Transcript Chapter Three

Chapter 3: Hotel Economics
Introduction
 Economics of public lodging closely reflect the general and regional
economy
 Heavily capitalized public lodging is as much a business of real estate and
finance as it is of lodging operations
 Hotels and motels comprise the bulk of rooms available to the public
 Hotel economy is a cyclical business
 Overbuilding is a problem
 The Lodging industry includes hotels, motels, all suites, resorts,
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conference centers, inns, bed-and-breakfasts, timeshares and
retirement homes with meals and other services.
Related lodging enterprises are all-suites, resorts, conference centers,
inns and bed-breakfast hostelries.
Timeshares can be included and retirement homes that offer meals are
a related business.
Airlines own or are affiliated in one way or another with hotels.
Airline and travel agency computerization has produced a worldwide
network of travel information upon which much of the lodging
business depends.
Statistics of Travel Industry
 In 2011, the global hotel industry revenue was $457B,
and by 2016 it is forecasted to reach $550B
 In 2014, Europe’s occupancy rate was highest at 68.8%,
while the Asia Pacific region saw a rate of 68.6%.
 In 2014, average room rates were $120/night in the US,
while room rates in the Middle East were the most
expensive at $167.95/night.
 Most expensive hotel rooms in the world on average
are located in New York City at $360/night.
http://www.ahla.com/uploadedFiles/_Common/pdf/Lodging_Industry_Trends_2015.pdf
http://www.statista.com/statistics/247264/total-revenue-of-the-global-hotel-industry/
The 2015 US Lodging Customer
 40% traveled for business, 60% traveled for leisure
 Business room night stay
 63% are male, 50% ages 35-54
 78% travel alone
 Pay $147 per room night
 Leisure room night stay
 57% are 2 adults, 39% ages 35-54
 80% travel by auto
 Pay $131 per room night
http://www.ahla.com/uploadedFiles/_Common/pdf/Lodging_Industry_Trends_2015.pdf
US and International Tourism
 US receives larger share of international tourism than any other
country
 In 2013, international travelers spent an estimated $180.7 billion, of
which, $140 billion was spent at destinations in the U.S.
 $41 billion on passenger fares on U.S. carriers.
 The U.S. share of 2013 world tourism receipts was at the top (12%);
more than double that of second-ranked Spain
 International travelers to the United States increased 5% over
2012 to a record 69.8 million.
 International arrivals grew by 8% to a record 32.0 million.
 These markets accounted for 46% of total arrivals to the U.S.
 Canadian arrivals also increased by 3% to a record 23.4 million.
 Mexican arrivals posted a slight increase of 1% to 14.3 million
arrivals
https://www.ahla.com/content.aspx?id=36332
Statistics of Travel Industry
 Some important statistics
 International hotel room growth rate: 2.6% in 2015
 US account for one quarter of the world hotel rooms
 Europe accounts for 45%.
 US lodging business represents 1% of GNP
 More and more lodging chains are getting out of the
ownership business.
 The ownership of the lodging chains as well as names of
the lodging properties keeps changing.
Hotel Income
 Hotel Income:
 Hotel income derives from operations and from franchise fees and
management fees in some cases.
 Developers get income from building and then selling the
properties.
 Franchise fees: up to 9 % which can translate into a 20%
room revenues increase for the franchised hotel.
 Franchising (for franchisors) is about 25% more profitable
than building or operating hotels, since franchisors are
largely risk-free and could remove the franchise if the
franchisee failed to make fee payments or live up to the
franchise agreement.
Financial Problems
 Financial problems:
 Cycles of overbuilding, when occupancies rise and investments look promising, too
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many hotels are built and time is needed for demand to catch up to supply.
Subject to the whims of the economy; occupancy rise in prosperity, falls in recession
(for, example, the recession that started in 2008 kept hotel occupancies low even
though hotel rates were stable or declined).
1980s, foreign investors jumped into the US market due to cheap American dollars.
Supply outpaces demand causing large debts that interest payments outgrow income
even with relatively high occupancy and good management.
By the end of 1993, overbuilding stopped, but thousands of rooms had been taken off
the market. The average number of employees per 100 guest rooms dropped from 70
to 50.
Some hotel developers in the 1980s profited big time. Mr. Hammeter’s developments
netted about 188 million when he sold properties in Hawaii. Location, location,
location.
https://www.zacks.com/commentary/51904/hotel-industry-grows-on-economicrecovery-time-to-invest
Hotels
 Include any public lodging establishment ranging from the bed and
breakfast family operation of a few rooms to the mega hotel of several
thousand rooms
 Hotel can be classified according to Rate Structure, Location, and Type of
guests
 Rate structure
 Budget hotel such as Motel 6 often hiring a husband and wife to run the
property with an apartment provided to keep their salary low.
 Limited service properties such as Comfort Inn, Hampton Inns and La Quinta
chains (the basic Hampton Inn costs about $31,000, not including land, a room
to build, compared to $80,000 or more a room for a full-service business hotel).
A free continental breakfast is usually provided in the lobby.
 The upscale such as Hiltons, Hyatts, Sheratons, and Marriotts, full service
hotels with at least one restaurant and a concierge service. Labor costs are high,
about 34 to 38 % of gross income.
 Resort hotels can be any properties that concentrate on attracting group
business but advertise as a vacation property, can have sports attractions on site.
Hotels
 Mega hotels are those with 1000 or more rooms. MGM grand
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Hotel and Theme Park in Las Vegas contains over 5000
rooms, claimed to be the world biggest hotel when it was
built. Of the 151 mega hotels in the world in 1991, 100 were
located in the US, Las Vegas had 18. Asia and Pacific region
had 30 of these properties, 12 in Japan, and 11 were in China.
Convention hotels cater to visitor and the leisure traveler.
Large luxury hotels such as the Waldorf Astoria in New York
City and the Ritz of Paris cater to high-level business and
affluent pleasure travelers.
All-Suite hotels provide complimentary breakfast and cocktail
hours, seek both business and pleasure traveler
Airport hotels service the air traveler and are usually attached
to large and international airports.
Casino Hotels
 Casino Hotels are different from the usual commercial hotel
 Highly profitable when well located and marketed
 Provide glamour, entertainment, and excellent, yet inexpensive, food and beverage
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that entice the visitor into the casino
The odds favor the house, which means if the visitor plays long enough they will
leave minus 10 to 20% short of what is bet
The hotels construction and the major reason for its being is the casino
Profits for casino hotels can be enormous, for example, up to 40% of Hilton Hotels’
profit is taken from its Las Vegas hotels.
Casino hotel business is very competitive because the next hotel is always bigger and
more outrageous than the last.
Operating a casino hotel is more complicated than the usual hotel. Security is the
number one issue.
Entertainment costs and other expenses are computed to keep profits coming, even
though top-notch entertainers are paid in millions
Gambling is becoming more widespread so the number and variety of these types of
establishments is going to grow
Currently 39 states have Casino gaming resorts. Up from 2 in 1988.
http://www.bloomberg.com/news/articles/2014-04-03/casinos-close-as-revenue-fallsin-gambling-saturated-u-dot-s
Casino Hotels
 Casino visitors and conventioneers behavior:
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Visitors spend nearly $500/person per visit
Conventioneers spend nearly $1000/person per visit
The high-roller’s average bit is between $150 and $250.
The average slot machine player bets $3 per pull and averages 300
lever pulls on a machine
The total input in each machine is therefore $900 per player.
Casinos make between 5 to 8 percent profit on each machine
55% of the total dollars bet in a casino is in the slot machines,
yielding an average of 80 percent of a casino’s profit.
The remaining 45% of the bets placed (on blackjack, roulette, etc.)
only yield 20% of the profit.
The Atlantic City attracts busloads of gamblers (1000 to 1500 charter
buses) who stay between 4 and 12 hours. This proved to be
unfortunate for the city which has very little economic benefit in
terms of infrastructure growth, from the gambling.
Casino Hotels
 Factors related to the volume of casino gambling:
 The regional and national economy, especially those regions close
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to the casinos (California is believed to provide half, or more, of the
visitors to Las Vegas and Reno)
The national sentiment for legalized gambling which, in the 1990s,
has been increasingly tolerant about gambling in its many forms
Airfares, and the cost and availability of gasoline (fuel shortages
raise the price of gasoline and aviation fuel as was saw in the last
2000’s).
Exchange rates (favorable rates for Europeans and Asians increase
travel to US casinos).
Casino marketing and glamour (worldwide coverage of casino
openings has increased the number of foreign visitors to the 39
states that currently have casino gaming).
The numbers of retired people who casino gamble is rising as are
the number of “junkets”(expense-paid trips paid for by the casinos).
The Lodging Leaders
 Most of the large hotel companies have moved out of ownership into
franchising or management contract.
 Franchising
 A Franchisee has access to the brand’s marketing, greater operational
control and greater ease in obtaining lenders, due to the use of the brand
 A Franchisor can expand the brands presence without much investment,
profit from fees and marketing revenues, save time and money on cost of
franchise agreements and eliminate significant investments and liabilities
http://www.hotel-online.com/News/PR2004_3rd/Sept04_FranchiseAgreements.html
 Management contracts
 The owner of a hotel employs the services of an operator to act as an agent
to provide professional management for a fee
 The owner takes all the risk
http://hotelmule.com/wiki/Management-contract
The Value of “Location”
 Three most important things about a hotel… in reality it
depends upon the market(s) being sought by management
and other factors:
 A resort hotel’s value depends in large part on its natural
surroundings
 A convention hotel is enhanced by a convention center nearby
 An airport hotel must have rooms in or near a busy airport
 Location can be enhanced by management
 A locations value is what the market value of the hotel is at
any time.
 Market value is what the hotel can produce in profit,
appreciation, or can be sold for later
Hotel Room Rates
 Set to what management believes can be charged and still
attract the maximum number of guests.
 Rack rate
 Rate that is published as being the standard rate for each of various
kinds of rooms offered by the hotel
 Average Daily Rate (ADR)
 What the hotel actually receives in revenue, computed by dividing
room revenue by number of occupied rooms
 Can be 20 to 50% lower than published rates
 The “right” room rate can be determined by what
competitive hotels charge, dependent on cost and “what
the market will bear”.
 Some believe the “price” is in the eyes of the guest, price is
a symbol of quality
 Fixed cost for a hotel run about 70 to 75% of income,
variable cost 25 to 30%.
How to determine the hotel rates:
1)The Hubbart Formula
 Lays out the steps needed to cover all costs and provide
a 15% profit on investments.
 The process works backwards.
 Find total annual revenue needed to cover all costs and
provide 15% return.
 Divide by the projected number of rooms that will be
sold in the coming year.
 Works were there is little to no competition and helps
to obtain a correct ADR
 Named after Roy Hubbart of Chicago, a major
proponent of the formula.
2)The Dollar per Thousand Rule
 $1 should be charged for each $1000 invested per room.
 If a 100 room hotel costs $4 million, the cost per room would be $40,000.
 Room rate for a fair return would be $40 ($40,000 per room cost divided by
$1000).
 Calculation assumes a 70% occupancy level over life of hotel and 55% house
profit from room sales.
 House profit is defined as all profits except income from store rentals, and
before the deduction of insurance, real estate taxes, depreciation, and other
capital expenses.
 ADR increases as occupancy increases.
 Less expensive rooms sell first and as they are sold out, higher priced rooms are
sold, raising ADR.
 A return of 10% of invested capital was considered a minimum goal.
 Other determinants of room rates include:
 Increases due to high seasons or major events.
 Package deals for vacationers or weekend specials.
Economic Analysis of Hotel Operations
 Hotel Economic Life Expectancy
 Rapid growth in first 5 to 10 years, level out for 8 to 15 years, then decline in
revenue.
 Average economic life is about 40 years.
 Forecasting Sales
 Use past sales, reservations and group bookings as a base for forecast.
 Apply current economic trends (occupancy rates).
 Reflect special conditions that will change sales (conventions in town).
 Subtract from the forecast a number that represents any negative factors
(opening of a competing hotel).
 Yield Management
 Used to discount or increase room rates to maximize income.
 Set up to automatically project room demand based on historical records.
 Try to attract customers at the maximum price they are willing to pay.
 Personnel Budgeting
 Predict how many staff will be needed throughout the sales forecast period
 No more, no less
Economic Analysis of Hotel Operations
 Food and Beverage Economics
 Take in half as much in sales as rooms do, only 10 to 20% in
profit
 Group food service in hotels can be more profitable than
service in restaurants
 Room service is believed to be a loss in profit even though the
prices are high due to labor costs
 Market and Feasibility Studies
 Studies done by a third, unbiased party, before hotel is built
 Studies include competition analysis, projected costs and
income, and supporting information that indicated the
likelihood of profitability for a hotel in a certain location
 Collects information about occupancy and room rates,
employment data and demographics for the locale and
surrounding area
Economic Analysis of Hotel Operations
 Operating Ratios
 Indicators of efficiency and to compare operating results
with hotels of similar character and location
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Use the ADR and the guest occupancy rate
 Profit margin (net income compared to total revenue is
the rations in which investors have the most interest
since it indicated the ability of the venture to pay back
their investments
 Lenders and owners are interested in liquidity and
solvency ratios, these indicate the financial soundness of
the investments
 Current assets divided by total assets indicates the
percent of assets that can be quickly turned into cash
Future Trends
 Given a free market society, hotels will continue to be
cyclical in profitability.
 Hotel construction depends on tax laws, economy, and
investing psychology, there are likely to be too many
hotels in some locations and too few in others.
 There will be periods during which there are too many
rooms for the current demand, for particular kinds of
hotels, at particular locations, during certain seasons.
 Lead times for the construction of hotels makes it
possible to be certain to the need for hotels when they
stay open.