A Developer’s Perspective: Reducing Fixed Costs in Hotel Operations Interview with Melanie Pennell-Mayer, Managing Member of Associated Ventures, LLC

The growing uncertainties in the financial markets present both risks and opportunities for the hospitality industry. Traditional financing options are diminishing and the order of the day is higher equity percentage requirements, full recourse and/or stringent covenants. However, new hotel development and renovation activities remain robust for the right projects, especially in locations where occupancy remains high.

Melanie Pennell-Mayer is a Managing Member of Associated Ventures, LLC, a national real estate development and investment firm that has been responsible for more than 35 projects exceeding $1 billion in value, with experience in all facets of real estate, and special emphasis on the hospitality and condominium sectors. Ms. Pennell is in charge of corporate strategy, business development and all administrative functions of the company. In addition, she directs all planning and execution of repositioning strategies for assets acquired or sponsored by the company. Ms. Pennell is also Chief Executive Officer of Associated Ventures International, LLC, a recently formed international hotel division for expansion beyond the domestic arena.

FocusED: In today’s market climate what do you look for in any given project and in what areas would you reduce overall fixed costs for running properties under consideration for development or renovation?

Pennell-Mayer: From a developer’s perspective we look for properties that demonstrate solid value from their accommodations, upscale amenities and attractive location. We want the same kind of cost advantages that any hotel operator needs to be successful in today’s competitive environment. In some situations, you cannot lower absolute dollar amount but you can lower the percentage of expense by raising the percentage of revenue in relation to expenses. Another tactic is to lower property taxes; although this is difficult to achieve, one can argue for a lower valuation on the basis of government guidelines for a specific property location.

Many operators are looking at ways to reduce costs by integrating green into their hotels. If you are starting from the ground up, then building green can reap you operational efficiencies in utility costs as well as tax breaks and incentives. Although LEED certification can translate into higher up front costs, you can ultimately recapture the green design premium and building expense through overhead savings. Even existing properties can capture tax savings by adding green standards where it makes sense on a cost/savings ratio.

FocusED: How do you look at Food & Beverage in some of the projects you manage?

Pennell-Mayer: In the hospitality industry, F&B can be a winning asset, driving traffic to the property. But, often the F&B operation tends to be the loss leader when owners and developers over-build these kinds of services and capabilities. A full service restaurant can be a money drain in the wrong market when a simple breakfast and snack offering would have sufficed. One of the best ways to minimize over-building is to continually solicit feedback from guests on what they are really seeking in their F&B experience, specifically catering to those needs and then scaling down the rest. It’s also advisable to perform a thorough market study when formulating the F&B offerings, then keep an eye on developments taking place with respect to competition—not only hospitality but local food service operations—and then fine-tuning offerings as your market evolves.

An example of how the local environment can dictate the scope of F&B operations is our boutique Hotel Highland brand and its flagship property in Phoenix. Once its renovation is complete they will be offering limited service due to the plethora of first class dining establishments within walking distance from any direction of the property. Although the hotel will feature a barista and other grab-and-go deli items available 24/7, we are not competing on an F&B basis in the kind of prevailing market where this hotel is located. Our emphasis is on unique, stylish or high-tech amenities that bring together a mix of culture, business and community. F&B generally works best in a hotel with conference facilities where it can be a reliable revenue generator with predictable food costs (60% below that of restaurant and room service) and labor costs.

FocusED: What kind of existing contracts would you assess in order to reduce expenses?

Pennell-Mayer: We continually analyze all current contracts to see how they stack up against new competition and products that have come into play. We determine if a product could compliment, upgrade or replace existing contracted services to decrease costs and/or increase revenues. We attempt to stay away from longterm contracts, especially in technology as it changes rapidly; that dynamic renders what is new today obsolete tomorrow. If we do engage a long-term contract, it must be an excellent value paired with our forecast to account for the likelihood that we will need to upgrade or re-tool within the contract life and get a commitment on how the vendor will accommodate us when such a situation occurs. Favorable contracts also depend on well informed and skilled negotiations, getting the best pricing structure and contractual deal points.

FocusED: What areas of fixed costs would you scrutinize the most and how would you maximize efficiency?

Pennell-Mayer: At the top of our list are the day to day expenditures of running the hotel. Since labor represents the largest single expense it is vital to evaluate staff efficiency, particularly how well employees are cross-trained and working as a team. You also need housekeeping services that are thorough but not rushed so that they can fully complete their task. Another critical area to look at is your front desk staff and how well trained and pro-active they are in on-site marketing and sales, so that they compliment any outsourced marketing via a franchise or independent sales team. Finally, you should thoroughly review monthly utility expenses, all aspects of property maintenance and costs for keeping equipment in top shape. A simple change to solar energy can have a dramatic impact on utility expense reduction as well.

For overall efficiencies of the real estate itself, as developers we avail ourselves of ongoing cost mitigation studies. Simple changes can measurably impact the bottom line, such as switching out incandescent light bulbs to more efficient fluorescent light bulbs throughout the property, reevaluating landscaping to minimize water usage and taking advantage of reclaimed water systems where available and installing solar lighting for exterior decorative use. Pin cards in guest rooms that offer an appeal to re-use towels (which is the standard with most major brands today) not only is environmentally correct, but increases your bottom line. This simple appeal can result in tangible savings, including reduction of housekeeping, laundry and linen costs along with water and energy conservation. Allowing guests on extended stay to opt out of daily housekeeping services can also save labor and materials costs.

FocusED: How would you reduce fixed labor costs without impacting service?

Pennell-Mayer: We save in labor costs by cross-training staff to take the initiative to solve situations on the spot or make adjustments in how things are done, if they see a way to increase effectiveness. It is imperative to have a strong corporate culture that instills a sense of ownership in delivering superb hospitality services from all levels of staff. Since employees are the first line of contact, their suggestions and input into operational procedures should be welcome and encouraged. First-hand knowledge of the needs and desires of guests is critical in maintaining their satisfaction. In addition, staff training should emphasize multi-tasking and cross-training oriented around a team approach to improve operational efficiency. At the bottom line we do not attempt to reduce base labor costs; instead we increase cost-effectiveness, resulting in a lower labor requirement and higher efficiency. All of these strategies translate into operational savings and increased revenue.