How To Combat The Ballooning Budget Blues

By Robyn A. Friedman
HNN contributor

REPORT FROM THE U.S. — Two recently released reports confirm what many hotel owners and managers already know: Operating costs are on the rise.

Fortunately, some savvy operators also shared ways to fight back against budget woes.

According to the HOST Almanac, which compiles operating statements of more than 5,400 U.S. hotels, every major expense increased during 2014. Management fees led the way with a 9.7% increase, followed by rooms expenses (+5.8%), utility costs (+5.6%) and taxes (+5.3%). The HOST Almanac is compiled by STR Analytics, sister company of Hotels News Now.

The 2015 edition of “Trends in the hotel industry” from PKF Hospitality Research, meanwhile, found that operating expenses per available room, or ExPAR, rose 4.9% during 2014 (+3.2% adjusted for inflation). While those gains might not seem significant, the report states that it’s more than twice the pace of ExPAR growth from 2009 through 2013.

“Until now, U.S. hotel managers have done a great job controlling expenses compared to previous recovery periods,” said Robert Mandelbaum, director of research information services for PKF-HR, in the report. “The cost control measures instituted in 2009 during the depths of the great recession were carried forward through 2013. The sharp uptick in expense growth in 2014 initially stood out as a potential threat to profit growth in the future.”

While expenses are generally up across the board, two in particular stand out, according to sources.

The first is costs associated with labor.

“There’s a lot of demand and fewer qualified individuals,” said Lee Weeks, CEO of Coral Hospitality in Naples, Florida, which manages nine properties. “We’re having to pay top dollar to get good people.”

Payroll per available room increased 3.7% from 2013 to 2014, split nearly evenly between full-service hotels (+3.7%) and limited-service hotels (+3.6%), according to the HOST Almanac.

“In the past two years, payroll costs have increased at levels just above historical inflation rates,” Joseph Rael, senior project manager of financial and profitability analysis at STR Analytics, said via email. “We experienced more substantial payroll increases in 2011 and 2012 during the recovery. Limited-service hotels were slower to recover from the recession and were also slower to increase payroll costs with greater increases coming in 2012 and 2013.

“This past year, both full-service and limited-service payroll costs increased at nearly identical rates. However, revenues have increased much more strongly during this time, and so payroll costs as a percentage of revenues has continued to decrease,” he said.

According to PKF, at 44.2% of expenses, labor is the single largest cost that hotel managers need to control. With the unemployment rate low and fewer workers looking for work, salaries, wages and bonuses grew by 3.7% in 2014, along with a 3.8% jump in payroll-related expenses such as employee benefits.

“People who were content with some of the more modest hourly jobs are now looking for better jobs, so it’s becoming harder and harder to replace them,” said George Heaton, CEO of Palm Beach, Florida-based Heaton Companies, which owns three hotel properties.

Despite the upswing in labor costs, Heaton said his properties are more affected by a rise in food prices.

The culprit? The drought in California and an avian flu that struck earlier this year, he said.

Prices for beef, pork, eggs and chocolate have risen as well, Heaton said, leading to an overall increase in food expenses of 5% to 6%.

Heaton has responded by substituting lower cost ingredients and cutting back on dishes made with eggs, beef and pork. To avoid passing along the increased costs to guests, he’s also reducing portion sizes, going from an 8-ounce hamburger, for example, to a 7-ounce one.

Fighting the budget blues
Heaton isn’t the only one finding ways to circumvent creeping costs. Hoteliers across the country are employing a range of tactics that touch nearly every facet of the business.

Doing so is a bit easier in full-service hotels and larger properties, said Nan Hua, an assistant professor at Rosen College of Hospitality Management in Orlando, Florida.

“If you have more functionalities and more areas that you’re serving customers, you will have more opportunities to cut costs,” he said. “A limited-service hotel doesn’t have restaurants, so cutting food costs is not a relevant question.”

Sources offered some tips to combat costs:

1. Going green. “Improve operational efficiency,” Hua said. “Reduce utility costs, and improve the garbage collection process. Although these are maintenance and hygiene-related areas, they offer room for improvement in terms of cost reduction.”

2. Going high-tech. Hua also said hoteliers could use information technology to operate more efficiently and hence cut costs. Technology might be able to provide some of the services of a concierge, for example.

Another example: Embedding RFID chips in towels can help prevent towel theft, a “big item for hotels,” Hua said.

With chips embedded, towels or even robes are scanned when they enter the laundry, go in and out of linen closets or are taken to the pool. There are sensors at the hotel entrances that pick up when the towel has left the property and alert the manager.

3. Self-insuring. Harris Rosen, president and COO of Rosen Hotels & Resorts, who owns seven hotels in Orlando with a total of 6,500 rooms, has saved about $250 million by creating his own self-insured health care plan for his 5,300 employees.

Employees pay low premiums, no deductibles and minimal co-payments, and have access to a 12,000-square-foot fully staffed medical center. Prescriptions are free or at low cost.

“Why did we save so much?” Rosen asked. “We are in control of our own destiny. We don’t have any third parties involved. We negotiate with the hospital; we negotiate with the specialists; and we put out own package together.”

4. Reducing turnover. Turnover is costly for any business, and the hospitality industry is no exception. Rosen said that his hotels are “very close to turnover in single digits.”

“We don’t have to keep training people,” he added. “I want my associates to feel like they are well taken care of. Associates that love their jobs provide great service—and don’t leave.”

Providing a strong health insurance package helps in that aim. Rosen’s employees pay just $750 per year for their insurance; the max they will ever pay is $500 out of pocket for a hospital visit, Rosen said.

He also doesn’t make employees take time off to go to the medical center; they can visit the doctor while on company time. By encouraging his employees to seek medical care, Rosen said they are healthier and more productive and, just as important, remain loyal.

Some other ways Rosen encourages that loyalty:

• He pays for college tuition for employees who have worked at Rosen Hotels for more than five years.
• He encourages families to work together at the company.
• He has lunch with employees once a week.

5. Managing OTAs. Hua also recommended that hoteliers better manage their online-travel-agency relationships to minimize commissions.

“Determine on a case-by-case basis whether you should use OTAs or whether the cost is too high a burden,” he said.