The 5 Biggest Factors Affecting Hotel Profitability in 2019
Posted by mdo on March 27, 2019 in Thought Leader Series
The hotel business is booming again. After the economic downturn closing the previous decade, travel and tourism were cut from family and business budgets in a hurry. As 2017 came and went, the public began to rebuild careers and reimagine their financial situations, making space for the expense of travel. In 2017, the hospitality industry saw $1.5 trillion in bookings, over 30% of which came from hotel stays alone. These numbers increased in 2018 and are set to rise again this year, which brings us to this question:
As hotels continue to bring in revenue, where should hoteliers focus their strategy to ensure profitability increases in tandem?
How Can We Improve Hotel Profitability This Year?
The answer isn’t about raising prices against a rehabilitating economy, nor about heavily marketing to an ad-weary audience. The five factors below are motivated by strong foundations, conscientious servitude, and improving operations from within the organization.
Strike a balance during hotel development
For hoteliers striking out into the industry for the first time or looking to grow their portfolio this year, develop wisely. The decisions around building a new hotel – location, size, amenities – are made once and felt forever. Joe Reardon, Chief Development Officer at Hotel Equities, has this to say about profitability during development: “It’s about making sure it’s the right product and that it works well with the demographics of your hotel – making sure that owners aren’t over-building the hotel but also making sure they’re not underdoing it, so that the life of the assets continue to grow.” Taking Reardon’s advice, it’s wisest to match the vibe and intention of the location where you’ll develop and build something suited to the plans and preferences of your ideal guest.
Develop a flexible relationship with vendors
One of the largest bundles of cost to the hotel owner comes from external service providers and product vendors. This can include the companies that provide towels and toiletries, external cleaning crews, and even your website developer. Dynamic negotiations with these individuals and organizations will keep your hotel agile and adaptive to shifts in the market. When the price of oil goes up and impacts distribution costs for the food provider you use, a healthy and open relationship with your representative will help you anticipate cost increases or avoid them. Similarly, if the travel and tourism industry takes a hit on a down-turned economy, you can turn to your vendors and loosen the strings on your contracts to account for decreases in demand. According to Chief Commercial Officer at Chesapeake Hospitality, Chris Green, there may come a time when you need to “talk to every one of your negotiated contracts and say, ‘hey, we’re slowing down, we’re seeing red’” and encourage those vendors to share your pain dynamically and adjust terms.
Earn labor loyalty and mitigate turnover
According to Reardon, profitability is less impacted by the costs of labor and more by the development and loyalty of the workforce in place. For context, the cost to replace an employee is 20% of that employee’s annual salary. For a hotel employee making $40,000 per year, turnover costs can exceed $8,000. For managers who make more, that cost increases. This truth is staggering when applied to the 73.8% annual turnover rate in the hotel industry. Hotels employ more than 15 million people worldwide, so if 73% of them are laid off, fired, or they quit – 10.9 million people will be displaced and change hands. This turnover will cost more than $87 Billion to hotels worldwide this year. Investing in your workforce with better pay, clarity in training, and career support will make all the difference for them and for you.
Foster consumer relationships organically
Much of the marketing and sales in the hospitality industry is now done digitally. Hoteliers and their CMOs are installing retargeting pixels on display ads, posting more consistently on social media platforms, and investing deeply into email marketing funnels. These are great things, but they’re not enough to win business that’s loyal to a competitor. Downscale competitors win on price while upscale competitors win on amenities and perception of luxury. To win more business without bending to either side, it’s essential to build relationships, and do so authentically. Data can be a huge asset to building those relationships if it’s harvested and analyzed thoughtfully. According to Green, “We use data and technology to find customers, attract customers, secure customers, and later on, to satisfy our customers. If you’re not doing that, you’re not making a real connection with your guests. That real connection is what’s going to limit your distribution costs because these are now returning guests.” The more you can invest, in time and cost, to earn return-business, the less you will have to spend earning and impressing new guests.
Invest wisely in technology
Technical improvements, both consumer-facing and administration-facing, are inevitable and essential. Consumers want to experience the latest technologies and modern comforts during their hotel stays, and administrators need to have access to the best possible data and utility available. However, not every shiny new software or technology is going to return on its investment at the same rate – it’s wise to intuit which technologies will either unforgettably improve your guests’ experience or assist seamless operation and better decision-making for owners and stakeholders. If a new form of technology doesn’t do one of these two things, it is auxiliary and should be purchased with discretion.
Ultimately, profit and loss are a moving target for most hoteliers. Vendor costs shift. Energy costs shift. The hospitality industry is malleable and economy-dependent. Turnover is high. By creating stability in your organization and creating operational integrity from within, you can build a sturdy foundation on which to weather every season. Support major operational decisions and stabilize profit through actionable data mining with myDigitalOffice – the premier data aggregate and visualization software for hotels.