As labor costs rise, so do creative solutions
07 JANUARY 2015 9:07 AM
Labor costs will always rise. But with “living wage” laws starting to become reality, effective ways to mitigate increases are essential.
REPORT FROM THE U.S.—Labor costs, which already accounts for the single largest line item on a hotel’s profit and loss statement, continue to rise. And with various state and local governments passing or at least debating so-called “living wage” laws—and the Obama administration pushing for a steep increase in the federal minimum wage—hotel operators are being forced to find ways to offset the expense through a variety of means.
According to the 2014 HOST Almanac from STR Analytics, sister company of Hotel News Now, the cost of labor as a percentage of total expenses remained fairly flat between 2012 and 2013. Payroll and related expenses for U.S. hotels accounted for 44.8% of total revenue in 2013 compared to 45% in 2012.
The most obvious way to mitigate labor cost increases is by raising rates, sources said.
“We went through a number of years where that was difficult to do,” said Bill DeForrest, a member of the board of the American Hotel & Lodging Association and president and CEO of Deerfield, Illinois-based Spire Hospitality, which manages 22 properties. “And because of that, rates have not kept up with the inflation of costs for a couple of years. But now that the industry is healthy again, we can get rate increases. And that is helping us manage the burden of all costs, not just labor.”
On average, Spire raised rates between 5% and 6% in 2014, he said. A few high-demand markets such as Denver allowed for increases of as much as 8%.
For 2015, DeForrest expects to raise rates another 6%.
Marc Potash, corporate VP of San Diego-based R.A. Rauch & Associates, which owns two hotels and manages a total of nine, expects rate increases of between 5% and 8% in 2015 that will vary by market.
“We're not just looking at that as a way to increase revenues,” he said. “It's also based on the fact that the hotel market is healthy.”
One thing most hoteliers are not willing to cut is employee perks, such as vacation time, 401ks and other benefits.
“That could come up from time to time as a topic of discussion with owners, but as a company that is something that we strongly recommend against,” Potash said.
The reason: Recruiting and retaining top-notch employees is essential to success in today's highly competitive marketplace.
DeForrest also said Spire would be loath to cut perks.
“We look at everything we do in the (context) of what will give us the best chance to compete for the best talent,” he said.
Aside from perks, cost cuts are achievable via other means. Chief among them: finding previously untapped operational efficiencies.
“What we're doing and what most hoteliers are doing today is making sure that our services and programming are right,” DeForrest said.
Mobile check-in and grab-and-go food options are two such examples. Both limit the need for full-time employees while serving guests’ new traveling habits.
“The brands are actually doing a great job with things like mobile check-in and express check-out capabilities, or the ability to engage with customers on what their housekeeping needs are. And I think we'll continue to see more and more opportunities to have more efficient operations,” DeForrest said.
R.A. Rauch & Associates also is exploring mobile check-in as a way of reducing operating costs, Potash said.
Rosemont, Illinois-based First Hospitality Group, which owns and/or manages a total of 62 hotels, has exploited increasingly the power of innovative technologies to optimize its efficiency, said President and COO Bob Habeeb.
“For example, we have really enhanced our labor control model,” he said. “We purchased some pretty sophisticated software three years ago, and it has really done the job for us. And that's because the best thing you can do to control labor costs is follow the science of labor control. And very often, that's where the biggest mistake is made by hoteliers.”
In essence, labor control means managing costs in a sophisticated way based on specific volume levels. The First Hospitality system constantly updates forecasts, and the forecasts constantly update the company's labor model.
“So you're making adjustments as close to real time as you possibly could, and that makes your labor operations much more efficient,” Habeeb said.
First Hospitality also started using innovative housekeeping management software three years ago.
“It's a very different way to assign dirty rooms and get benefits from the improved efficiency,” Habeeb said. “And one key difference from traditional housekeeping operations is assigning not by geography, but by room status: check-out rooms versus stay-over rooms. That makes housekeeping much more efficient.”
Yet another way of juggling key elements of a hotel company's bottom line is effective negotiation with online travel agencies, Potash said.
“We are very fortunate to have very strong relationships with the major OTAs,” he said. “And they understand that we have been giving them increased volume, so the question becomes how much they are willing to work with us on commission costs so we can continue to channel business to them.”
Having those conversations allowed R.A. Rauch & Associates to negotiate better deals with OTAs across the board for 2015, Potash said.
Despite any hotelier’s best efforts to manage and mitigate labor costs, it is a basic economic reality that they will continue to rise, DeForrest said. As a result, operators must always find better ways to offset those cost increases.
“Therefore, efficiency is a bigger part of the hotel business discussion than I think it has ever been,” he said.