Study Shows Resilience of Alternative Hotel Fees
PKF study shows alternative hotel fees are readily absorbed by guests. Such alternative revenue streams could be better managed during scarce peak hotel cycles. (See 3 slides below)
As the lodging industry goes through its cycles, the major sources of revenue (room, food, beverage) for U.S. hotels fluctuate dramatically. For example, rooms revenues during the recent industry recession declined 16.1 percent from 2000 to 2003. On the other hand, some of the “minor” revenue sources for hotels show more stability over the long term. During the same 2000 to 2003 period, the combined revenue from Other Operated Departments and Rental and Other Income declined just 2.7 percent. Given the relative consistency of sales generated by such outlets as health clubs, movie rental, parking, and commercial leases, managers can depend on these departments to provide the hotel with a more predictable source of revenue.
In 2005, room revenue represented 68.0 percent of total revenue at the typical U.S. property, while the Other Operated Departments and Rental and Other Income contributed just 6.0 percent. Naturally, hotel managers should devote the majority of their time and efforts to the rental of guest rooms. However, given the consistency of revenue from these alternative sources, as well as the 53.5 percent combined average profit margin, the minor operated departments of a hotel should not be overlooked.
To analyze the revenue generated by Other Operated Departments and Rental and Other Incomes, we have extracted data from our proprietary Trends in the Hotel Industry database of hotel financial statements. Data was pulled solely from those hotels that operated a given revenue source consistently from 1999 through 2005. For example, our analysis of golf course revenues relied solely on data taken from hotels that reported golf revenue for each year from 1999 through 2005.
Consistent and Strong Growth
Not only has the revenue generated by the minor departments been more consistent, it has grown at a greater pace than the larger sources of revenue. From 1999 to 2005, the combined revenue generated by Other Operated Departments and Rental and Other Income grew at a compound annual basis (CAGR) of 2.8 percent. Concurrently, rooms revenue increased at a CAGR of 1.2 percent, while total hotel revenues grew at 1.4 percent.
Not all minor operated revenue sources have enjoyed growth in the past six years. During this period, revenue from a typical hotel’s parking garage, gift shop, commercial leases, and health club has increased. Conversely, sales from a hotel’s movie rental, guest laundry, and golf course operations have declined.
The following paragraphs provide insight into revenue trends for five selected Other Operated Departments.
Revenue from parking/garage operations exhibited the greatest increase of all the Other Operated Departments we examined. For those hotels that operate a valet parking and/or garage operation, the sales from these outlets increased by 6.4 percent on a compound annual basis from 1999 to 2005. While parking operations can be very profitable for hotels, anecdotally we have heard that the high charges can, and do, stimulate guest complaints.
Golf revenue, measured on both a per-available-room and per-occupied-room basis, declined steadily from 2000 through 2003. In 2004 and 2005, hotel golf sales rebounded somewhat, but are still below their 1999 levels. Indications are that hotel guests did not have the time, nor budget, to devote to golf during the recession years.
- Health Club
Health club revenue has grown at a compound annual rate of 4.1 percent from 1999 to 2005. A significant reason for the increase in health club revenue is the proliferation of spa operations within resort and convention hotels. Unlike golf, a broader spectrum of guests participate in physical fitness, salon, and spa activities, and it takes less time. In addition to in-house guests, hotels also sell health club/spa services and memberships to local residents.
- Guest Laundry
Guest Laundry is a revenue source that appears to be turning into a “luxury” for hotel guests. Pressure to control travel expenses, shorter stays, and business casual attire are all factors that have contributed to the 3.8 percent CAGR decline in per-occupied-room revenue generated by this department from 1999 to 2005. Fortunately, most hotels outsource this service and therefore do not carry the exposure of fixed operating expenses.
- Commercial Leases
The rental revenue earned from leases to commercial tenants has increased 2.0 percent CAGR from 1999 to 2005. Examples of rental revenue include leases to retail outlets and car rental agencies, as well as rooftop billboards and antennas. Further analysis of the data reveals that rental revenue has fluctuated somewhat during the past six years. This could be an indication that the most leases in our study sample are based on a percentage of tenant revenue and therefore will rise and fall with the volume of business at the hotel.
As we enter a period of peak performance in U.S. lodging industry, it is anticipated that most hotel managers will push room rates at the potential expense of occupancy. With somewhat fewer occupied rooms and hotel guests, one would expect a corresponding decline in movie rental income, gift shop purchases, and spa treatments. However, recent history has shown that the relatively lower priced services (compared to room rates) of the Other Operated Departments are voluntarily, or reluctantly, absorbed by hotel guests. Hotel managers need to either apply their yield management practices to the Other Operated Departments, or consider the expansion of alternative revenue sources.
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Robert Mandelbaum is the Director of Research Information Services for PKF Hospitality Research (www.pkfc.com). He is located in the firm’s Atlanta office. This article was published in the January 2007 edition of Lodging Magazine.