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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Coming up in October 2018...

Revenue Management: Getting it Right

Revenue Management has evolved into an indispensable area of hotel operations, chiefly responsible for setting forecasting and pricing strategies. Because the profession is relatively new to the hotel and hospitality industries, a clear-cut definition of what exactly Hotel Revenue Management is has only recently emerged - Selling the Right Room to the Right Client at the Right Moment at the Right Price on the Right Distribution Channel with the best commission efficiency. Though the profession can be summed up in a single sentence, that doesn't mean it's easy. In fact, it's an incredibly complicated and complex endeavor, relying on mountains of data from a wide range of sources that must be analyzed and interpreted in order to formulate concrete pricing strategies. To accomplish this, Revenue Managers rely on an array of sophisticated technology systems and software tools that generate a multitude of reports that are central to effective decision-making. As valuable as these current technology systems are, much of the information that's collected is based on past historical trends and performance. What's new is the coming of big, data-driven, predictive software and analytics, which is likely to be a game-changer for Revenue Managers. The software has the capacity to analyze all the relevant data and predict occupancy levels and room rates, maximizing hotel profitability in the process. Another new trend that some larger hotel chains are embracing is an emphasis on Booking Direct. For Revenue Managers, this is another new channel with its own sales and costs that have to be figured into the mix. The October issue of the Hotel Business Review will address these developments and document how some leading hotels are executing their revenue management strategies.