The New Dilemma: Net Profit is Shrinking But Gross Revenue is Growing
By Yatish Nathraj Hotel Broker, HTL Hospitality Advisors | October 18, 2015
The hotel and service industry evolves in the front of the house all the time to meet the ever-changing expectations of our guest. Sometimes these expectations can start eating away at the bottom line, which good managers adapt to and change these environments to encourage a good rapport. But we have seen a change in the business aspect of the hospitality industry. Not only have guest's demands sometimes become unreasonable, our service supply change is being disrupted by ever increasing back of the house costs. The standard percentage of goods, labor and debt on our Profit and Loss statements are obliterating the Net profit line. This has been concerning investors and managers, making our careers as managers of revenue, a juggling act. We work so hard at getting the revenue into our doors and we see the ever-increasing RevPar year over year, but still Net Profit is shrinking.
This time it's not as simple as changing the type of eggs that are used at breakfast to reduce breakfast cost. The electric bill tripled in the last few years and there are no alternative vendors to change to, to reduce breakfast cost. Hospitality managers must start thinking out of the box on issues like cost analysis, we need to look at the bigger picture like our electric bill and analyze the price per kilowatt during peak demand versus off peak hours. Is it cheaper to run heavy machinery that uses up a lot of electricity during the day or evening?
One of my clients used this method and saved 30K over the summer. They looked at their electricity bill for high consumption periods, and found out that their onsite laundry and dryers were skyrocketing their electricity utility expense each month, but by how much? First they decided to cut back the amount of laundry they do during the normal times and run it during night audit. At first they noticed that their electric bills started dropping considerably, but for this to be successful, they discovered for their facility to complete laundry during the night and still have enough linen on the beds and for guest request, they needed 2.5 PAR of laundry to accomplish this and be successful at it. They also needed to train the ever so busy night auditors to do some laundry during down time to ensure there was not a plethora of linen left in the morning.
Then they looked at air condition units and how to reduce the usage of electricity. Air conditioning is a big part of hospitality and when a place is too hot or cold it could be uninviting to the guest. After looking at some ideal temperatures, and conducting some research they discovered that by setting their thermometers to 76 degrees for cold and hot and locking the controls for the common areas to prevent tampering they would save an average of 18% yearly on energy cost. According to the Department Of Energy's Pacific Northwest National Laboratory the right thermostat settings could save a facility 18% on its energy cost in one year without affecting the comfort level in the environment.
These two easy steps in managing utilities costs can make a big difference in net operating income by just changing policies to help run our operations more efficiently.
Human Resources is the most important part of our industry; our employees can make or break our guest service chain. These people are essential to guest satisfaction, most hotels are laying off and cutting down staff to reduce their exposure to new laws and local government policies. But is that the real solution? For argument sake if you run a 100-room national franchise hotel that averages 68% per year around the minimum amount of staff you should have are 15 people every day. How many times a year are you replacing one of these key people? How much does it cost to train someone to be as good as that person or better? If you don't know that number, let me throw a number out for you; it costs around $3,000 per employee, according to a recent Harvard Business Study Review. This number can be higher or lower depending on your hotel and the position that needs to be replaced; according to the study if you take 16% of annual wages of the employee that leaves that would be the mean for the replacement cost of a new employee. But this is an average for line staff employees i.e. front desk, housekeeping and maintenance. The higher you go up the ladder the more expensive it gets to rehire and train an employee.