There is no doubt that we are in the midst of a business cycle where average rate and occupancy are trending downward. With 5,800 new hotels coming on line in the next 12-18 months (representing 786,000 rooms), the additional capacity could be easily perceived as ill-timed. Various factors contributing to a general malaise are: the credit melt-down (sub-prime loans, Bear Stearns failure); more retailers filing chapter 11; problems at General Motors; gas prices and airline woes.

As a result of the current economic climate, business and personal budgets are undergoing scrutiny in an attempt to save money. With travel expenses on the rise due to gas prices and airfare increases, travel-related budget items are particularly under the microscope. With the potential for consumers to realize significant savings by shortening business and leisure trips or eliminating some travel all together, the hospitality industry is straining to provide goods and services as concern over a shrinking revenue stream intensifies.

With economic pressures forcing business and leisure travelers to evaluate their travel plans, budgetary concerns in the tourism and hospitality sectors test the ability of even the most experienced hotel operators to maintain sales and marketing strategies while managing expenses.

Having spent an entire career in the hospitality industry providing support services to hotel owners and operators, I have had many opportunities to work with hotel operators who may be struggling to adjust to falling revenues. As an example, I often find that hotel operators cut their sales and marketing budgets during an economic downturn, in an attempt to balance the bottom line. On the contrary, I strongly advocate implementing a stronger marketing presence by increasing the sales staff, along with the sales and marketing budget. If the competition cuts back on their marketing programs, it is to your advantage to increase yours.

When we consider cost control in the hospitality business, it is important to stick with a proven methodology that works. My recommendation is to start out with an operational analysis that identifies areas for improvement in the cost structure or where cost reductions would be most prudent and effective. This operational analysis would include a review of a number of areas:

  • Real Estate Taxes
  • Name Brand
  • Food and Beverage
  • Property Staffing
  • Inventory
  • Physical Condition
  • Mortgage Payments and Other Debts
Real Estate Taxes

As real estate taxes are a large recurring hotel expense, establishing the valuation of a property is critical. Since a hotel is a business and not simply real estate, it includes a business enterprise value (including intangibles) and a market value as well. To ensure that an assessment is appropriate for tax reduction purposes, other factors should be considered in the valuation process such as economic conditions, declining property values and/or significant new supply.

Name Brand

During uncertain market conditions branding can make a huge difference. A comprehensive analysis from this point of view helps to determine the appropriate franchise affiliation. If the current brand proves to be a mismatch and deters business activity, a review of the franchise agreement will indicate what your penalty might be for changing affiliations.

Food and Beverage

Usually F&B operations automatically come under tighter scrutiny when costs go up. An hour-by-hour review can highlight whether your food and beverage outlets are productive during operating hours and whether those operating hours can be reduced. This would enable you to reduce the costs or loss from those operations without impacting the core revenue stream.

Property Staffing

This is a very critical area, as labor is the largest single cost component for running a hotel. Here we simply need to compare staffing with actual business volumes at the time service is rendered. It is necessary to review each department and each individual to determine whether you are getting the maximum productivity for the money you’re spending. Usually, hospitality organizations can save a tremendous amount of money just by re-scheduling staffing and thereby cutting payroll dollars while maintaining the same standard of service.

Inventory

At many hotel properties, inventorying storerooms usually produces excess furniture, televisions and a variety of supplies that could be sold to free up storeroom space as well as put money back into the hotel. By gaining strict control of all housekeeping, office, linen, and food and beverage inventory items, a tremendous amount of money can be saved by using what you have and selling off excess inventory.

Physical Condition

In today’s competitive environment it’s more important than ever to maintain the physical condition of your properties. There are not only franchise requirements to do so, but guests are very sensitive about a property’s condition. If there is a reserve for furniture, fixtures and equipment replacement, it should be used to keep the property in first-class condition which will lead to better guest relations and, as a result, produce higher average rates.

Mortgage Payments and Other Debts

Finally, be transparent about your financial obligations. If a property is falling behind in payments, it is wise to let your lender or creditor know in advance so that they can help you with a strategic plan. Lenders do not want to foreclose on hotels. They would rather work out a program that will keep the property alive until the economic outlook improves.

Conclusion

The fact of the matter is that many hospitality and resort operators have repeatedly not only weathered economic downturns but have thrived. During my 50 years in this business, I’ve seen the hotel cycles rise and fall, along with markets and trends that come and go. This span of experience has given me the understanding of the necessary balance between innovative ideas and the power of good fundamentals that is needed for a hotel to perform at its peak.

However, even if your operations start going south, it’s not too late to make a course correction. With the right kind of expertise, the average turnaround time on hotels in operational distress is approximately 17 months. The return to profitability is validation that these hotels were poorly managed and marketed. If hotel operators review the seven items as outlined above, it is possible that they can effectively redirect their property to profitability before disaster strikes.

Morris E. Lasky is the founder and chief executive officer of Lodging Unlimited, Inc., with a career in the hospitality industry than spans more than 50 years. Mr. Lasky is also chairman and co-founder of The Lodging Conference in Phoenix, Arizona, now in its 14th successful year, and co-founder and producer of the 6th annual International Hotel Conference in Rome, Italy.
Lodging Unlimited, Inc. has been the management company or consultant on over $7 billion in hospitality real estate. With more than 300 hospitality clients in the U.S.A., Canada, Caribbean and Europe, Lodging Unlimited, with offices in Chicago, Phoenix and Philadelphia, has provided the services needed to maximize profits across all sector types and in all economic cycles. Founded in 1970, Lodging Unlimited, Inc. has been a qualified source for sound operational solutions for 38 years.
For more information about Lodging Unlimited, please go to www.lodgingunlimited.com