By David Lund
In the hotel business, we have lots of stakeholders: brands, managers, executives, and owners. But one has by far the biggest risk. The risk in this sense is holding a large hand of cards and the game is suddenly over and you must cash out all of those face cards and tens.
What happens in the hotel business when the phones stop ringing? Who must pay the piper?
It has been seven great years in most markets in North America that the hotel sector has been strong and growing year over year. Some markets have produced several years of strong single and even double-digit RevPAR growth. With the great RevPAR growth comes solid profits, more than enough to cover wages and expenses, leaving a nice profit. But what happens when the music stops? Who will find a chair and who will not?
The last hotel business down cycle occurred in 2007-2009. During this downturn, a typical hotel may of had revenues decline for three years in a row. This could mean a 20+ percent decline from their peak in 2006. GOP in this scenario in the same years would have down +30%. Flow-thru retention was dismal given the large fixed cost of labor, union contracts, and benefit costs. Revenues would have been down because of less occupancy and fewer banquets but the big culprit was the rate. Cash flow before capital was suddenly backward. How can this be? What happens when things (the top line) stopped growing?
In the hotel business owners have all the risk. Brands largely get paid by fees off the top. In this scenario, their management fees decreased in proportion to the revenue drop. During this downturn an average 15 percent decrease in fees. On the other hand, the brand still provided its other management services. Owners tried to get the brand to throw anything and everything off the sinking ship but that was never enough to right the equation. The manager and executive got squeezed a lot during this period but they survived because they were essential to mitigate the ongoing financial disaster. The owner had “all” the risk.
So, how can it be so dangerous to be an owner of a hotel? It seems like a sound investment. A hotel might be in business for decades and could be a popular location and destination. To see and understand the realities of the business, you need to go behind the curtain. There is a saying in the hotel business that I like, “You cannot save your way to prosperity.” It is very applicable here.
But behind the curtain the total payroll cost, including benefits was huge. This was the large unmovable object that killed the desire for hotel ownership. Payroll is like a field that needs to be burned every few years. The one big problem with the payroll in a hotel is you can’t get rid of it, you can’t even get it to go down in many cases! There is only one numer that you can count on in a hotel to increase every year and its the average hourly wage.
There are two competing facts in a hotel: One fact is the average rate in a hotel will go up and then down. The second fact is the average rate of pay never goes down.
For hotels to survive the next big downturn, they must act now. Take measurable steps to innovate. I was in a new hotel in NYC a while back and no bellman, no doorman, no front desk clerks and that is just what I could see perusing the lobby. I'm not saying this is the solution for you. You need to find your own way. But rest assured of two things. One, it's not a matter of if, its a matter of when we slip into the next financial mess that kicks hotels in the teeth. Two, ownership will carry the burden.
Don’t wait for trouble to come knocking. Be proactive. The best time to paint the deck is when it’s sunny, not when it’s raining.
