When Hotels Are the Customer
|by Patrick Quek, April 2000
When contemplating the question, "Who's in the lodging business?" one almost automatically thinks of hotel owners and operators. Beyond the obvious, a large pool of vendors and suppliers fulfill the needs of the industry. We find, for example, that The Hospitality Research Group of PKF Consulting probably provides just as much industry intelligence data to hotel service providers and vendors as it does directly to hotel owners and operators.
As the retail and wholesale industries adopt E-Commerce business models, more and more hotels will be ordering their goods and supplies via the Internet. Not only do individual suppliers and vendors have their own ordering conduits via their proprietary web sites, but several new procurement companies have developed sites that act as a one-stop shopping portal for all hotel supplies.
Why all this interest in serving the supply needs of the hotel industry? Just how big is the procurement market?
What Does A Hotel Buy?
To gain a better understanding of hotel procurement, we analyzed the expenditure patterns of 786 hotels in our Trends® in the Hotel Industry database for the period 1994 through 1998. The sample consists of 463 full-service hotels and 323 limited-service hotels. The full-service hotels averaged 322 rooms an a $126.17 ADR in 1998; the limited limited-service hotels averaged 105 rooms and a $60.34 ADR in that same year.
For each property, we calculated the amount spent per year to purchase goods and materials that are commonly referred to as MRO, or "maintenance, repairs, and operations " items. In general, this includes materials that can be picked off a shelf, packed in a box, and shipped to the property. Examples are guestroom supplies, chemicals, uniforms, food and beverages, and non-capital furniture, fixture, and equipment expenditures. Not included are items such as utilities, labor, contracted services, or large F.F.&E. purchases deemed to be capital in nature.
How Much Does A Hotel Buy?
In 1998, the hotels in our sample averaged $5,287 per available room purchasing the goods and supplies described above. This represents 11.7 percent of their total revenue for the year.
For full-service hotels, this figure equals $6,300 per available room, or 12.1 percent of revenue. By far, the largest component of this figure is the amount spent to purchase food and beverage. In 1998, the full-service properties in our sample spent an average of $3,838 per available room to purchase food and beverages.
Limited-service hotels, with minimal food and beverage purchases (used for complimentary breakfasts and receptions), averaged only $852 per available room in total purchases in 1998. Goods and supplies used by the maintenance department ($512 PAR) made up the largest component of purchases for the limited-service properties.
During most of the 1990s, hotels were fortunate to enjoy double-digit increases in profits, despite relatively strong increases in the cost of operations. In the December 1999 issue of Lodging, we documented the fact that hotels experienced relatively large increases in labor costs when compared to both inflation and to other industries. While labor is certainly the largest expense for all types of hotels, it should be noted that the growth rate for purchases of hotel goods and supplies also has surpassed inflation from 1994 to 1998.
From 1994 through 1998, the dollar volume of purchases for the hotels in our sample grew at a compound annual average of 3.6 percent. This compares to total revenue growth of 6.8 percent and inflation of 2.3 percent during the same period.
For full-service hotels, purchase expenditures have consistently increased from year to year. On the other hand, limited-service hotel purchases have fluctuated. In both 1996 and 1998, the limited-service hotels in our sample actually spent less on goods and supplies than they did in the prior year. The main reason for this appears to be the implementation of cost controls due to the relatively low growth in revenues recently experienced by limited-service hotels.
Rooms Supplies Grow The Most
From our sample, we isolated selected departmental purchase categories and analyzed their growth from 1994 through 1998.
Of the selected purchases analyzed, the greatest growth has been observed within the rooms department. The dollars spent to purchase laundry, linen, and guest supplies for guestrooms have increased at a 5.6 percent compound annual pace from 1994 through 1998. This is approximately one and a half times the pace of growth for all purchases combined. It should be noted that during this same period, the number of rooms occupied for the sample actually declined slightly (-0.3%). Therefore, any increase in expenditures would be attributable to price increases, upgrades in the quality of the items purchased, or an increase in the amenities placed in guestrooms.
On the other end of the spectrum, the amount spent for china, glassware, silver, and linen within the food and beverage department grew on average only 2.7 percent per year from 1994 through 1998. While the durability of these food and beverage items is greater than the goods and supplies used in the guestrooms, the difference in relative pace of expenditures between the two departments could be reflective of management emphasis. While it is true that full-service hotels are placing an increasing amount of emphasis on their food and beverage operations, management may favor the relative profitability of the rooms department. A dollar increase in upgraded guestroom amenities or supplies might yield a greater return than a similar investment in restaurant or banquet equipment.
Purchases Under Scrutiny
As the pace of revenue growth slows down in the near-term, hotels will be focusing on the cost side of their operations in order to grow their profits. While quality of goods sold and service provided is still important, vendors and suppliers of the hotel industry would be wise to emphasis cost savings when attempting to service the needs of hotels during the next few years.
Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.
Robert Mandelbaum at the firm:
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