A company’s labor costs and revenue generation typically follow the trajectory of the country’s gross domestic product, but at times, one grows more than the other, an analysis shows.
LONDON and BROOMFIELD, Colorado—In the first part of this Labor Costs analysis, we focused on the relationships between labor cost and total revenue per available room, the impact of government regulations on minimum wages and its effect on the bottom line.
As the hotel industry is part of a larger and complex ecosystem, for this second installment, we will zoom out one step further and study the dynamics between hotel performance and certain macroeconomic factors. We continue using data from STR’s P&L program, and Oxford Economics, for three select countries with similar characteristics: Germany, the United Kingdom and the United States. STR is the parent company of HNN.
Macroeconomic drivers impact on labor costs
When bringing macroeconomic indicators into the mix, one story emerges: As the strength of a country’s economy increases, so do labor costs, but revenue does as well. As a refresher from our previous analysis, here is a comparison chart, showing each country’s gross domestic product, TRevPAR and labor per available room.
The graph below depicts the percent change of GDP and demand from 2007 through 2019. It shows that GDP is a good indicator for hotel demand. This is particularly true in the U.S., where domestic travel drives hotel performance more so than international travel.
CPI influences profitability
Labor costs have been rising in all three countries: 3.9% in the U.S., 3.6% in the U.K. and 2.9% in Germany—and this is not balancing well with RevPAR marginal increase. Labor costs are outpacing revenue gains, and we have seen those expenses grow at a faster rate than inflation. CPI index increased by 1.7% in Germany, 2.5% in the U.K. and 2.4% in the U.S. This is affecting profitability margins and gives great concern to the industry about a potential downturn coming up. U.K. reliance on skilled workers from the EU and the upcoming reduction in labor supply from those countries due to Brexit is likely to increase costs even further.
The other side of the coin
We have been looking at labor costs and minimum wages, all related to those able to have a job. Yet, unemployment rate is another good indicator to look at. A strong economy is characterized by a low unemployment rate, and as discussed previously, a strong economy results in stronger hotel performance. We can see below that the lower the unemployment rate, the higher LPAR. It shows that scarcity in labor force clearly has a strong effect on salaries and benefits as hotels aim to attract the best talent.
Bringing it all together
To sum up, labor appears to be strongly linked to macroeconomic drivers. There has been a growing concern about the next downturn. The hospitality industry has seen rising costs while revenue growth is slowing down, making some people think the industry will soon reach an inflection point. Awareness about labor costs has increased not only among hoteliers, but also investors, who are starting to factor these costs into their feasibility models. It will be interesting to see in the future what strategies hoteliers will put in place to become more efficient in terms of managing labor costs.
Lucie Geffroy is junior analyst at STR. Claudia Alvarado is analytics manager at STR.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.