I always wondered how a hotel would operate
financially if it were located in different parts of the world. To
demonstrate these differences and show the impact on the net income, I
developed the following side-by-side comparison of the revenue and
expense for a proposed 200-room Marriott type hotel, assuming it was
located in the following five regions: China, Europe, India, South
America and the U.S.
Let’s assume the projected occupancy and average rate are the
same in each market, which will produce identical rooms revenue. The
rest of the revenue and expense items will be projected by my local HVS
partners based on how this Marriott hotel would be designed and
operated in that particular region. For example, in India, a Marriott
hotel would typically have significantly more food, beverage and
banquet outlets thereby generating more food and beverage revenue than
a Marriott hotel in the U.S.
Click here to
download the detailed chart of revenue and expense showing the
side-by-side comparison for the five regions as of the Marriott’s
fourth year of operation.
Base on the financial statements set forth, it is apparent
there are many similarities and differences in the mode of operation
and the resulting impact on revenues and expenses for hotels in various
parts of the world. Let’s take a closer look.
The underlying assumption for all five markets is the
subject property is a 200-room Marriott hotel in its fourth year of
operation in 2014. The occupancy is 71% and the average rate is $250,
which produces rooms revenue of $12,958,000.
Food and Beverage Revenue
India shows the highest food & beverage revenue of
$9,517,000 compared to the lowest, with China at $6,312,000. Indian
hotels typically have extensive food and beverage outlets — usually
several restaurants and extensive banquet rooms. Some of the best
restaurants in India are located in hotels. The large Indian weddings
are often held in hotel banquet rooms. Travelers also appreciate dining
in a hotel since driving in the large cities can be challenging and
time consuming. Hotels in China also attract banquet business, but
their restaurants don’t cater to as many locals as Indian hotels. The
European Marriott is second to India in food & beverage revenue
with a volume of $7,390,000. Locals in Europe will often frequent hotel
restaurants and utilize their banquet facilities. South American and
U.S. hotels derive similar levels of f&b revenue.
India and South America show the highest telephone
revenue with a volume of $630,000 and $466,000 respectively. India
hotels derive significant revenue from Internet charges, which are very
expensive in this region. The U.S. telephone revenue is $96,000 and
Europe is a low $22,000. China does not separately account for
telephone revenue but puts it in Other Income.
Rentals and Other Income
South America and the U.S. have the highest rentals and
other Income at $932,000 and $829,000 respectively. China is the lowest
India’s spa revenue is the highest at $950,000. Upscale
Indian hotels typically have extensive spa facilities that cater to
both hotel guests and the local community. Spa revenue for China,
Europe and the U.S. ranged from $241,000 to $413,000. South America
does not show spa revenue because hotels of this size typically have
very small spas and the income is insignificant.
A hotel in China typically has garage revenue and for
this property it was estimated at $307,000. The other regions did not
specifically include garage revenue, but it could be included in other
The resulting total revenue ranges from $24,560,000 for
India down to $20,361,000 for China. Europe, South America and the U.S.
are similar at approximately $21,000,000.
Rooms Department Expense
Major financial operating differences among the
different regions become apparent when the rooms department expense
percentage is compared. India has the lowest at 10.4% and Europe is the
highest at 30%. China, South America and the U.S. are similar at around
22%. India’s extremely low labor cost is the primary reason why the
rooms department expense is so low. Indian hotels appear overstaffed,
and usually provide a high level of service. However, wages are
extremely low there, which results in a highly profitable department.
Europe’s labor costs are very high. Unions, government regulations,
vacations and benefits, high cost of health care and social security
contribute to staffing costs and a high rooms department expense.
Food and Beverage Department Expense
Again, India with its low labor cost has a f&b
departmental expense ratio of 45.5%. The other regions of the world are
fairly consistent with a cost ranging from 64% in China to 68.6% in the
U.S. It appears Europe’s higher f&b volume helps control the
expense ratio at 67.8%. Food & beverage labor is not as large of a
component of the f&b department as it is in the rooms department.
In all areas of the world, the telephone department
makes a small profit except the U.S., where it loses money. This can be
attributed to the low telephone revenue in the U.S.
India has the lowest spa expense at 40.8%, with China at
55.9% and Europe and the U.S. at 76.1% and 73.4% respectively. Again,
these differences are typical labor cost related.
Good profit is made in the garage of China hotels with
an expense ratio of 25.4%.
Administrative and General
South America has the highest administrative and general
cost at $11,940 per room. Europe is the next most expensive at $8,975
per room, followed by the U.S. at $8,120. Comparatively, India is not
as low as might be expected, operating at $7,130 per room.
Administrative and general expenses are not as labor intensive as rooms
and f&b, so India’s labor advantage does not show up as much in
this expense item.
The U.S. has the highest marketing expense at $6,090 per room, followed
by South America at $5,430. India is at the lowest at $3,020. The
competitive environment in the U.S. is particularly difficult and
requires higher expenditures in marketing.
Brand Marketing Fee
India hotels typically charge a separate marketing fee
for chain-affiliated hotels.
Property Operations and Maintenance
India pays the most for property operations and
maintenance: $4,955 per room. This can be attributed to the high cost
of replacement equipment parts and the wear and tear of operating a
hotel in India. The property operations and maintenance in the other
areas of the world are similar: around $3,500 per room.
India has the highest energy costs at $9,665, followed
by China at $6,885 and Europe at $3,925 per room. South America and the
U.S. are similar at approximately $2,700 per room.
Income Before Fixed Charges
With its high f&b coupled with very low departmental
expenses, the proposed Marriott in India generated income before fixed
charges of $12,528,000, which was 51% of total revenue. The other four
markets had a fairly tight range of IBFC of $8,014,000 for Europe and
up to $8,788,000 for the U.S. These profit ratios are about 40%.
The base management fee for all the markets was 3% of
total revenue except for China and India, which was 2.5%. China is a
particularly attractive market for international hotel companies who
compete aggressively to obtain management contracts.
The U.S. pays the most in property taxes: $540,000.
China is next at $433,000, followed by Europe at $424,000. India is
next at $252,000, followed by South America at only $110,000. Note that
South America also pays a turnover tax of $844,000 and a bank credits
& debits tax of $211,000, making it much more expensive than the
other regions from a total tax perspective.
Insurance ranges from a low of $66,000 in South America to $209,000 in
Reserve for Replacement
All the markets utilized a 4% of total revenue reserve
for replacement except the U.S., which used 5%.
The following are several additional expenses that are
deducted by typical buyers of hotels in the regions where they operate.
As appraisers, it is important to reflect the actions of typical buyers
and sellers and include these expenses in the revenue and expense
statement if they are customary deductions used by market participants.
For example in China, it is normal for buyers to deduct a business tax.
This type of tax is normally deducted in other regions of the world.
An additional tax normally deducted in China, which
amounted to $1,117,000 or 5.5% of total revenue.
Incentive Management Fee
Additional fees paid to hotel management companies are
usually based on a percentage of net income. Marriott typically has an
incentive management fee, which is traditionally deducted for valuation
purposes in other areas of the world. However, as described previously,
in the U.S., incentive management fee is usually subordinated to debt
service and is usually loaded into the equity yield and not
specifically deducted during the appraisal process. Occasionally, it
may be helpful to include incentive management fees for appraisals in
the U.S., which is also proper methodology. Outside the U.S., the
incentive management fee ranges from 2.7% of total revenue in South
America to 3.9% in India.
Turnover Tax and Bank Credits and Debits Tax
As previously described, hotel appraisers in South
America also deduct a turnover tax and a bank credit & debits tax.
The resulting income for these five regions is as
South America: $4,904,000
India leads the list showing a net income of $9,602,000, which
is significantly higher than the other regions. South America is the
lowest at $4,904,000. Even if you deduct an incentive management fee
for the U.S., it would still be the second highest at $6,351,000. At
least from a profit point of view, these results show why India has
been getting so much attention from hotel companies looking to do
business there. On the other hand, even with the growth of Brazil,
South America is not as active in new development compared to India,
the U.S. and China.