Either you have mountains in your backyard or a sandy beach just beyond the front door.  Or, maybe you have to drive through an 18-hole championship golf course before you reach the employee parking lot.  Given this environment, why wouldn’t you want to be the manager of a resort hotel?

Resorts are businesses whose performance can be significantly influenced by factors (weather, economic trends, etc…) that are beyond the control of management.  Our analysis of the operating data from resort hotels also finds them to be very complicated operations with multiple revenue sources and extraordinary expenses.

Resorts Under Analysis

The Hospitality Research Group of PKF Consulting (HRG) recently analyzed six years’-worth of resort hotel performance data in preparation for the April 2001 Resort Management Conference sponsored by The International Resort Association and The University of Denver School of Hotel, Restaurant, and Tourism Management.  The information was taken from HRG’s Trends in the Hotel Industry database of financial statements.  From the Trends database, we pulled information from 147 resort hotels.  Certain resort data were also compared to the performance of 115 full-service hotels of comparable size and performance.  At the time the analysis was performed, the most current data was from the year 1999.  The analysis runs from 1994 through 1999.

Numerous And Diverse Sources of Revenue

When comparing the operations of resort hotels to comparable full-service properties, the most obvious difference lies in the mix of revenue sources.  Given the expansive nature of facilities and services offered at most resorts, income from other operated departments comprises 12.0 percent of total revenue for resort hotels compared to just 3.1 percent for comparable full-service properties.  Examples of other operated departments at resorts include spas, golf, skiing, horseback riding, and tennis.

Because of this high contribution from other operated departments, rooms revenue at resort hotels comprises only 55.0 percent of total revenue versus 61.1 percent for the comparable full-service hotels.  Also, it should be noted that occupancy at the resort hotels has typically operated three to four percentage points below comparable full-service properties.

On the surface, one could make the improper observation that resort hotels are less concerned with rooms revenue than other hotel types.  However, what must be understood is that resort managers, compared to managers of other hotels, have historically taken a different approach to generating rooms revenue.  The real driver of revenue at most resorts is the number of guests (as opposed to occupied rooms) because the other revenue sources have been priced on a per-person basis.  Therefore, resort management focuses more on guest count, multiple occupancy, and revenue per guest, as opposed to the traditional measures of occupancy, ADR, and RevPAR.  It should be noted that this emphasis on guest count has diminished somewhat in recent years with the implementation of “resort fees” that are automatically charged to all guestrooms, regardless of facility usage.

The diversity of revenue sources becomes more evident when looking at the different types of resort properties.  We divide our resort sample into four property type categories (beach, desert, mountain, inland/lake) that are based on the environmental location of the property.  This categorization by location typically indicates the extent and type of recreational facilities and services offered by the resort.

When sorting the resorts by the four property type categories, we find that the contribution of revenue from sources other than the rental of guestrooms reaches a high of 57.3 percent at inland/lake resorts, to a low of 39.2 percent at beach resorts.  It should be noted that the 60.8 percent mix of rooms revenue at the beach resorts is still less than the average rooms revenue mix (61.1 percent) for the comparable full-service hotels.

Complexity Leads To Greater Expenses

While the extensive facilities and services of resort hotels generate an extraordinary volume of revenue, they also carry operating costs not typically found at comparable full-service hotels.  Our analysis shows that operating profit margins (before capital reserve, depreciation, rent, interest, income taxes, and amortization) for resort hotels ran 4.9 percentage points below comparable full-service hotels in 1999.

When analyzing the comparative income statements, the biggest discrepancy lies in the departmental expenses.  In 1999, departmental expenses averaged 45.1 percent of total revenue at resort hotels, while these same expenses were just 40.5 percent at the comparable full-service hotels.  The implication here is that, while resort hotels enjoy revenue from a diversity of sources, these other revenue-generating departments are not as efficient in dropping dollars to the bottom line.

Historical Trends Give Angst

To analyze the historical performance of resort hotels, we compared the performance of 48 resort hotels for which we had data each year from 1994 through 1999 to 115 same-store comparable full-service hotels for the same period.

The comparison shows that total revenue grew at a slightly slower pace at the resort hotels than at the comparable full-service hotels.  Enjoying greater occupancies and ADR, the full-service hotels experienced greater growth in rooms revenues than the resort hotels during the study period.  However, in the area of other operated departments (which, as explained earlier, represents 12.0 percent of total resort revenues), the resort hotels enjoyed an average annual compound growth (CAG) in revenue nearly double that experienced by the full-service properties (12.0 percent vs 6.2 percent).

On the expense side, not only did we find that resort hotels typically operate with a greater cost structure, but their expenses have grown at a faster pace than the operating expenses of the comparable full-service hotels.  From 1994 through 1999, total operating expenses for the sample of resort hotels grew at a compound annual rate of 5.1 percent.  This was greater than the 3.9 percent compound annual growth rate for costs at the comparable full-service hotels.

Relax – It’s Not That Bad

While we’ve shown resort hotels to be complex operations that take a greater effort to generate a profit, it should be noted that these hotels still produce the greatest profits when measured on a dollar per-available-room basis.  Therefore, while resort properties typically cost more to develop or purchase, they also generate more money.

The next time you go to visit a resort hotel, you probably won’t find the general manager on the golf course or tennis court.  Instead, the GM will be back in the office finding ways to increase revenues and control costs.

Patrick Quek is president and CEO of PKF Consulting and Hospitality Asset Advisors International.  He is located in the firms' San Francisco office.