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With Hotels, Does Spending Money Make Money?
by: Robert Mandelbaum

From the start, 2001 was a tough year for the U.S. hotel industry.  Even prior to September, rooms RevPAR was down close to 2.0 percent for the year.  In response, hotel managers looked to cut expenses as they have always done.

The events of September 11, 2001 certainly exaggerated the decline in revenue.  Our 2002 Trends in the Hotel Industry report shows that, by year-end, total hotel revenues had dropped 9.9 percent.  In response, U.S. hotel managers were able to reduce their operating expenses by 5.2 percent.  Unfortunately, with revenues declining to a greater degree than expenses, operating profits for the typical U.S. hotel dropped 19.4 percent in 2001.

A survey of 1,200 hotel General Managers conducted by The Center for Hospitality Research at Cornell University and Realtime Hotel Reports, LLC found that 70 percent had redirected their sales and marketing efforts to some degree in response to the events of September 11, 2001.  However, only 28 percent of the managers surveyed stated that they had increased their sales and marketing budget by a significant amount in order to cope with the drop off in occupancy.

When forced to cut expenses, the marketing department presents a dilemma for hotel managers.  While cost-cutting is needed in order to maintain profitability, reducing marketing expenses could potentially weaken the market penetration of the property.  After all, when business is down, the need to maximize a property�s position within the market becomes even more critical, as well as difficult.  Fewer resources might damper the effectiveness of this effort.

To provide some perspective on this challenging management decision, we examined information from our Trends in the Hotel Industry database to analyze the relative movements of sales and marketing expenses compared to hotel revenues.  Revenue and expense data were studied from a sample of 1,704 properties for which we had complete sales and marketing department expenditures for both 2000 and 2001.

Ups And Downs

In 2001, the typical hotel in our survey sample averaged spending $1,267 per available room in the sales and marketing department.  This figure includes the salaries, wages and benefits of the sales personnel of the hotel, as well as the expenses associated with supporting locally generated marketing and advertising initiatives.  Not included in this expense are the fees paid to a chain or referral system to cover national advertising, sales, and marketing programs.

On average, the hotels in our sample reduced their sales and marketing expenditures 8.6 percent from 2000 to 2001.  Concurrently, the total revenue for these properties declined 8.0 percent, while profits dropped 19.7 percent.  The most severe declines in marketing expenses occurred in the limited-service hotel segment (-19.3 percent), however, marketing expenses at these properties only averaged $366 per available room, or 2.4 percent of total revenue.  For the year, limited-service hotels averaged a 4.8 percent decline in total revenue.  Convention hotels, whose local marketing expenditures equaled $3,064 per available room, reduced their costs in this department by 13.3 percent.  In turn, the total revenue for the convention hotels in our sample dropped 11.3 percent in 2001, the greatest decline for any property type.  Despite management�s attempts to reduce expenses, the operating profits for limited-service hotels fell 8.5 percent, while convention hotels earned 25.3 percent fewer dollars for the year.

The lone exception to the trend of cutting marketing expenses was found in extended-stay hotels, where we observed a 4.3 percent increase in sales and marketing expenditures for the year.  Despite increasing their marketing dollars, these hotels could not avoid the industry-wide downturn.  They saw their revenues fall off 5.2 percent and profits drop 11.9 percent.

An analysis of the sample based on chain affiliation reveals that both independent and affiliated properties experienced a drop in revenue of 8.0 percent in 2001.  Without the benefit of national sales and marketing support, the independent properties in our sample increased their marketing department expenditures by 2.3 percent during the year in an effort to retain their market position.  On the other hand, the chain-affiliated hotels averaged a 9.6 percent decline in marketing costs.

Payroll Remains Flat

On average, payroll and related expenses made up 51.7 percent of the total expenditures in the sales and marketing department.  The remaining 48.3 percent of the departmental costs cover such �other marketing expenses� as supplies, phone calls, travel, and local advertising, merchandising, and promotional programs.  It should be noted that the vast majority of limited-service hotels in our sample (75 percent), as well as a large number of extended-stay hotels (45 percent), do not have any dedicated sales personnel.  Therefore, the local sales and marketing dollars for hotels in these categories are spent almost exclusively on the �other� items.

As noted before, the average hotel in our sample reduced their marketing expenses by 8.6 percent in 2001.  The main driver of this decline was a 15.1 percent cutback in the �other� expenses, as opposed to cuts in personnel.  Sales and marketing payroll and related expenses declined only 0.5 percent for the year.  In fact, the payroll costs for the sales and marketing departments at convention and resort hotels actually increased on average by 6.6 percent.  We believe the decision to reduce �other� expenses, as opposed to payroll, was based partially on loyalty, as well as the fact that personal sales efforts are more critical and effective during recessions, as opposed to less direct sales techniques.  This is especially true in the group meetings market segment.

Relative Movements

When sorting the survey sample by movements in revenue and marketing expenses, we did see some minor correlations between the relative movements of marketing expenses and revenues.

Of all the hotels in our survey sample, 65.4 percent did reduce their marketing department expenditures in 2001 by an average of 18.3 percent.  Of those hotels that did reduce their marketing costs, 78.3 percent experienced a decline in total revenue, while the remaining 21.7 percent saw their revenue increase for the year.  Of the 34.6 percent of the properties that increased their sales and marketing expenditures in 2001, 32.3 percent were able to increase their revenue, while 67.7 percent suffered from a decline in sales.  While the difference is small, it does appear that more hotels in the �increased marketing expenses� category were able to improve their revenue than those that had cut marketing costs.

Sorting the data by revenue movement, 74.7 percent of the hotels in the survey sample suffered from a decline in total revenue during 2001.  Of these, 68.8 percent had cut their marketing expenses, but 31.2 percent increased their marketing outlays.  Of the remaining 25.3 percent of the survey sample that had the good fortune to see their revenues increase in 2001, 55.9 percent did so despite a cut in marketing costs, while 44.2 percent spent more in marketing for the year.  Once again, we did observe that a fair number of the hotels that did experience an increase in revenue did, at the same time, spend more in marketing. 

Chicken And Egg

We clearly acknowledge the fact that most hotels cut their marketing expenses in 2001 because they needed to, and that the decline in revenue was mostly attributable to market conditions and events (economic recession, September 11, etc.) beyond the control of the hotel sales and marketing team.  The question does remain whether the increases in revenue were the result of the increased marketing expenditures, or if these hotels able to avoid cost cuts because their revenue was not down.

Unfortunately, on the whole, it does not appear that efforts to control marketing expenses resulted in any significant influence on revenues in 2001.  Increases in marketing expenditures did not guarantee increased revenue.  On the other hand, properties that decreased their marketing costs did not suffer to a much greater degree than those that did not cut costs.  Again, in 2001, external forces appear to have had the greatest influence on revenue generation, as opposed to internal sales efforts.

Robert Mandelbaum is the Director of Research Information Services for the Hospitality Research Group of PKF Consulting.  Alexander Feneck assisted with the research for this article.

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Contact:
PKF Consulting
Robert Mandelbaum
email [email protected] 
 3391 Peachtree Road 
Suite 420 
Atlanta, GA  30326 
phone  (404) 842-1150 
fax  (404) 842-1165

Also See Commissions in the Hotel Industry: Agents for Change? / Robert Mandelbaum / PKF / Aug 2002
Will Hotel NOIs and Property Prices Follow Revenues in Their Downward Spiral? / John (Jack) B. Corgel, Ph.D / Hospitality Research Group of PKF Consulting / June 2002 


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