Hotel Business Review

Ms. Roberts

Sales & Marketing

A Profitable Approach to Budgeting Hotel Retail Inventory

By Janine Roberts, Director of Sales and Marketing, Tradavo

Do you have a fixed monthly budget for your hotel market or gift shop? If so, what factors are used to determine that monthly amount? And what happens to profitability and the ability to meet your guests' needs when inventory runs out before the next month's budget can be used? How managers define and set the hotel retail inventory budget has an undeniable impact on both retail profitability and overall guest satisfaction, yet many purchasing managers are getting this important revenue source all wrong by treating it like a capital expense and setting a fixed budget that limits profitability and disappoints guests.

Hotel executives and general managers deal with numerous budget decisions on a daily basis. Some purchases like new pillows, TV's, or flooring upgrades are viewed as an expense or a "fixed cost" that is a necessary expenditure to maintain the quality of the hotel but offers no immediate, measurable return on investment.

Other purchases are considered "investments" as they are intended to yield an expected and measured return to justify the cost of the purchase. The length of time required to realize the anticipated return and the amount of profit expected are important factors in determining the budget for this type of purchase with a short term, high profit yielding investment being the most desirable.

Research clearly shows a properly managed hotel gift shop or pantry that is well merchandised with correctly priced inventory is an investment that will yield an immediate, highly profitable return on investment - even in a down economy! Consumer goods such as bottled water, sodas, snack foods, quick meals, and sundry or personal care items offered in a lobby shop provide both a considerable revenue increase in the all important Sales Per Occupied Room numbers as well as a highly valued convenience factor to guests looking for a late night snack or quick relief to a splitting headache.

A product that is purchased for the hotel pantry can easily sell the same day it is offered yielding a 50-65% profit margin - with products such as soda and water yielding as much as a 200% profit margin! Highly profitable returns from fast moving consumer goods are all but guaranteed when best selling assortments are offered and adequately stocked in a hotel gift shop or pantry.

Yet, many purchasing managers treat the pantry like a capital expense and set a fixed monthly budget limiting the potential for the operation to meet its maximum profit potential when budgets run out and disappointing valued guests when shelves sit empty. A fixed budget is frugal and wise to do to with expenses or even with investments that have a long return horizon, but can be costly when limiting the purchases of products that move quickly and yield an immediate return that is otherwise lost when inventory runs low.

Managers who set a pre-determined budget for their hotel pantry often run out of products early due to one large group or busy weekend resulting in empty shelves and depleted offerings for a week or more because the "fixed budget" has already been spent for the month. Even a few empty shelves or sparse product rows can result in reduced sales as guests perceive a half empty market or gift shop as "picked thru" and will typically pass on purchasing anything because they feel that the products offered are old.

Consider the loss that occurs when running out of bottled water just a few days per month. On average hotel pantries sell 20 bottles of water per day. A 16 oz. bottle of water is typically a $.40 cost of goods that sells for at least $2 - earning on average $32/day. Running out of water can literally cost your market hundreds of dollars per month from just one item being out of stock! Now multiply that by several items being out of stock for a week at a time because budget has run out. You could easily be forfeiting over a thousand dollars per month of revenue and frustrating guests who were looking for that convenience by entering the Market for a desired item that is not available.

So what is the correct way to set a budget for your hotel retail operation?

Obviously, you do not want to give the front office manager free reign to order at will with no spending constraints, but it is important to base that budget on relevant variable factors rather than arbitrary fixed amounts. The most important factors to consider when setting a budget for a successful, profitable retail operation are: guest demand and space constraints.

Guest Demand and Par Levels

The best way to effectively meet guest demand is by tracking Par Levels - or the amount you would need to have on hand to ensure that you do not run out while waiting for your next delivery. This is accomplished by determining how many of each item are sold in a given day, week, or month and how frequently your supplier delivers.

For example, if you know that your gift shop sells approximately 6 King Sized Snickers Bars per day or 180 per month, you know that you need to budget for at least 4 cases per month of that particular item. You also know that if you only have one 48 count case in your supply room that you have about 8 days of inventory left of your top selling item. If your supplier requires a week's notice for delivery or has a set delivery day each week, then you should never have less than 1 case left of back stock for that product before placing a new order to effectively meet guest demand.

You will also want to leave flexibility to properly address the anticipated needs of large groups by planning ahead and purchasing inventory that would be popular with that particular group. Consider items such as Gatorade and Powerbars when sports teams come in or novelty ice creams, microwaveable pizzas, and Skittles when planning for an influx in children or families. Having the wrong assortment for a specific group can result in a lost revenue opportunity.

Space Constraints

You never want to carry excess inventory - particularly when you are dealing with items that have a short shelf life like potato chips, a limited display area, and minimal back stock storage - as is often the case in hotel pantries. But you never want to run out of product either! Again, this requires understanding guest demand, stocking your available space to meet that demand, and reordering accordingly.

For those with larger back stock areas, this may mean ordering once a month. For others, who are limited solely to the space available on their shelves, this may mean ordering smaller quantities once per week, so it is important to select a supplier who can offer flexibility in delivery schedules and minimums. For smaller retail operations, consider investing in a shelf management system (about $30/shelf) which allows more product to be displayed on a shelf and reduces the need to provide additional storage for back stock items.

Overview

Monitoring the average monthly guest demand and required space to adequately supply hotel retail inventory are the best means of determining a relevant budget for a successful, profitable hotel retail operation that meets the needs of the guests it serves. These easy to evaluate factors allow a purchasing manager the flexibility to accurately anticipate how much needs to be spent each month to adequately supply valued guests and can easily be justified by the immediate return on investment that is realized based on profit margins and sales reporting.

Janine Roberts, Director of Sales and Marketing for Tradavo, a retail services company specializing in design, optimization and supply needs of the industry. She works to improve retail profits and the automate management of hotel lobby shops. Janine developed and implemented the Retail Services element of Tradavo to provide hotels assistance in selecting, merchandising and effectively pricing inventory. She also created the highly successful Grand Opening Program to help general managers preparing for a grand opening and to launch their retail operation. Ms. Roberts can be contacted at 303-883-2335 or jroberts@tradavo.com

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