Labor Cost Models: Asia versus North America

Can your revenue graph consistently stay ahead of your labor cost graph?

By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | September 16, 2012

Take any hotel Profit & Loss Statement and the chances are that the single major item of expense for the hotel across all departments would be the labor cost. It would not be out of place to have that labor cost account for 30% all the way through to 50% (sometimes more than that too) of Total Hotel Revenue.

Labor force is key to hotel business. People are the most important asset in the delivery of service in the hospitality industry. Managing labor costs is vital. A 2012 Survey indicates that in the year 2011, labor cost represented 46 percent of all operating expenses, or 35 percent of total revenue.

Economic Development & Labor Costs

It is indeed true that the more developed an economy is, the higher will be the labor costs. As an economy morphs from a developing to a developed one, it will have to pay a higher price for the services of its people. This is because of education levels improving, more demand for qualified people and many other related factors. For instance, in the 1990s, labor Cost as a % of Total Revenues in China used to be less than 15% obviously due to the cheap labor available and the economy just beginning to grow. Today it is between 20% and 30% on an average and rising dramatically. In fact, as the Chinese economy has developed in the last decade, ironically, its place as a low cost labor base in general and in the hotel industry specifically has steadily fallen. Today, the countries, which have become the new low cost labor bases, are Bangladesh, Vietnam, and Cambodia to name some major ones. This is purely economics at work.

High Labor Cost Challenges

What are the implications of a high labor cost on a hotel's bottom-line? To begin with, if say, the labor cost is 40% of Total Revenues, in simple terms, it means that for every dollar earned in revenues 40 cents have to be set aside towards labor costs. This is a huge chunk of the revenues that will have to be earmarked and does impact profitability.

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