The budget season is just about over, and the hopes for 2003 have been factored into dollars and cents.  Whenever a general manager forecasts for the following year, he/she hopes and plans to do better than the competition.  This is as true today as it was in the fall of 2000.

When the hotel industry budgeted for 2001, it was expecting a slowdown in growth, but not a decline performance.  Due to the unforeseeable events and volatility of 2001, the hospitality industry experienced the largest single year deterioration in hotel performance ever.  No budget could have foreseen such a dramatic year, but it is still interesting to see what hotel managers expected, knowing they were headed into a slow year.

From our Trends in the Industry database of financial statements, we analyzed the budgets and actual operating performance of 552 properties for 2001.  This sample was then separated into full-service, limited-service, resort, convention, and extended-stay hotel markets.  The following highlights our findings.

Occupancy and ADR

By the end of 2000, the hospitality industry had already begun to slow down, and the average hotel expected this trend of moderate growth to continue.  The average hotel from our sample budgeted for a 1.8 percent increase in occupancy.  By the end of the year, occupancy was actually down 6.2 percent for the average hotel; this resulted in a variance of 12.3 percent from the budget.
Going into 2001, convention hotels from our sample budgeted for the largest increase (2.4 percent) in occupancy while the resort hotels expected the smallest growth budgeting for only a 1.2 percent increase.  Looking back at what actually occurred in 2001, convention hotels saw the greatest decline (-10.1 percent) in occupancy.  Resort hotels finished just behind them with a 8.3 percent decline in occupied rooms.  Extended-stay hotels experienced the softest decline in occupancy (-3.7 percent).

If 2001 had turned out according to the way our sample had budgeted, the average daily rate (ADR) would have grown by 3.5 percent.  This was not to be.  Fortunately, ADR did not decline to the same extent as occupancy, but the ADR did finish the year down by less than half a percent.

Unlike occupancy, resort hotels were the most optimistic when it came to their ADR.  Resort hotels budgeted for a 6.7 percent increase to their ADR.  Limited service hotels expected the smallest increase in ADR, budgeting for only a 1.7 percent improvement from year 2000 levels.  In actuality, resort hotels were able to sustain a 4.3 percent growth in ADR; this places them at the top of our sample.  Full-service hotels in our sample experienced the largest drop in ADR, declining nearly 2 percent.  Limited-service hotels remained relatively flat, in terms of ADR change, declining one tenth of a percent.
 
 

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Revenue

Although in 2000 the average hotel saw revenues rise by 7.7 percent, the average 2001 budget from our sample called for only a 5.0 percent increase in revenue.  Unfortunately, even this modest growth was not to be.  Our total sample of hotels experienced a 7.8 percent decline in revenue in 2001.  This average hotel missed their budgets by almost 8 percent. 

The resort hotels from our sample budgeted for the largest growth in revenue (7.3 percent), while the limited-service hotels were the most pessimistic aiming for only 3.2 percent growth.

By the end of 2001, resort hotels experienced the lightest decline in revenue (4.4 percent).  Full-service hotels, which projected a 5.0 percent increase in revenue, were hit the hardest and suffered over a 10 percent decline to revenue.  The variance between what the full-service hotels budgeted for and what actually occurred was 14.6 percent. 

Just as with ADR, resort hotels were the most optimistic when they budgeted for revenue.   They were able to hold their revenue losses to only 4.4 percent, the smallest drop among our sample.  Limited-service hotels projected only a modest growth in revenue (3.2 percent) and ended the year falling short of their budget by the smallest margin (9.0 percent) compared to the rest of our sample.

Operating Expenses

As the year progressed, managers found the need to cut operating expenses as revenues began to decline.  In an effort to soften the eventual decline to year-end profits, operating expenses where cut wherever possible.  The average hotel budgeted an increase in operating expenses of 3.8 percent.  By the end of the year, operating expenses at these hotels had actually been reduced by 3.2 percent.  This is one area in which hotel managers were smart to have deviated from their budgeted amounts.

Going into 2001, the extended-stay hotels from our sample planned for a 6.2 percent increase in expenses.  The limited-service hotels were the most conservative budgeting for only a 2.1 percent increase in expenses.  Again, hotel managers responding to the decline in revenues reduced operating expenses.

By the time 2001 was over, those same extended-stay hotels had posted a modest 2.7 percent increase in operating expenses.  They were the only group to spend more in 2001 than they did in 2000, due in large part to their already relatively low operating expenses.  The convention hotels from our sample slashed operated expenses by nearly 6 percent and varied from their budget by nearly 11 percent.  Limited-service hotels cut operating expenses by only 1.7 percent, thus finishing the year with a 3.7 percent variation from their budget.

Profits

Despite the effort by hotel managers to reduce operating expenses, revenue declined at a greater rate, and profits suffered.  From our sample, the average hotel experienced a 16.6 percent decline in profits and missed their budgeted profit by 22.3 percent. 

Full-service hotels took the hardest hit in profits, falling over 22 percent from year 2000 profit levels.  Going into 2001, the full-service hotels had budgeted for an increase in profits of 9.4 percent.  The variance between what full-service hotels expected and what they achieved was nearly 30 percent.  Resort hotels from our sample expected the largest increase in profits (14.0 percent) and finished the year falling 11.0 percent. They missed their budgeted profits by 22.0 percent.  Limited-service hotels finished the year closest to their projected bottom lines, missing by only 16.0 percent. 

How to Budget for 2003?

Looking ahead toward 2003, we are again expecting moderate growth.  Going into a slow year, we should apply the lessons we�ve learned.  Specifically, despite the natural desire to aim high while budgeting, modest forecasts call for modest budgets.  This is not the year to aggressive, but rather to budget accurately and attempt to maintain modest growth in profitability.

As managers prepare their budgets, they may find some of the products offered by the Hospitality Research Group (HRG) helpful.  HRG provides Hotel Outlook reports, for 50 major U.S. lodging markets, containing annual and quarterly data covering 15 years of history and a 6-year forecast.  It includes RevPAR, ADR, occupancy data and more for both full- and limited-service hotels.  HRG also provides customized Benchmarker reports that allow the hotel owner to compare his/her property, in terms of both expenses and revenues, to a select group of comparable hotels in a comprehensive report.  To order any of these tools contact Claude Vargo at (404) 842-1150 ext. 237.

Alexander Feneck is a Research Assistant in the Atlanta office of the Hospitality Research Group of PKF Consulting (HRG).  Robert Mandelbaum, the Director of Research Information Services for HRG, assisted with the article.