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 June 2019...

Sales & Marketing: Selling Experiences

There are innumerable strategies that Hotel Sales and Marketing Directors employ to find, engage and entice guests to their property, and those strategies are constantly evolving. A breakthrough technology, pioneering platform, or even a simple algorithm update can cause new trends to emerge and upend the best laid plans. Sales and marketing departments must remain agile so they can adapt to the ever changing digital landscape. As an example, the popularity of virtual reality is on the rise, as 360 interactive technologies become more mainstream. Chatbots and artificial intelligence are also poised to become the next big things, as they take guest personalization to a whole new level. But one sales and marketing trend that is currently resulting in major benefits for hotels is experiential marketing - the effort to deliver an experience to potential guests. Mainly this is accomplished through the creative use of video and images, and by utilizing what has become known as User Generated Content. By sharing actual personal content (videos and pictures) from satisfied guests who have experienced the delights of a property, prospective guests can more easily imagine themselves having the same experience. Similarly, Hotel Generated Content is equally important. Hotels are more than beds and effective video presentations can tell a compelling story - a story about what makes the hotel appealing and unique. A video walk-through of rooms is essential, as are video tours in different areas of a hotel. The goal is to highlight what makes the property exceptional, but also to show real people having real fun - an experience that prospective guests can have too. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.