Hotel Cost Controls in an Uncertain Market
Morris E. Laskey
There is no doubt that we are in the midst
of a business cycle where average rate
and occupancy are trending downward.
With 5,800 new hotels coming on line in the next 12-18 months
(representing 786,000 rooms), the additional capacity could be
easily perceived as ill-timed. Various factors contributing to a
general malaise are: the credit melt-down (sub-prime loans,
Bear Stearns failure); more retailers filing chapter 11; problems
at General Motors; gas prices and airline woes.
As a result of the current economic climate, business and
personal budgets are undergoing scrutiny in an attempt to save
money. With travel expenses on the rise due to gas prices and
airfare increases, travel-related budget items are particularly
under the microscope. With the potential for consumers to
realize significant savings by shortening business and leisure
trips or eliminating some travel all together, the hospitality
industry is straining to provide goods and services as concern
over a shrinking revenue stream intensifies.
With economic pressures forcing business and leisure travelers
to evaluate their travel plans, budgetary concerns in the
tourism and hospitality sectors test the ability of even the most
experienced hotel operators to maintain sales and marketing
strategies while managing expenses.
Having spent an entire career in the hospitality industry
providing support services to hotel owners and operators, I
have had many opportunities to work with hotel operators who
may be struggling to adjust to falling revenues. As an example,
I often find that hotel operators cut their sales and marketing
budgets during an economic downturn, in an attempt to
balance the bottom line. On the contrary, I strongly advocate
implementing a stronger marketing presence by increasing the
sales staff, along with the sales and marketing budget. If the
competition cuts back on their marketing programs, it is to
your advantage to increase yours.
When we consider cost control in the hospitality business, it
is important to stick with a proven methodology that works.
My recommendation is to start out with an operational analysis
that identifies areas for improvement in the cost structure or
where cost reductions would
be most prudent and effective.
This operational analysis
would include a review of a
number of areas:
- Real Estate Taxes
- Name Brand
- Food and Beverage
- Property Staffing
- Inventory
- Physical Condition
- Mortgage Payments
and Other Debts
Real Estate Taxes
As real estate taxes are a large recurring hotel expense,
establishing the valuation of a property is critical. Since a
hotel is a business and not simply real estate, it includes a
business enterprise value (including intangibles) and a market
value as well. To ensure that an assessment is appropriate for
tax reduction purposes, other factors should be considered in
the valuation process such as economic conditions, declining
property values and/or significant new supply.
Name Brand
During uncertain market conditions branding can make a huge
difference. A comprehensive analysis from this point of view
helps to determine the appropriate franchise affiliation. If the
current brand proves to be a mismatch and deters business
activity, a review of the franchise agreement will indicate
what your penalty might be for changing affiliations.
Food and Beverage
Usually F&B operations automatically come under tighter scrutiny
when costs go up. An hour-by-hour review can highlight
whether your food and beverage outlets are productive during
operating hours and whether those operating hours can be
reduced. This would enable you to reduce the costs or loss from
those operations without impacting the core revenue stream.
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