Market in Decline ?
It's time to focus on fundamentals and implement these operational strategies to
maximize financial performance during declining economic periods
By Silvie Cohen, Vice President and Nina Kleiman, Executive Vice President of Asset Management of hotelAVE
In a declining or decelerating economic period, like the one currently underway, hoteliers—including owners, asset managers, and operators—need to proactively develop and implement strategies that preserve both top and bottom lines to successfully navigate during lean times. Here, we present and discuss a number of specific revenue- and expense-related strategies that can help hotels outperform the industry amidst declining or decelerating market trends.
Group up – It’s all about the base!
Focus on base business to hedge the hotel’s risk against market downturns. Reconsider customers that in previous years may have been deemed too low rated to create a viable base. Whether it is “grouping up,” securing an airline crew, or partnering with a wholesaler, guaranteed room blocks allow operators to figuratively reduce the size of their hotel, and ultimately yield average rate.
An independent hotel secured a contracted rate for 80 rooms per night below the hotel’s actualized average daily rate (ADR). Despite the rate discount, the hotel was able to maintain relatively flat revenue per available room (RevPAR), outpacing the STR competitive set RevPAR declines.
Create a low-demand room revenue checklist
Create a low-demand checklist that enables the hotel team to implement strategies immediately to maximize business. The checklist should include the following strategies:
- Ensure that the tiered best available rate- (BAR-) pricing levels drive demand. If they don’t, re-evaluate and set new BAR levels that include smaller pricing modifiers between rate categories.
- Analyze price shops and positioning against competitive hotels based on market demand levels. Market demand tools such as , or , and corporate negotiated-rate shops are essential to understanding the hotel’s positioning.
- Review lower-rated market segments such as Government, AAA, AARP, and Advanced Purchase rates. Ensure that all channels are open and priced competitively.
- Consider packages that drive new customer segments to the hotel’s website, because low-demand periods generally correlate with higher cancellation rates. Packages could include local offers, free parking, or breakfast rates that attract non-refundable customers.
Implement destination fees
Destination fees—also called facility or resort fees— offer customers a high price/value proposition while also representing a profitable revenue stream with superb flow-through of 50-80 percent towards the bottom line. The typical customer value proposition is four times the value of the bundle of benefits included in the fee (i.e., $120 customer value for a $30 facility fee). Although these fees are controversial, some of the contentiousness and risk associated with them can be mitigated if disclosures are clearly stated up front—especially for independent or non-affiliated properties.
A New York City hotel implemented a $40 resort fee, which included a daily F&B discount, a welcome cocktail, Wi-Fi access, a mini-bar credit, and other services. The fee generated over $900,000 of annual incremental revenue with a gross operating profit (GOP) margin of 60% yielding an incremental $540,000 of GOP.
Create a profit preservation plan
During declining economic periods when revenue weakens, managing expenses to achieve targeted GOP and NOI is critical. A formal profit preservation plan (see example, Figure 1) created specifically for your hotel will clearly outline and track potential cost-saving strategies by department. These plans should be created in advance of the revenue decline.
- Success is best achieved when responsibility is assigned to the department lead of each specific profit preservation item for maximum accountability—the General Manager, Director of Finance, Director of Engineering, and so on.
- The plan should be a living document—it should be monitored and measured monthly, with potential savings highlighted so that the impact of NOI is easily understood in advance for cash management purposes.
- As a rule of thumb, owners look for expense reductions to compensate for 50 percent of revenue shortfalls (either to last year or budget). This ratio is modified to 30-40% in markets where labor is not as variable due to labor agreements.
Prioritize savings in non-guest impact items
Focus first on areas that do not negatively affect overall guest experience when cutting costs. Do this by reviewing in detail all hotel
revenue and expense contracts, as well as select undistributed and fixed expenses. Examples of potential non-guest impact items include landscaping, waste management, Sales & Marketing partnerships, technology, copier leases, and off-site storage. There are third-party companies that provide audits of various expenses (such as utility bills, OTA invoices and real estate taxes) for a percentage of the realized savings.
A luxury hotel began to closely monitor all income, maintenance and equipment-rental contracts via a contract-tracking spreadsheet that detailed associated monthly and annual fees, start and end dates, and scope of services. The hotel identified a specific contract to rent artwork that cost the property more than $10,000 each month. The hotel trimmed this $120,000 annual expense by terminating the contract and purchasing $15,000 of artwork as a one-time expense. The hotel also identified an expense line item for off-site storage that incurred monthly rental fees. The hotel eliminated those fees by paying once to create useful storage areas onsite and moving the stored materials onsite.
Ensure all F&B outlets are profitable
Complete a break-even analysis of the hotel’s F&B outlets to ensure each makes money. Bring the analysis to the NOI line by including the fees paid on revenue. These typically average 10 percent, plus additional deductions from departmental
profits for items such as management, furniture, fixtures and equipment reserve, and centralized brand fees. If the outlets are not profitable, seek out areas that could provide expense opportunities—for example, cost of goods, labor, and operating expenses. Be sure to review hours of operation to ensure sales volumes correspond to business hours.
Combine job classifications
Review staffing levels to see if opportunity exists to consolidate job functions wherever possible in specific labor areas. Common successful consolidations include Front Desk with switchboard, In-Room Dining Order reception with switchboard, and Security with Operations. Focus on overnight staffing, as this work shift often has more labor and capacity to take on additional tasks, due to the reduced amount of supervisory duties required in these low-demand hours, that can also eliminate the requirement for certain third-party maintenance contracts.
A hotel was able to consolidate positions of in-room dining order taker and switchboard. By understanding the job duties undertaken on each shift and the hotel’s needs, the labor consolidation optimized efficiency and eliminated 4.5 employees, thereby yielding significant savings.
Even in a declining or decelerating economy, hotel operators can deploy a number of strategies to outperform market trends. In order to ensure there is appropriate time to implement contingency plans to mitigate shortfalls, we recommend that hoteliers proactively identify emerging and future trends and risks and develop proactive mitigation plans before the need becomes urgent and reactive.
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About the Authors
Ms. Nina Kleiman, MBA, holds a master’s degree in business from the Haas School of Business at the University of California – Berkeley and Bachelor of Science from Cornell University’s School of Hotel Administration. As an Executive Vice President of Asset Management at hotelAVE with more than 25 years of industry experience, she deploys industry-leading asset management practices focused on revenue management and profit opportunities
Ms. Silvie Cohen holds a Bachelor of Science from Cornell University’s School of Hotel Administration. As Vice President at hotelAVE, she readily identifies value-add strategies from both a revenue and expense standpoint, while ensuring operators use best practices to maximize top and bottom lines for both branded and independent hotels