Members of the Hospitality Asset Managers Association shared their concerns over growing expenses amid reduced revenue growth projections and how they hope to cut their costs.
SAN DIEGO—As the industry cycle progresses, hoteliers are keeping a close eye on their revenue streams and the expenses that eat away or, at times, overtake them.
At the Hospitality Asset Managers Association Fall 2016 Conference in San Diego, several board and committee members spoke about which expenses are keeping them up at night and how they’re hoping to address those increasing costs.
Growing costs, growing concerns
Labor and benefit costs will have a much steeper growth line than in the past, said Rich Niedbala, SVP of asset management at Lodging Capital Partners. Good operators learned from the end of the last cycle and have managed similarly, he said, but external factors have changed since then.
“Living-wage laws have come (into) a number of markets,” he said. “Universal health care. The overtime laws. All this is coming to play. It has changed a lot.”
The general trend has been that hotels are doing well, said Rick Pastorino, president and principal at REVPAR International, so operators want to ensure they’re maintaining a solid base of good employees. That means making sure employees are compensated correctly, he said, and new supply has pushed operators to try to retain employees given the cost of turnover.
“With supply coming online, we have that pressure,” Pastorino said. “With unemployment rates so low, the market is thin. We see pressure on hourly rates and salaries going up. Labor is an area we anticipate to see above (Consumer Price Index) increases.”
Melissa Silvers, principal at SCS Advisors and VP of HAMA, shared a similar experience with external pressure on labor costs, and recalled when wages increased in the telephone department by $20,000 in one month. An increase that large warranted investigation.
“They got a $2 raise to bring them to market,” she said.
While labor is a major concern for many asset-management companies, there are other growing costs catching their attention as well. Commissions are growing both for the major brands, which can depend on the model, as well as credit cards, said Larry Kaminsky, EVP at Fulcrum Hospitality and HAMA board member.
“Credit card commissions tend to be a significant factor, especially as more and more operators are allowing groups to book significant business or pay for group business through credit cards,” he said.
Many hotels are dealing with just an overall growing cost creep, said HAMA board member Larry Trabulsi, SVP at CHMWarnick, which requires working with the brands and management to offset it. Hotels are experiencing record occupancy levels, he said, but expenses are growing faster than revenue. With such high levels of occupancy, it comes down to pricing, he said, from the rooms to food-and-beverage.
“The cost of acquisition is higher,” he said. “Payroll and benefits—benefits in particular—are growing faster than inflation. The new reward (discount) program expense is growing quickly.”
At a point in the cycle, hoteliers have to start getting proactive with cost control, Kaminsky said, and it needs to be a dedicated effort. If things deteriorate, they need to be prepared for that, he said.
“If not, you can go through several months of having to reduce expenses while the revenue is not there to support it,” he said.
There has been a trend in the past several years that when things are going well for hotels, the focus is on driving rate, Niedbala said, and people don’t pay as close attention to expenses. The great rates coming in obscure the costs, he said, and people are now tightening down the ship.
Lodging Capital Partners will perform an internal review, Niedbala said, and it has already put operators on notice to look for opportunities to cut costs, cut some staffing and try to reduce some services instead of eliminating them. If the revenue projections from the major brands are correct, he said, the revenue might not be robust enough to support some of their operating standards.
“We’ll push back on some of those,” he said.
All of the hotels under SCS Advisors will have cost containment plans, Silvers said, some of which do contain labor cuts. In June, SCS Advisors asked GMs to submit their plans, she said, and when the plans came in the next month, several of the hotels only came back with reductions of $50,000 in expenses when revenue was down “pretty significantly.”
“We said, ‘You have to go back and dig deeper,’” she said.
Tim Dick, principal at Three Wall Capital and HAMA Industry Relations Committee chairman, said that in some markets, his company’s hotels are improving performance by stealing share, which isn’t always a good thing when the market is not improving.
“Ideally, it would be great to be improving because the market is improving, and then improve over the market, but that’s not always the case,” he said.
One approach Lodging Capital Partners will take is to make sure staff is properly trained to handle guests’ concerns in an equitable way, Niedbala said, not simply just rebating the cost of the room.
“See what else may satisfy them and make them feel they’ve been taken care in the way they should be taken care of,” he said. “We’re pushing people to be creative, to reinforce the training they already have but maybe got a little soft. It’s that time in the cycle. Everyone is tightening down a little.”