Article Summary: CHMWarnick shares its findings of its yearlong study of large group-centric hotels to quantify group net revenue and what they recommend hoteliers do in response.
CHMWarnick shares its findings of its yearlong study of large group-centric hotels to quantify group net revenue and what they recommend hoteliers do in response.
Primary Category: Opinions
Secondary Categories: Ownership
In 2018, several of the major hotel brands made the decision to cut third-party intermediary group business commissions from 10% to 7%. Marriott International was the first to do so, followed by Hilton and Hyatt Hotels Corporation. This move was widely praised by the hotel ownership community for its purported lowering of the cost to acquire group business.
On the surface, especially for convention/group-heavy hotels, the reduction on future business booked and consumed promises to be significant, given that commissions paid out to third-party intermediaries can easily hit seven (and higher) figures. This initiative aside, owners and investors in hotels need to ask themselves—and more importantly their operators—what is the true cost of acquisition to obtain these groups? This should include an examination of those items that show up on a profit and loss statement, as well as the concessions and givebacks that may not be recorded or reported.
The answer is not as simple as a 3% commission reduction. In fact, the answer is very complicated, and getting to the bottom line is challenging at best, and money is very likely being left on the table.
When a hotel’s sales team is in the bidding process for a piece of group business, the back and forth between the salespeople and the client (either third-party planners or clients who have their own in-house planners) often results in a fair amount of incenting on the salespeople’s part, all of which has a direct impact on the financial performance of the hotel. As such, it is critical for owners to understand the sales process that yields the resultant net revenue.
In order to better understand such impacts, our asset management team at CHMWarnick studied a sample of large group-centric hotels for a period of one year in an effort to quantify group net revenue. The results were eye-opening.
When looking at the commissions/discounts/concessions/rebates, the best way to decipher these incremental costs associated with group business is to categorize them into separate “buckets,” i.e. what costs are room night-related, food-and-beverage-related and other-revenue-related. Using such an approach, we compiled the data, including discounts from third-party partners, like parking and audio visual, to ascertain the net revenue for group business in our sample. The list and variety of additional costs and concessions associated with the bookings was extensive and included such items as:
- rebates for transportation or other services associated with citywide groups;
- separate fees being paid to housing companies associated with a given group;
- third-party technology fees;
- room revenue rebates;
- waived or significantly reduced banquet room rental;
- discounted audio visual equipment;
- complimentary high-speed internet access;
- complimentary upgraded menus;
- complimentary welcome receptions;
- discounted or complimentary parking;
- loyalty point bonuses to planners and/or group guests;
- complimentary guestrooms;
- complimentary room upgrades;
- brand-related technology fees, including per-room and F&B booking charges; and,
- group master account paid via credit card rather than bank wire, among others.
Based on this analysis, our findings determined that these deducts on average cost well into the teens and often times exceed 20% of gross contract value, even with the much ballyhooed decrease in third-party commissions. Better understanding of net revenue, both on an occupied group room basis, as well as, on a net average daily average rate basis, gave way to constructive conversations surrounding strategy, pricing, tactics, goal setting, evaluating business opportunities and also how to best incent and compensate salespeople to better align with profitability goals.
While brands continue to make strides in negotiating with intermediaries in an attempt to lower costs, there is considerable opportunity to improve profit margins on group business. The first question hotel owners should be asking their operators is, “What does it cost to secure each piece of group business?” The answer is likely a lot more than you thought; that is, if it is even being tracked in the first place. The second question should be, “What is the strategy to reduce these costs in aggregate?” The answer is most likely as complicated as the issue itself.
It is incumbent upon management to make this a priority and for ownership to be diligent in holding the operators accountable. Furthermore, if already not in place, better controls with checks and balances on the approval process for these types of costs is paramount to protect ownership’s interest and ultimately increase net operating income.
Dan Walsh is a vice president at CHMWarnick, the leading provider of hotel asset management and owner advisory services. The company asset manages more than 70 hotels comprising approximately 29,000 rooms valued at roughly $15 billion and is advising on development projects valued at over $2 billion. CHMWarnick’s hotel owner advisory services include asset management, hotel planning and development, acquisition due diligence, owner-entity accounting, management/operator selection and negotiation, capital planning and disposition strategy. CHMWarnick has nine offices nationwide, including locations in Boston, Phoenix, Chicago, Fort Lauderdale, Honolulu, Los Angeles, New York, San Francisco and Washington, D.C. For more information, contact 978.522.7000 or visit www.CHMWarnick.com. For the latest company news, follow CHMWarnick on Twitter @CHMWarnick and LinkedIn.
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Headline: The true cost of group acquisition
Article Date: 8/13/2019
Article Time: 8:36:00 AM