3 key themes for budget season
3 key themes for budget season
16 JANUARY 2018 8:40 AM

Here's a look at common themes for the 2018 budget season, including revenue, expenses and capital. 

The budget process is a time to reflect on both successes from the prior year, but also to take a step back and evaluate the upcoming year both financially and holistically. The following provides a summary of common themes surfaced during this year’s budget season, broken into three key areas: revenue, expenses and capital.

1. Revenue
Prognosticators such as STR, CBRE and PwC are expecting industry-wide revenue-per-available-room to grow or decline in the range of 2% in 2018. While these may be aggregate estimates, each market, competitive set and hotel may react differently based on market-specific and hotel-specific issues.

  • Challenge to push outside the box on RevPAR growth: In many cases, hotel teams are finding themselves “boxed into” RevPAR growth percentages by above brand guidance, with little (or no) margin to deviate from directives. This creates a conundrum for owners. Ideally, the hotel teams and ownership had discussions on RevPAR growth expectations prior to submitting the budget.
  • Optimizing mix of business: With occupancy levels remaining at/near record levels, it is pivotal for asset managers to work with revenue management teams to analyze, identify, target and achieve a hotel’s optimal business mix. As a wise GM once said: “It’s like peeling an onion – lots of layers.” This optimal mix may include reduction of discounts, pricing strategies for special corporate and above segments and even identifying other segments, such as government, which potentially may have a higher ADR than some discounted segments in certain markets.
  • Disruption from CapEx projects, not just at the property-level, but marketwide: Hotels under renovation in 2017 should expect larger RevPAR increases in 2018. Conversely, hotels that may have benefited in 2017 from renovations at other hotels may need to “readjust” performance expectations in 2018, as these other hotels come out of renovation.
  • For large hotels, focus on meeting space utilization and F&B spend: To paraphrase, not all group demand is created equally. Increasingly, hotels are impacted by group segment booking rooms-only events and/or more off-site F&B events. These trends have increased the focus on meeting room utilization and space patterns. For hotels with more “rooms-only” demand, hotel teams should focus on local catering to make up the banquet shortfall. This often requires challenging conventional thoughts about booking parameters and free selling, as well as shifting of resources to support catering sales.

2. Expense management

With sluggish top-line revenue growth expected for 2018, it seems there is more recent focus on expense management as a means for generating profit growth. For many hotels, the 2018 budget review process started with a simple analysis of revenue growth of 2%, tempered with an expense growth rate of 3%. This new reality requires additional strategies to insure meaningful profit growth in 2018 and beyond.

  • Reflection and realization of prior year’s ROI cost savings: With profitability challenged by the aforementioned reasons, 2018 is shaping up as a year where owners will need to realize 100% (if not more) of planned savings from prior year’s ROI projects. Examples may include energy-efficiency projects, such as LED re-lighting, and labor-saving initiatives, such as revamped room service and re-engineering other areas draining the operation.
  • Impact of frequent-guest programs: With the brands pushing to gain more loyalty brand members (and often adding property-level enrollment incentives paid for by owners), frequent-guest expenses continue to increase dramatically, with little documented benefit back to the owner for the increased contribution.
  • Acknowledge the silent expense creep: Despite best efforts, items such as group commissions continue to increase at high rates, with a large majority of group demand being handled through intermediaries. In 2017 at many large convention hotels, this expense was a silent killer, coming in well above budget expectations.

3. Capital
With several strong performance years in the rearview mirror, many hotels currently enjoy healthy balances in their FF&E reserve accounts. This has seemingly resulted in increased requests by operators for capital projects, which are showing up in the 2018 capital budgets.

  • OK to say no: Even if a hotel can “afford” 100% of projects requested, this does not necessarily mean they should all be executed. One of our first exercises for any hotel team should be to prioritize and/or classify each project as part of its submission. It is amazing how often projects get pushed when a hotel has to rationalize a project and/or prioritize one project over another.
  • Sometimes more is needed: In some instances, additional funds should be increased for a project and/or added projects to a hotel capital plan for execution. This is applicable not only to typical FF&E reserve items, but also items that may be considered owner funded, such as MEP and elevators/escalators.
  • Focus on the long-range capital plan: While 2018 projects may be a key priority, the focus should be on how 2018 fits into a long-range capital plan. Simply stated, a dollar not spent in 2018 should be available to spend in a future year, when needs may be greater and funds may not be as plentiful.

Asset managers will have their work cut out for them, as 2018 is shaping up to be an interesting year!

For additional insight, read 2018 Budget Season Insights for Hotel Owners.

Larry Trabulsi is a Senior Vice President at CHMWarnick, a leading hotel asset management and business advisory services firm with over 8 offices nationwide. Larry serves as a board member of the Hotel Asset Managers Association (HAMA).

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