the unemployment rate declined by 0.3 percentage point to 5.8 percent. Employment in leisure and hospitality increased by 292,000, as pandemic-related restrictions continued to ease in some parts of the country. However, employment in leisure and hospitality is down by 2.5 million, or 15%, from its level in February 2020.

In order to cajole workers to join the hotel ranks, some employers have even turned to offering bonuses for those who stay on for a set amount of days. To hear it from hotel owners and operators, demand is coming back, but the staff it takes to service those guests is not.

Payroll by the Numbers

Hotels like it when costs are down, allowing for more revenue to flow to the bottom line. But labor costs are a double-edged sword: If they are lower, it may be because the hotel isn’t fully staffed, which could lead to service deficiencies and future loss of clientele.

Total hotel payroll on a month-to-month, per-available-room basis, amid normal times, is a mostly fixed cost, which, between January 2019 and February 2020 ran around $88 on a moving-average total. It’s dropped ever since, hitting its nadir of $21.92 in April 2020. As of April 2021, labor on a PAR basis was $37.77, 57.9% less than at the same time in 2019. Meanwhile, occupancy has climbed more than 30 percentage points since April 2020, while labor costs are up $15.85 on a PAR basis.

Hoteliers will do all they can to keep their biggest expense down, but not at the expense of customer service and experience. Labor costs may remain down for the time being, but based on broader macro circumstances, rather than want.

Some solutions have been floated. At the Hunter Hotel Conference, in March, in Atlanta, the world’s largest hotel operator, Aimbridge Hospitality, floated the idea of turning to gig workers to fill positions. An Uber answer for hotels.

In the U.S., there are several reasons why employment is depressed, including unemployment benefits that oftentimes surpass minimum wage, migration of talent to other industries or migration of talent to locations that pay a higher minimum wage regardless of job function. The American Rescue Plan extended Pandemic Unemployment Assistance from 50 weeks to up to 73 weeks through September 6 and extends Emergency Unemployment Compensation from 24 to 53 weeks. It also continues to support workers by providing an additional $300 in weekly benefits through September 6. If that supplemental benefit is discontinued, the expectation is that many workers who remain on the sidelines will look to opt back in.

Total hotel other expenses, meanwhile, were up 109% in April 2021 over the same time a year ago. Expense creep is real, and will naturally happen, but hoteliers are dead-set on creating more efficiencies post-pandemic via better time management and, potentially, the gradual removal of some expected services, such as daily housekeeping and complimentary breakfast. At the same time, creating revenue where there wasn’t before, by, for example, charging for daily housekeeping and a hot breakfast, are part of an ongoing conversation.

Restaurants felt the full brunt of the COVID-19 pandemic. It’s a lesson and cautionary tale for hoteliers. Hopefully they’ve paid attention.

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