Stating the obvious: Payroll increases negatively impact hotel profits

Fairmont Washington, D.C. (The U.S. recorded a 1.2-percent increase in gross operating profit per available room in June 2017 year over year, but labor costs are up 2 percent as well.)

A new study from HotStats shows hotels in the U.S. recorded a 1.2-percent increase in gross operating profit per available room in June 2017 over the same period last year, but increases in labor costs could be hindering further potential growth. Labor costs are up 2 percent, according to a worldwide poll of full-service hotels conducted by HotStats, prompting reservations from operators.

June’s year-on-year growth in top-line performance at U.S. hotels resulted in a 0.6-percent increase in occupancy, as well as a 0.5-percent increase in average daily rates, resulting in a 1.2-percent increase in revenue per available room to $167.76. Food-and-beverage revenue also was up (3.9 percent) alongside conference and banqueting business (4.2 percent).

However, growth in F&B was greeted with growth in F&B labor costs, which are up 13.7 percent, as well as a 4.4-percent increase in labor costs in rooms. Labor costs for June 2017 were recorded at 33.8 percent of total revenue, a 2-percent increase year-over-year from the same period in 2016.

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“Currently, the growth in labor costs at hotels in the USA is seriously outpacing the growth in total revenue. In the 24 months to June 2017, payroll has increased by 14.3-percent on a per available room basis, compared to the 6.8-percent increase in [total] RevPAR during the same period,” Pablo Alonso, CEO of HotStats, said in a statement.

HotStats found that hotels are feeling the sting of increasing labor costs in months where business slows, such as in Washington, D.C., where a 3.4-percent increase in payroll costs year-over-year contributed to a 2.3-percent drop in profit conversion. The city was host to a record number of U.S. visitors in 2016, and its hotels recorded a 10.5-percent increase in RevPAR in the last 12 months to June 2017, reaching $197.28. However, comparing June 2017 to June 2016 tells a different story, with RevPAR down 2 percent to $220.21 and payroll costs up 3.4 percent to 35.9 percent of total revenue.

“The minimum wage in Washington, D.C., increased from $10.50 per hour to $12.50 per hour on 1 July; this is equivalent to a 19-percent increase and will then incrementally increase to reach $15 in 2020. For an industry [that] is heavily reliant on minimum-wage employees, this will surely impact hotel profitability,” Alonso said. HotStats contrasted D.C.’s performance with Dallas, which recorded a 3.2-percent increase in RevPAR due to growth in non-rooms revenue such as F&B (up 19.7 percent) and conference and banqueting (up 27.6 percent) on a per-available-room basis. Dallas’ RevPAR came in at $109.06 in June, compared to the U.S. average of $167.76, but HotStats’ report says hotels are able to maintain stronger profit levels (recorded at 39.8-percent of total revenue in June 2017) due in part to Texas’ lower minimum wage. At $7.25 per hour, with no scheduled increases planned, Dallas’ hotel payroll soaked up roughly 31.4-percent of total revenue for the month, sliding in under the national average of 33.8 percent.

For many operators, payroll increases are inevitable, and the numbers show there is a definite negative impact to their bottom line. It’s an expected outcome—so now is the time to prepare.