AMERICAN HOSPITALITY-ONLINE REPORT
Expense Growth Mutes Profit Growth
While
11.4 percent growth in profitability should be considered strong, this
level of profit improvement is somewhat disappointing relative to the pace
of revenue growth. Back in the late 1990s, 7.0 to 9.0 percent growth in
revenues produced 14.0 to 16.0 percent growth in profits. The main reason
for this relative under-achievement is the 6.4 percent growth in hotel
operating expenses observed in 2004. Separate studies conducted by PKF
Hospitality Research found that a spike in operating expenses is common
during the initial stages of an industry recovery. “The hiring of staff
to match the increased business volume, combined with the reinstitution of
services and amenities that had been eliminated to cut costs, are the main
reasons for this anomaly in operating expense growth,” Woodworth
concluded.
Labor Costs
At 45.9 percent of all operating expenses, labor and related costs
represent the largest expense item for hotels. Therefore, the 6.3 percent
increase in labor and related costs that occurred during 2004 contributed
significantly to the 6.4 percent increase in total hotel operating costs.
This also implies that all other operating expenses, excluding labor
costs, grew at a pace greater than 6.4 percent. There are two components
to hotel labor costs: salaries and wages, and employee benefits. Employee
benefits include items such as payroll taxes, payroll-related insurance,
subsidized employee insurances and meals, and retirement plans. “The
salaries and wages paid directly to hotel employees went up 5.5 percent in
2004. However, it is the 8.9 percent increase in employee benefits that
concerns hotel owners and operators,” Mandelbaum said. “Hotel managers
struggle to balance the desire to offer their employees benefits like
health insurance and 401 K matching, with the cost of providing such
benefits. In addition, some benefits are government mandated, with little
room for management control.” In the past two years, employee benefits
have increased a total of 16.6 percent. This is the greatest two-year
increase for this expense item since the 25.2 percent growth rate observed
back in 1988 – 1989.
Undistributed Operating Expenses
Undistributed Operating Expenses rose 6.5 percent in 2004. This covers
such costs as Administrative and General (A&G), Marketing, Property
Operations and Maintenance, and Utilities departments. The majority of
undistributed costs are “fixed” in nature and not heavily influenced by
changes in the business volume at the hotel. Therefore, most increases in
undistributed operating expenses can be viewed as intentional additional
expenditures by management. The largest increases in Undistributed
Operating Expenses occurred in the Administrative and General Department,
where costs grew 7.3 percent during the year. Of note is the fact that
labor costs in this department grew at 5.8 percent, thus indicating that
hotels boosted their relative spending on such items as information
systems, security, credit card commissions, and human resources. On the
other hand, the majority of the 6.1 percent growth in marketing costs can
be attributed to increases in labor-related expenses. “Total Marketing
Department expenses grew 6.1 percent in 2004, while the labor and related
costs within this department grew 7.0 percent. Apparently hotels believe
an investment in personnel is needed to improve their market position,
more so than advertising or promotion,” Woodworth remarked. Hotel Utility
Costs have fluctuated dramatically during the past few years.
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