Why Q3 Numbers Make Profit Matter That Much More

The third quarter of 2018 could prove to be an inflection point for the U.S. hotel industry. Up until then, hotels basked in solid growth, strong demand and sturdy revenue. But after positive revenue per available room growth for more than 100 consecutive months, RevPAR turned negative in September.

While the month’s deficiency may have been a blip, the product of tough hurricane comps at the same time last year, it wasn’t just one month of suffering for some hotel companies, including Choice Hotels International and InterContinental Hotels Group. The former reported a 1.4-percent decline in domestic RevPAR for the third quarter. Average daily rates increased 0.9 percent but occupancy rates declined 160 basis points for the quarter compared to the same period last year.

IHG didn’t fare much better. RevPAR slumped 0.5 percent in the quarter, heavily weighed down by a 1.2-percentage-point drop in occupancy. CEO Keith Barr alluded to the 2017 hurricanes as having a pernicious impact.

Other hotel companies reported positive RevPAR, but the margins were slight. Marriott International’s North American RevPAR was up just 0.6 percent for the third quarter. Competitors Hilton and Hyatt reported domestic RevPAR increases of 1 percent and 1.4 percent, respectively.

The data come against a backdrop of inflationary volatility. Even moderate inflation can quickly create uncertainty as businesses have more difficulty estimating future costs.

According to the U.S. Bureau of Labor Statistics, the annual inflation rate for the 12 months ending in September was 2.28 percent. It was 2.95 percent in July and 2.70 percent in August. Year-over year, these 2018 numbers were appreciably higher than 2017. A full 1.22 percentage points for July, .76 percentage points for August and .05 percentage points for September.

Trouble for hotels arises when expenses grow higher than the pace of inflation. And with unemployment at historic lows, wage-driven inflation is more and more of a threat, as employers bid up wages in an effort to hire qualified people.

Data points illustrate this threat. Consultancy Yardeni Research cites a comeback of the Phillips curve, an economic model that describes an inverse relationship between employment rates and rises in wages. Simply put, lower unemployment leads to higher wages. In October, the unemployment rate fell to 3.7 percent. Supplementary, the Employment Cost Index, which details the changes in the costs of labor for businesses, for private-sector workers’ wages and salaries edged up to 3 percent year-over-year during the third quarter, according to Yardeni, the highest rate recorded since the second quarter of 2008. Meanwhile, average hourly earnings rose 3.2 percent YOY during October—the highest since April 2009.

Labor is only one part of the expense puzzle, but it is the biggest piece, accounting for more than 40 percent of a hotel’s operating expenses. In the U.S., total payroll as a percentage of revenue is up 6 percentage points year-to-date October 2018, versus the same period last year, to 34 percent.

Data on total expenses show that they have creeped up only slightly through October versus the same period last year, and at 18.5 percent of total revenue, has come down since the same time period in 2016 when total expenses reached 20.3 percent of total revenues. The worry is over cost volatility and how operators deal with fluctuations in payroll, sales and marketing, A&G and F&B, to name just some of the expense departments.

Hoteliers, in order to maximize asset ROI, service debt and increase cash flow, must keep a steady eye on their hotel’s bottom line and ensure they squeeze the most out of every dollar captured on the top line to drop to the bottom line. One of the best ways to do that is through benchmarking—not only against competitors, but internally, to spot patterns and determine where adjustments can be made that will result in higher GOP margins.

External benchmarking, meanwhile, allows for a clearer picture of competition and how their numbers compare with your own. It’s recognition of your performance versus like product—and an understanding, by line item, in the case of HotStats’ data, of your revenues and expenses, vis-à-vis the competition.

In a constantly shifting economy and fickle travel industry, placing a premium on profitability is no longer a choice; it’s a must.