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Surprised, or Stubborn? U.S. Hotel Managers
Missed Their Budgets In 2008


By: Robert Mandelbaum, October 22, 2009

The U.S. lodging industry rebounded strongly after its 2001 to 2003 industry recession.  RevPAR growth exceeded 7.8 percent each year from 2004 through 2006.  While hotels achieved a relatively strong 5.8 percent growth in RevPAR in 2007, industry performance started to show its first signs of softness.  During the year, demand grew less than 1.0 percent contributing to a slight drop in occupancy (-0.4 percent).

Despite the decline in 2007 occupancy, U.S. hoteliers remained optimistic when preparing their budgets for the following year.  Hotel management forecast increases in occupancy, ADR, RevPAR, and profits for 2008.  In hindsight, we now know that the U.S. hotel industry suffered declines in all major performance measurements during the year

When preparing their 2008 budgets, did hotel managers miss the early warning signs observed in 2007, or did they stubbornly follow the historical practice of not budgeting for performance less than the prior year?

To answer this question and assist U.S. hotel management in the preparation of their 2010 budgets, PKF Hospitality Research (PKF-HR) examined the accuracy of 518 hotel budgets for the year 2008.  The data was taken from the Trends® in the Hotel Industry database of PKF-HR.

Budget Inaccuracy

Looking towards 2008, the hotel managers in our survey sample were budgeting for a 6.8 percent increase in total revenue.  Unfortunately, at the end of the year, total revenue declined 1.8 percent.
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BUDGET ACCURACY 
2008 Budget vs Actual Ė All Hotels* 
(Percent Change From 2007 to 2008)

Note: * - Sample of properties that reported budget data.
          ** - Before deducting capital reserves, rent, interest, income taxes, depreciation, and amortization
Source: PKF Hospitality Research

The main reason for the revenue shortfall was an overestimation of the number of rooms expected to be occupied.  The properties in our research sample budgeted for a 1.6 percent increase in occupied rooms in 2008, but actually ended up accommodating 3.7 percent fewer rooms than they did in 2007.  Fortunately, hotel operators were able to raise their room rates to some degree.  In 2008, the ADR for the sample grew 2.1 percent, but fell 2.9 percentage points short of the budgeted growth rate of 5.0 percent.

Growth in ADR was welcome news, but not enough to overcome the deficit in occupancy.  The net result was an actual 1.8 percent decline in RevPAR in 2008, far short of the budgeted increase of 6.5 percent.  Since rooms revenue comprised 64.7 percent of total revenue for the hotels in our survey sample, this explains most of the underperformance in budgeted total revenue.

Facing less revenue growth than expected, the hotel managers in our survey reacted by controlling their costs.  Total operating expenses (operated departments, undistributed departments, fixed charges) were budgeted to grow 6.5 percent from 2007 to 2008, but only increased 0.5 percent.  Part of the moderation in expense growth can be attributed to the reduced occupied room count and corresponding reduction in the variable expenses that would have been needed to serve these rooms.

Despite controlling their expenses, the hotels in our survey sample were unable to achieve their target net operating income  (NOI).  NOI was anticipated to grow 7.3 percent in 2008.  Instead, the sample properties suffered a 7.7 percent decline on the bottom-line.  At the end of the year, hotels fell short of their budgeted profit levels by 14.0 percent.

Looking Towards 2010

PKF Hospitality Research has been tracking the accuracy of hotel budgets since the late 1990s.  During this time, we have learned that hotel managers are very adept at budgeting during prosperous periods for the lodging industry.  However, when the industry suffers through a slowdown, the accuracy of hotel budgets deteriorates dramatically.  Under poor market conditions, hotels have missed their profit targets by as much as 20 percent.
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HISTORICAL BUDGET ACCURACY 
Percent Difference Actual Compared to Budgeted Performance*

Note: * - Sample of properties that reported budget data.
          ** - Before deducting capital reserves, rent, interest, income taxes, depreciation, and amortization.
Source: PKF Hospitality Research
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Budgeting for 2010 will be extraordinarily tough for U.S. hoteliers.  Current year market conditions continue to deteriorate each month, thus creating an environment of pessimism.  While the final results are not in, it is expected that most hotels will not meet their budgeted performance marks in 2009.  In a June 2009 survey conducted by PKF-HR, 86 percent of the 407 managers surveyed stated that their property will perform worse than their budget for the year.

Compounding the current negative situation are forecasts of continued declines in the overall performance of the U.S. lodging industry for 2010.  According to the August 2009 edition of Hotel Horizons®, PKF-HR is projecting RevPAR to decline 2.7 percent next year.  With the decrease in RevPAR driven mostly by a 3.1 percent decline in ADR, PKF-HR is predicting that unit-level hotel profits will drop 8.3 percent.

Given these factors, it will be difficult for hotel managers to buck historical stubborn behavior and budget for further declines in revenues and profits during 2010.  However, as we have observed in the past, external pressure from the corporate offices of the management company or ownership may force the establishment of more aggressive operational targets.

Robert Mandelbaum is the Director of Research Information Services for PKF Hospitality Research.  He is located in the firmís Atlanta office.  For more information on the reports and services PKF-HR offers to assist hoteliers in the budgeting process, please visit www.pkfc.com/store.  Parts of this article were published in the September 2009 issue of Lodging.

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Contact: 

Robert Mandelbaum
Director of Research Information Services
PKF Hospitality Research
3475 Lenox Road, Suite 720
Atlanta, GA  30326
Phone: (404) 842-1150, ext 223
Fax: (404) 842-1165
E-Mail: robert.mandelbaum@pkfc.com
Website: www.pkfc.com

 

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Also See: Hoteliers Underestimated 2007 Profits; Will They Lowball 2009? / Robert Mandelbaum and Steven Nicholas / October 2008
The Accuracy of Hotel Budgets; Hoteliers Underestimate 2006 Unit-Level Costs / Robert Mandelbaum / October 2007
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