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 Managing Hotel Labor Costs

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by: Robert Mandelbaum, PKF Consulting

February 2004 - From 2000 to 2002, hotel managers were faced with a 14 percent decline in total revenue.  In response, management was forced to reduce their operating expenses in order to limit declines in profitability.  Because payroll and related costs comprise 44 percent of hotel operating expenses, it was inevitable that hotel managers looked at their labor costs when the time came to cut costs.

To examine how controllable hotel labor costs really are, we pulled payroll and related information from our Trends in the Hotel Industry database for the period 1989 through 2002.  Here is what we learned:

  • Hotel labor costs move in close correlation with total hotel revenue.
  • Lowered labor costs have comprised a large percentage of the reductions instituted by hotel managers during industry recessions.
  • During prosperous periods, labor costs rise faster than all other expenses.
  • During periods of industry recovery, the growth in rooms occupied outpaced the growth in labor costs, thus indicating operating efficiencies.
  • During periods of stabilized industry prosperity, the increase in labor costs have outpaced the growth in rooms occupied, thus indicating operating inefficiencies.
The following paragraphs detail some observations of the data studied.
 
Charts (1990 - 2002)
Annual Change in Total Labor Costs
Annual Change in Total Revenue vs Change in Total Labor Costs
Annual Change in Labor Costs and All Other Expenses
Compound Annual Change in Departmental Cash Payrolls

Have Money, Will Hire

From 1990 through 2002, the annual changes in labor costs have been almost identical to the annual changes in total revenue, whether the changes are positive or negative.  During this period, total hotel revenues have grown at a compound annual rate of 3.0 percent while total payroll and related costs have grown at a nearly identical 2.5 percent pace.

The most notable exception to this trend was the recovery year of 1992.  Coming out of the 1991 recession, hotel managers immediately began to re-hire staff that had been laid off the prior year.  Therefore, the rise in labor costs more than doubled in the increase in total revenue.  A similar spending pattern is occurring during the early recovery stages of the current recession.  In our mid-year 2003 Trends survey, we have already seen a 2.5 percent increase in labor costs from the first half of 2002 to the first half of 2003.  This increase in payroll and related expenses has occurred despite a 3.7 percent decline in total hotel revenues during the same period.

Cut Costs, Cut Labor

As stated before, hotel managers tend to examine labor cost reduction opportunities when asked to reduce their hotel’s operating expenses.  An examination of movements in labor and all other expenses shows that payroll reductions contributed significantly to the cost controls implemented in both 1991 and 2001/2002.  In 1991, hotel managers were able to cut their operating expenses by 1.9 percent while suffering from a 3.1 percent decline in total revenue.  What is interesting to note is that labor costs fell 10.3 percent, thus indicating that all other operating expenses actually increased 7.3 percent.  Therefore, if not for the cuts in labor costs, the declines in 1991 profitability would have been more severe.

During the recent recession, both labor costs and all other operating costs have been cut in both 2001 and 2002.  During the two-year period, labor cost reductions have accounted for 64.6 percent of the total decline in operating expenses.  Of note is that most of the reduction in labor costs occurred during 2001.  It is apparent that the majority of cuts to fixed labor components (salaried positions, back-office personnel, etc…) were made immediately.  Subsequent labor cost savings occurred, for the most part, because of the reduction in business volume and reduced hourly staffing requirements.

Prosperity Breeds Inefficiency

While hotel managers are skillful at controlling labor costs relative to movements in revenue, they appear to be less adept at monitoring their staffing based on the number of rooms occupied.  Logic would dictate that fewer rooms occupied would require fewer employees and result in reduced payrolls.  However, this has not always been the case within the hotel industry.

Once again, hotel managers dramatically reduced their payrolls during the 1991 and 2001/2002 recessions when both revenues and rooms occupied fell.  However, rooms occupied fell during the later part of the 1990s (1996through 1999) as well.  Nevertheless, labor costs continued to grow at a 2.9 percent compound annual rate.

On the surface, the accusation could be made that hotel managers were not minding labor costs during the plateau of the 1990s prosperity.  When labor costs per-occupied-room increase more rapidly than labor costs measured on a per-available-room basis, this is an indication of inefficiency.

However, mitigating circumstances may explain why payrolls continued to increase despite the decline in business volume.  During the period 1996 through 1999, revenues continued to increase 5.5 percent annually, despite the decline in rooms occupied.  This enabled hotels to “staff up”, despite the realistic need for fewer employees.  In addition, unemployment rates were very low, forcing hotels to pay premium wages in order to retain and attract employees.

Unlike Other Businesses

With such a dependency on labor, hotels have not been able to benefit from the technology-created productivity enhancements that other industries have enjoyed.  Therefore, management of labor costs is critical to the profitable management hotels.

Our analysis has shown that hotel labor is a highly controllable cost that managers have effectively handled.  During difficult times, hotel managers have made the tough decisions and reduced their payrolls.  Conversely, when benefiting from increases in revenue, hotel mangers have invested in human capital, a most critical component of hotel product.

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Robert Mandelbaum is the Director of Research Information services for The Hospitality Research Group of PKF Consulting (HRG).  To benchmark your hotel labor costs, contact HRG at (404) 842-1150, ext 237.
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Contact:
Robert Mandelbaum
Director of Research Information Services
The Hospitality Research Group of PKF Consulting
3340 Peachtree Road, Suite 580
Atlanta, GA  30326
Phone: (404) 842-1150, ext 223
E-Mail: robert.mandelbaum@pkfc.com
www.hrgonline.com
Also See: The Evolving Relationship Between Hotel Sales Managers and Meeting Planners / What's in the Minds of Meeting Planners Today? / Robert Mandelbaum / January 2004
Bed-and-Breakfast and Country Inns Suffer Less than Hotels / Robert Mandelbaum / December 2003
PKF Consulting Forecasts 2003 Holiday Season for Hotels; 2003 Performance Will Exceed Levels Achieved in the Year 2000 / PKF / November 2003
2003 First Half Hotel Profits Plunge; Average U.S. Hotel Suffered 11.9% Decline in IBFC During the First Six months of 2003 / PKF / October 2003
Operating Profits for the Average U.S. Hotel Dropped 9.6% in 2002, This After a 19.4% Decline In 2001 / PKF Consulting - HRG Annual Hotel Trends Report / April 2003
Hotel Benchmarking Revisited; Bottom-Line Comparisons Among Similar Properties Are the 'Bottom Line' / May 2003


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