Hotel Retail Outlets Are Growing in Profit
Historically hotels have offered retail outlets primarily for guest convenience and satisfaction. In general, the revenue generated by hotel retail outlets represents only a small part of total hotel revenue.
Of the properties in the Trends in the Hotel Industry database of CBRE Hotels' Americas Research that reported retail revenues and expenses, retail sales made up just 0.9 percent of total hotel revenue in 2015.
Retail operations vary greatly, depending on the type of hotel. The retail department at resorts often includes clothing stores, gift shops, and newsstands that are full of custom-branded items with the hotel's logo. On the other end of the spectrum, limited-service properties frequently operate a small kiosk located next to the front desk that sells items mainly for the guest's convenience, such as toiletries, snacks, and soft drinks.
To examine the financial impact of retail operations on U.S. hotels, we analyzed the revenues, expenses, and profits provided by 467 properties in the Trends in the Hotel Industry that reported retail sales data each year from 2010 to 2015. All properties that were analyzed managed their own retail operations. Properties that leased their retail outlets to third-party operators were excluded from the analysis.
From 2010 to 2015, retail sales revenue for the properties in our sample increased at a compound annual growth rate (CAGR) of 4.1 percent. This is less than the growth in total hotel revenue of 6.1 percent during the same period, but greater than the average of all Other-Operated Departments at 3.7 percent.
Among the various property types, retail revenues grew the most at full-service hotels, and the least at resort properties. As full-service hotels adjust their food and beverage offerings, self-service mini-marts with prepared foods, microwaveable items, and alcoholic beverages are popping up in hotel lobbies and replacing three-meal-a-day, all-purpose restaurants, mini-bars, and room service. The mini-mart revenue has not fully replaced the revenue lost within the Food and Beverage Department, but it does meet an increasing consumer preference.
Retail revenue growth has lagged at resort hotels, but they still achieve the highest levels of retail revenue. In 2015, resort hotels achieved annual retail revenues equal to $1,535 per-available-room (PAR) basis and $6.01 per-occupied-room (POR). The extensive retail offerings at resort hotels have remained consistent, thus limiting sales growth compared to the other, evolving property types.
Convention hotels, with large public spaces and greater guest counts, also achieve above average retail sales figures. In 2015, convention hotels enjoyed retail sales of $892 PAR and $3.17 POR.
Retail sales volume is lowest at limited-service ($1.03 POR) and extended-stay ($0.76 POR) hotels. These property types were the forerunners of the mini-marts that the full-service hotels are now emulating. However, since limited-service and extended-stay properties typically offer one or two complimentary meals, the opportunity to sell more extensive (and expensive) food items is limited.
Growth in retail sales may have lagged overall hotel sales, but the story for retail department profits is very positive. From 2010 to 2015, the departmental profits for self-operated retail outlets increased by a CAGR of 7.6 percent. Retail department profits increased the most at full-service at 10.2% and extended-stay hotels at 8.8 percent.
The healthy growth rates for profits can be partially attributed to the changing nature of the retail offerings. The mini-marts and kiosks previously mentioned require very little, if any, staffing. Most are manned by front desk personnel. In 2015, total labor costs equaled just 17.0 percent of departmental revenue on average for the entire sample, which contributed to the 27.0 percent profit margin achieved during the year. This is greater than the 22.9 percent profit margin recorded in 2010, thus emblematic of the enhancements to efficiency.
At 50 percent of department revenue, the cost of goods sold is the greatest expense for hotel retail outlets. Per the rules of the Uniform System of Accounts for the Lodging Industry, departmental profits for all operated departments are calculated before deductions for undistributed expenses such as administration, technology, marketing, maintenance, and utilities.
Hotel owners and operators continually alter their operations to meet the changing requirements of their guests. Stimulated in part by changing food and beverage facilities, as well as the growing desire for quicker and simplified retail outlets, properties have expanded their offerings of kiosks and mini-marts. This transformation has occurred in both full- and limited-service hotels. These new retail operations have proven to be well received by guests, and highly efficient and profitable.