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HotStats | March 16, 2020
Hotel operating services can be divided into two main groups: those that generate income and those that do not. Typically, hoteliers focus on the first group when analyzing financial performance. After all, that’s where the money comes from!
Thus, services such as rooms, F&B and spa are closely scrutinized, and departmental key performance indicators (KPIs) are carefully studied and compared.
The second group includes the non-distributed departments, namely administrative and general services (A&G), information and telecommunications systems (I&T), sales and marketing (S&M) and real estate and maintenance (P&M). . Even though they are not profit centers, their finances should not be overlooked.
According to HotStats data, in 2019, total undistributed spending represented 24% of total revenue in the United States, reaching 26.6% in January 2020, too large a share to go unchecked. Plus, unallocated expenses directly affect your gross operating income (GOP) and therefore can make or break the flow-through of your property.
Here are three unallocated spending trends to watch:
1. Credit card commissions
Credit cards are often a preferred method of payment at hotels, especially for travelers who like to collect points. All of this credit card use has an impact on profitability. According to HotStats data, in the United States, credit card commissions increased 1.9% in 2019 compared to the previous year. In contrast, total turnover only increased by 1.8%. While credit card commissions are expected to increase as income increases, it is the difference in growth rates that can be troublesome.
This trend was accentuated in January 2020, with credit card commissions increasing 6.4% year-on-year against a total revenue increase of 3.2% year-on-year. As these A&G expenses continue to overtake revenue generation, hoteliers are vulnerable to shrinking profit margins.
2. Loyalty programs
Loyalty programs play a central role in customer loyalty and brand allegiance. However, the benefits offered by brands come at a cost, and it is the hoteliers who have to collect the check. But how well do homeowners get their money’s worth?
In 2019, the cost of loyalty programs increased 5.2% in the United States compared to 2018, according to data reported by HotStats. Additionally, January 2020 saw a 10.4% year-over-year increase in this measure.
As with credit card commissions, this expense line exceeds its revenue counterpart and further impairs profit conversion. To ensure that this financial effort is worth it, hoteliers should weigh the benefits of loyalty programs against the characteristics of their establishments and how they meet the needs of their specific clientele.
3. Energy
Energy management is a constant concern for the accommodation industry. Over the years, the development of greener technologies, from smart thermostats to motion sensors and energy-efficient light bulbs, has helped hoteliers save costs and reduce their environmental impact. We know every penny counts, but how much do these energy saving strategies actually add to the bottom line?
HotStats reports a decrease of 1.9% in electricity expenditure of hotels in the United States for the year 2019 compared to 2018. In addition, gas expenditure also decreased by 1.2% during of this period. The savings continued through January 2020 for both spending lines, recording decreases of 3.8% and 10.6% year-on-year respectively. With this gain in efficiency in the use of energy, hoteliers are better equipped to lower costs in the face of declining revenues.
Conclusion
The trend in the hosting industry to measure financial success by focusing on the best results often sidelines undistributed departments. Yet these departments are essential to the operation of a hotel as they provide support services to all profit centers.
Undistributed spend provides insightful information about how business is conducted, such as the level of waste at your hotel, the financial trade-off between signing up or opting out of loyalty programs, changes in customer payment preferences consumers or the evolution of franchise fees over time.
The end goal for managers and owners is to optimize profitability, and this can never be achieved without a thorough understanding of profit and cost centers. Thus, unallocated expenses must be measured, tracked and calibrated, as diligently as high-end metrics.
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