Retail Operations Contribute to Hotel Income and Guest Service

Retail operations within the lodging industry vary greatly. In limited-service, select-service hotels, and extended-stay properties the retail operation frequently consists of a kiosk located next to the front desk that sells magazines, snacks, drinks, and microwavable food.

In large convention and resort hotels, the retail offerings can cover tens of thousands of square feet of leased out newsstands, gift shops, florists, and clothing stores. For the most part, retail operations provide just a small contribution to the total income of a hotel. However, to a greater degree, they do contribute to guest satisfaction and the competitive position of a property.

To examine the financial impact of retail operations on U.S. hotels, we analyzed the 2008 revenues, expenses, and income reported by 1,551 properties in the Trends® in the Hotel Industry database of PKF Hospitality Research. Our analysis segregated 1,307 hotels that operate their own retail operations, and another 244 properties that lease out their retail space. Properties with mixed operations (operated and leased), as well as concession revenue, were excluded from the analysis.

Hotel Operated

For those properties that operate their own stores, retail revenue averaged $502 per available room, or 0.9 percent of total hotel revenue. Retail revenue, measured on both a dollar per available room ($2,088) and percentage of total revenue basis (1.9%), is greatest at resort hotels. The combination of greater guest counts and longer lengths of stay appear to justify the operation of extensive retail shops at resorts.

The contribution of retail revenue to total revenue among the other property types falls into the tight range of 0.4 percent to 0.7 percent. At limited-service and select-service properties, small retail operations are in place to sell products that complement the increasing availability of mini-refrigerators and microwaves offered in the guest rooms.

When a hotel decides to operate their own retail stores, they also carry the burden of the associated costs. After deducting the direct operating expenses, the average hotel self-operated retail department achieves a 26.6 percent profit margin.

The greatest retail operating expense is the cost of goods sold (51.6% of department revenue), followed by labor costs (16.5%) and other direct operating expenses (5.3%). The relatively low labor cost ratio can be attributed to the retail operations at the small hotels that are staffed by front desk personnel.

Leased Operations

The practice of leasing retail operations to an outside vendor is appealing to hotel owners. By leasing out the hotel's gift shop, less time is required from hotel management, and the burden of the operating expenses is removed. Of course, with all leased operations a hotel does lose some control over guest service and depending on the structure of the lease, a share of the store's profits.

Not surprising, the highest incidence of leased-out retail operations was found at the traditional 200 to 300 room full-service hotel. The gross revenue ($330 PAR) at these hotels is high enough to attract an outside vendor, but not significant enough to warrant self-operation.

On average, the net income the hotel receives from the lease payments of retail stores averaged $147 per available room. Rental payment revenue was highest at resort hotels ($397) and lowest at the few limited-service properties ($15 PAR) that lease their operations.

Operate or Lease?

On the surface, it appears that the $134 PAR departmental profit earned by hotels that manage their own retail stores is fairly comparable to the $147 PAR in rent payments received by properties that lease retail operations. However, it should be noted that the $134 PAR departmental profit is before deductions for the hotel's undistributed expenses and fixed charges.

The decision to operate or lease a hotel's retail shops needs to be made on a case by case basis. For large resorts, the dollars can be significant, and a full financial analysis is warranted. However, for most properties, the income contributions are minor, so the financial differences between scenarios are minimal. In these circumstances, the decision needs to be made based on management preference and the impact on guest service.

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Robert Mandelbaum is Director of Research Information Services for PKF Hospitality Research. He works in the firm's Atlanta office (www.pkfc.com). To purchase a copy of the 2010 Trends® in the Hotel Industry report (2009 data), please visit www.pkfc.com/store. This article was published in the May 2010 edition of Lodging.

PKF Consulting offers hotel appraisal and hotel valuation services, hotel market studies, hospitality litigation support, and hotel advisory services. Colliers International Hotels offers hotel brokerage and hotel transaction services. PKF Hospitality Research produces Hotel Horizons®, an econometrically based hotel forecast, Benchmarker, a customized comparative hotel benchmark report, and annual Trends®, a historical hotel financial publication, as well as hotel research services.

photo of Robert Mandelbaum