As labor costs rise, US hotels to see profit declines
As labor costs rise, US hotels to see profit declines
03 SEPTEMBER 2019 8:37 AM

Hotel profitability is on the wane with hoteliers saddled with increasing expenses, notably labor and insurance, which means focusing more and more on alternative revenue streams.

NASHVILLE, Tennessee—U.S. hotels are operating at peak profitability, but margins are declining.

Raquel Ortiz, assistant director of financial performance at STR, the parent company of Hotel News Now, said revenues are still growing modestly, but expenses have outpaced revenue for the third consecutive year.

Speaking at a data dash session at the Hotel Data Conference titled “Profitability under pressure,” Ortiz said total revenue was $218 billion in 2018, with rooms contributing $165 billion.

In 2015, 38.4% of that revenue equaled gross operating profit.

“In 2019, currently that margin is 37.7%, and we predict that this number will continue to decline,” Ortiz said, adding that 2019 is likely to be the first year for profit declines.

Real revenues and profits are both flattening out from peaks, but do appear to be sustaining themselves, Ortiz said. The latest numbers for gross profit per available room ($15,891 per room) equal the third-highest level for real profits seen since STR began tracking the metric.

Luxury led 2018 revenue and profit gains, with an 8.2% uptick in earnings before interest, tax, depreciation and amortization growth, compared with a 3.4% decrease for the combined midscale and economy class.

The principal reason for all the pressure, Ortiz said, is that expenses continue to increase, notably labor, with annual increases since 2011 averaging 15.1%.

“Total labor costs in 2018 hit $70 billion,” Ortiz said. “In response to this and other pressures, there is an increased emphasis on more revenue growth outside of the rooms department, with 11.3% being miscellaneous revenue, which is the highest we’ve seen in a number of years, and 9.7% in (food and beverage) and related F&B.”

Expenses now are outpacing revenue growth, Ortiz said, who added that costs have gone up across the board over the last year. Insurance (+5.8%), general and administrative (+4.2%), labor (+4%) and management fees (+3.5%), have all increased. An average of all expenses is 2.9% higher.

“Insurance companies have increased premiums due to claims following disasters and terrorist threats,” Ortiz said.

She added 32% of markets have an insurance expense of more than $500 per available room. The average is $608, and resorts—many of them being in coastal regions—post a figure of $845 per available room.

Pruned performance
There still is ample bandwidth to make hoteliers and shareholders happy, Ortiz said.

“There is 11% growth in Minneapolis and Miami due to events, the former having the Super Bowl (in 2018), and a number of cities saw 6% (gross operating profit per available room growth), which is quite significant in this time of subdued growth,” Ortiz said.

Ortiz said profit growth remains heavily dependent on pushing RevPAR.

“A 10% (increase) in RevPAR equals a 21% increase in GOPPAR, while a 10% (decrease) in RevPAR equals a 21% decline in GOPPAR,” she said.

Ortiz said that in 2018, 41.2% of the 165 U.S. markets STR tracks experienced profit declines, whereas in 2014 it was only 13% of the then 164 U.S. markets.

That said, eight of nine regions did realize GOP growth, with the Middle Atlantic showing a 4.9% increase in 2018. Some markets achieved strong double-digit RevPAR growth, such as Texas West (+21.5%), Oklahoma (+12%), Texas North (+11.9%) and Cleveland (+10.6%). Ortiz said it was “secondary and tertiary markets that continue to lead the way.”

Texas West also heads the 2018 list in terms of increases in profit, up 40.8%, the only market to see an increase of more than 30%.

Seven of the 10 lowest-performing RevPAR markets also were in the bottom 10 when it came to the largest profit declines. Louisville, Kentucky, saw the largest RevPAR declines (-9%) and the largest profit change (-17.7%).

Ortiz said margin pressures on rooms have also inevitably led to more focus and pressure on growing revenues elsewhere.

Resort areas are seeing the largest growth in miscellaneous income, and presumably the greatest pressure to increase it, Ortiz said.

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