by Robert Mandelbaum

Bed and breakfast inns are a large and growing part of the U.S. lodging industry.  Will the guest satisfaction and loyalty this segment traditionally commands be enough to carry B&Bs through a sluggish economy?

As lodging businesses, bed and breakfast inns (B&B) are definitely unique operations and differ greatly from most U.S. hotels.  The typical B&B has only eight guest rooms, and the vast majority are owned by individuals that take a very active part in the operation.  In fact, 83 percent of all B&B owners live on the premises, while 88 percent describe themselves as “active” in their operations.  On average, 41 percent of all the hours logged by inn employees are those put in by the owners themselves.

The close ties between the health of the U.S. economy and the nation’s hotel industry have been proven over the years.  Given the unique operating characteristics of bed and breakfast inns, how does their performance fluctuate in light of changes in the economy?

Since 1996, The Hospitality Research Group of PKF Consulting (HRG) has been engaged by the Professional Association of Innkeepers International (PAII) to conduct their biennial Industry Study of Bed and Breakfast / Country Inns.  The following highlights some of the B&B performance data gathered during the 2000 study, followed by a discussion of what to expect during 2001.

Recent Prosperity

Like the U.S. hotel industry, B&Bs have enjoyed increases in revenues and profits during the past few years.

From 1999 to 2000, the average B&B in the United States increased occupancy from 49 percent to 50 percent.  This compares to the 69.3 percent and 70.6 percent occupancy levels, respectively, for U.S. hotels in PKF Consulting’s annual Trends in the Hotel Industry survey.

Due to the seasonal nature of most B&Bs, their rural locations, and lack of convention business, it should not be surprising that their annual occupancies are lower than those of the average hotel.  However, the order of magnitude of the growth in occupancy (2.0 percent) from 1999 to 2000 was the same for B&Bs.

Although smaller in size, B&Bs command slightly higher average room rates than the hotels participating in PKF Consulting’s survey of major U.S. lodging markets.  This is due mainly to the higher mix of rooms with special amenities (fireplaces, Jacuzzis, etc…).  The average daily room rate (ADR) for B&Bs grew from $125.25 in 1999 to $128.87 in 2000.  This represents an increase of 2.9 percent.  During this same period, hotel managers were able to grow their rates from $116.89 to $122.73, or an increase of 5.0 percent.

Prodigious Profits

Both B&Bs and hotels were able to take advantage of their increases in top line performance by growing their bottom-line profits.

Since the PAII Industry Study is conducted on a biennial basis, we can only compare the movement in average unit-level profits from 1998 to 2000.  During this time period, the average B&B grew their operating profits (before debt service) by a healthy 51.3 percent.  This was the result of an average 30.3 percent increase in total revenues, combined with only a 19.8 percent increase in expenses.

For comparison purposes, the typical U.S. hotel grew its total revenues 11.9 percent and held its expense growth to 10.9 percent.  The net result was a 14.1 percent improvement in operating profits.

What To Look For In 2001

In 2001, we have seen the nation’s economic growth slow down.  In turn, most travel indicators are below the performance levels achieved in 2000.  Through June of 2001, air travel is down 1.3 percent, rail traffic is off 0.6 percent, and hotel occupancy has declined 3.0 percent.

The real impact of the 2001 economic slowdown on the performance of U.S. bed and breakfast inns will not be known until the end of the year.  However, knowing their unique operating characteristics, we can speculate on how vulnerable bed and breakfast inns are to an economic downturn.

For bed and breakfast inns, the following factors appear to mitigate the potential negative affects of an economic recession.

Demand Orientation - Based on research conducted by HRG, the biggest declines in lodging demand during 2001 have occurred in the commercial and group segments.  Fortunately, for bed and breakfast inns, commercial and group demand represents only 20 percent of all guests staying.

A 1995 study by YBR Marketing found that the typical bed and breakfast guest has achieved relatively advanced levels of education and falls into the upper income status.  Historically, the leisure travel habits of high-income individuals tend to be less susceptible to change during periods of economic recession.  Given the large degree of repeat “high-end” guests in the bed and breakfast, the potential exists for a large portion of these guests to return in 2001.

Not all B&B guests can be classified as residing in the “upper income” category.  Those leisure travelers with more modest incomes do become more price-sensitive and change their travel patterns during recessions.  In an effort to save money, their leisure trips become more regional, and vacations are typically shorter in duration.  Fortunately, 80 percent of bed and breakfast inns are located in villages or rural areas.  Most are within a few hours’ drive of a major metropolitan area.  Therefore, these inns are already accustomed to accommodating short, regional trips taken from major urban areas.

Active Owners And Operators – As stated before, the vast more of B&B owners take an active role in operating the business.  This close tie between the personal and professional life of innkeepers both adds to, and subtracts from, their operating flexibility in a recession.

With the vast majority of owners living in their inn, the propensity for an innkeeper to sell the enterprise when business declines is low compared to that of a hotel owner.  After all, selling their inn would mean losing their home.  In addition, 57 percent of all inn owners do not depend on the inn for their primary income.  They rely on a partner with an outside job, or retirement income.  Given this economic structure, innkeepers have more of an incentive and a cushion to “ride it out” during an economic recession, as opposed to an inactive hotel owner who might be more eager to “bail out” as conditions warrant.

While the heavy involvement of innkeepers in the operation of their inns certainly impacts their social life, it does offer some professional advantages when business levels slow down.  During a recession, an active owner has more flexibility with labor costs compared to the choices for a hotel manager.  Bed and breakfast owners can always trim their fixed payroll costs by paying themselves less.  In addition, by working more hours, inn owners can reduce the variable component of their labor costs.  While both options are not very attractive, they are relatively easy and quick to implement.  Just think what a hotel manager at a union hotel has to go through to cut payroll.

Price Value - When travelers become more price-sensitive, the price-value of a lodging establishment takes on more importance in the purchase decision.  Hotel managers and innkeepers can enhance the price-value perception of their properties either by cutting rates and/or adding value-added services.

Historically, the operators of bed and breakfast inns have been very creative and skillful in marketing their properties.  Most offer packages that include additional services either within the inn, or within the community.  In fact, frequent bed and breakfast guests perceive the offering of a “free” breakfast, an evening cocktail, or a Modified American Plan as a value-added enhancement.  The strong emotional appeal of the “B&B experience” provides a strong tie between inns and their guests.  Twenty-four percent of a typical inn’s guests are repeat and referred customers.  This affection is tough to break, even during recessions.

Not All Rosy

While I’ve described a variety of factors that theoretically appear to mitigate the negative impacts of a national recession, bed and breakfast inns are still vulnerable in some degree to declines in their levels of business.

Most prominent is the fact that bed and breakfast inns are small businesses with a limited margin for error.  A few dollars lost, or a decline of just a few occupancy points, has a great impact on a small unprepared operation.  While independence does offer greater flexibility and adaptability, inns lack the corporate support that helps other forms of lodging cope during a recession.  Finally, vacations are considered by economists to be a “luxury” item.  Given the high degree of orientation to this segment, inns must be able to quickly adapt to changes in the patterns of leisure travelers.

History has shown that the bed and breakfast inns, like hotels, were able to grow and flourish during the boom times of the 1990s.  Now that the B&B sector of the lodging industry has reached a more mature stage, it will be interesting to observe how these ameliorating factors affect bed and breakfast performance during the recession of 2001.

To purchase a copy of the 2000 Industry Study of Bed and Breakfast / Country Inns, please contact PAII at (805) 569-1853 or www.paii.org.

Robert Mandelbaum is the Director of Research Information Services for the Hospitality Research Group, the research affiliate of PKF Consulting.