Are Rising Labor Costs Draining Your Hotel's Profits?

By Gary Isenberg President, LWHA Asset & Property Management Services | July 08, 2018

A significant share of a hotel's profits gets spent on labor, making it the most expensive line item in a property's budget. In fact, CBRE 2017 Trends report estimated payroll and related costs gobble up nearly 43% of a hotel's revenues. To put that in perspective, operating expenses account for 35% of a budget, sales a mere 7.2%.

Of course, there's a good reason why labor tops all other operating costs: Hoteliers need staff to clean rooms, check in guests, prepare and serve meals. Yet labor, I believe, presents the most controllable expense account in a hotel's budget. Hotel operators have the ability to control labor dollars, even if they don't always realize it. First, though, hoteliers must recognize all the interrelated components that influence labor costs. Some of those factors reside outside a hoteliers control, like mandated municipal minimum wage hikes and always-rising health insurance costs. Other pieces fall well within a hotel's purview -- how staff is scheduled and the impact that schedule has on labor expenses.

Operators know costs are spiraling. So the challenge becomes, what can operators do to mitigate those increases and reduce payroll expenses? Even though wages constitute the largest expense category, hotels can manage those costs when operators analyze the delicate relationship between staffing and scheduling practices and payroll.

Living Wage Laws & Healthcare

First, let's examine some external factors, specifically, efforts to raise the minimum wage and the impact of the Affordable Care Act. On the national front, the National Employment Law Project currently backs an initiative to increase the minimum wage, which has spurred a counter-lobbying program by the hotel industry.

Particularly worrisome to the American Hotel and Lodging Association is the singling out of the hotel industry for mandated minimum wage hikes. The organization notes the industry has boosted wage and salary for its workers by $18.5 billion since 2005. Further, the lodging industry collectively paid its employees a total of $74 billion in 2015. Those statistics only underscore the steady rise of wages in the hotel industry.

On a state level, several cities in California have passed living wage laws, including Santa Monica, which as of July 1, 2017 mandated hotel wages be set at $15.66 per hour, far in excess of the federal minimum wage standard of $7.25 an hour. Los Angeles's minimum wage for workers who staff hotels with more than 150 rooms now stands at $15.37 an hour. Long Beach's minimum hourly wage is set a bit lower at $14.35.

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Social Media: Getting Personal

There Social media platforms have revolutionized the hotel industry. Popular sites such as Facebook, Twitter, Pinterest, Instagram, Snapchat, YouTube and Tumblr now account for 2.3 billion active users, and this phenomenon has forever transformed how businesses interact with consumers. Given that social media allows for two-way communication between businesses and consumers, the emphasis of any marketing strategy must be to positively and personally engage the customer, and there are innumerable ways to accomplish that goal. One popular strategy is to encourage hotel guests to create their own personal content - typically videos and photos -which can be shared via their personal social media networks, reaching a sizeable audience. In addition, geo-locational tags and brand hashtags can be embedded in such posts which allow them to be found via metadata searches, substantially enlarging their scope. Influencer marketing is another prevalent social media strategy. Some hotels are paying popular social media stars and bloggers to endorse their brand on social media platforms. These kinds of endorsements generally elicit a strong response because the influencers are perceived as being trustworthy by their followers, and because an influencer's followers are likely to share similar psychographic and demographic traits. Travel review sites have also become vitally important in reputation management. Travelers consistently use social media to express pleasure or frustration about their guest experiences, so it is essential that every review be attended to personally. Assuming the responsibility to address and correct customer service concerns quickly is a way to mitigate complaints and to build brand loyalty. Plus, whether reviews are favorable or unfavorable, they are a vital source of information to managers about a hotel's operational performance.  The February Hotel Business Review will document what some hotels are doing to effectively incorporate social media strategies into their businesses.