Three steps to take toward reducing hotel costs

Lobby of the Sofitel Chicago Magnificent Mile.

CHICAGO — It's one thing to make money, but it's another to watch as incremental costs add up to pry it from your fingers. Hotel operators know well the thousands of tiny barbs these costs represent, and at Hotel ROI Midwest, part of the Hotel ROI Series, reducing this loss was top of mind. The event, held at the Wyndham Grand Chicago Riverfront, began with a discussion on maximizing the worth of owner assets before delving into methods for minimizing costs.

The largest cost for most owners is often their debt payments, and Ravi Patel, president of Hawkeye Hotels, said achieving the lowest possible interest rate by any means possible is imperative to avoid treading water on assets that should be working in owners' favor. While interest rates have crept up across the U.S., Patel said he still considers them low enough to benefit from.

“We are at a 3.7-percent interest rate across the board,” Patel said, suggesting that now is a good time to go after commercial mortgage-backed securities lenders to secure effective rates. “We have all local lenders, and we are not afraid of recourse.”

RELATED: Why hotel profitability starts with the state of your asset

This leads us to the first of three ways to reduce costs across hotels:

Pictured from left to right: Jerry Cataldo, president and CEO, Hostmark Hospitality Group; Chris Winterhalter, CEO and co-founder of Hotel Rehabs, a national hotel renovation contractor based in Chicago; and Ravi Patel, president, Hawkeye Hotels.

1. Eliminate Dead Space

While interest rate remain low, Chris Winterhalter, CEO and co-founder of Hotel Rehabs, a national hotel renovation contractor based in Chicago, said the easiest way to minimize costs is to research and put thought into the purpose behind your property’s spaces, and the value these spaces are providing through design. It’s possible for well-designed hotels to realize a huge return on investment from small spaces that are utilized correctly, while conversely a potential bad ROI could stem from a large space designed without purpose.

“Think of it as the New York effect,” Winterhalter said. “In New York City, restaurant tables are close together so that businesses can put every inch of space to work. Take that mentality into your market and you can gain a lot of value by repurposing things that aren’t making a lot of money.”

One example of dead space being repurposed, courtesy of Patel, is the concept of transforming excess storage into guestrooms. “Even on a new construction, the more efficiency you can get out of every square foot, that turns into major dollars,” he said.

According to Winterhalter, hotels should ensure that all of their space can be used to provide a return on investment, such as the expanded F&B area in the Sheraton Suites in greater Chicago.
 

2. Throw Out Your Crystal Ball

More often than not, minimizing costs boils down to planning — planning for design, planning for financing and even planning for disasters. Jerry Cataldo, president and CEO of Hostmark Hospitality Group, said trustworthy managers capable of dealing with catastrophes are worth their weight in gold because it becomes exponentially more difficult to control costs during a bad situation you haven’t planned for. 

“Form response teams with partners you know you can work with to address issues as they come up while everyone else in the region is scrambling for solutions,” Cataldo said. “A lot of what you do to be successful there happens prior to encountering [a bad situation].”

Winterhalter brought up the concept of strong and reliable insurance contracts, which must be read completely before signing and all differ from region to region. Patel said it’s important to narrow down the most destructive possibilities and insure against them, and don’t invest in anything that is irrelevant. For example, if a hotel is located near a river its owners will want nominal insurance for water damage on the property’s first floor, furniture and walls, but if the hotel isn’t located near a large water source the same owners will have different concerns.

“Some budget or lower-end hotels don’t have things like wind, hail or mold built into their contracts,” he said. “Those add up to a lot of dollars when you have a disaster.”

On the topic of property taxes and F&B costs, Patel said both are important factors in profit & loss statements. Because property taxes vary from market to market, Patel said it was important to work with attorneys you are familiar with in some cases and branch out to national firms in others depending on the situation.

“Be nimble, look at every possible angle [you] can,” he said. “There are so many ways to dissect [property taxes]. Ask what the hotels are paying across the street and start from there.”

As for food & beverage budgets, Cataldo said it is of critical importance to understand forecasting. In his experience, too many hotels are throwing money away on budgets built on fallacies, and a lot of what hotels can control in costs gets thrown out the window in the face of bad forecasting.

“We’ve gotten very good at forecasting on the room side, but many companies don’t put as much emphasis on forecasting for F&B,” he said.

“Inventory controls are imperative,” Patel said. “Scheduling for deliveries in a proper way lowers spoilage and also ensures you aren’t over-buying and things aren’t walking out the door.”

Patel said operators should be nimble in the face of opposition, and curious about the opportunities facing their competition.
 

3. Invest in Quality Labor

Labor is, on average, a hotel’s largest expense, and Cataldo said operators too often don’t pay enough attention to the hiring process. He referred to poor hiring as an “insidious expense” with no immediate impact and endless potential for long-term damage, not to mention the root of higher turnover. 

How can operators avoid hiring the wrong people? Patel said that personality is the No. 1 attribute to look for in good employees, because everything else can be taught. Location is also a factor. Patel said that in many cases, smaller markets produce more high-quality talent and a better wage scale because they are populated with individuals who are looking at jobs in hospitality as career moves, with the hope of eventually transitioning into mid-level positions. Conversely, suburban markets are difficult to find talent in some cases due to low unemployment, while cities pose different challenges due to the high volume of applicants and available jobs.

“Groom from within,” Patel said. “If you have a front office manager you want to promote find a chance to do so as soon as possible — use it as a theater system to flourish and grow. Also, owners with fewer properties tend to be better at hiring and have lower turnover, drastically, because they are more available physically and are on hand to create a culture.”

If you are considering investments into a market with employment challenges, Cataldo said to plan for them and create strategies to offset some of these concerns.

“Consider morale and how you treat your employees… it’s essential in attracting the best talent,” Cataldo said, pointing out small perks and benefits for employees such as salespeople who may benefit from the opportunity to work from home. “It’s a small industry, people will talk about the places they want to work. Doing the right things makes you attractive, and people will find you.”

From a design standpoint, Winterhalter said to pay extra attention when hiring a building engineer, which can maximize savings if they are skilled. “The quality of building engineers that we see, on average, is low,” Winterhalter said. “Whether that comes from wages or how the department is treated we don’t know, but once in a while we find a good building engineer and they save us a ton of money. It’s hard to quantify that kind of preventative maintenance in dollars.”