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Hotel Profit and Loss Statement: how to create it?

Xotels ·2h
Hotel Management isn't merely about strategy. There are many layers, each of which require your undivided attention. Human resources, operations, budgeting, and income and cost control are but a few areas which necessitate focus, as well as the requisite knowledge and skill. But how can you efficiently assess the business areas that generate maximized profits?To accomplish this step and provide the best platform from which your hotel will succeed, the key is to prepare and execute a carefully structured profit and loss statement. In this article as we review a Hotel P&L sample based o the Uniform System of Accounts for the Lodging Industry (USAL), a rich resource that provides numerous key insights for hotel managers.A hotel profit and loss (PnL) statement provides you with an analysis of your hotel's revenue, cost and profit performance. It helps you understand how much bottom line margin the property is making. Therefore, it is essential for any hotel manager to fully understand each line item of their P&L statement, and where pertinent, how to interpret the data to inform business decisions.Note: You may also see P&L statement referred to as your hotel income statement, profit and loss report, statement of financial results, income and expenses statement, or statement of profit and loss.They are typically carried out on a monthly, quarterly and annual basis. Although the frequency is entirely at your discretion and what you think is best for your hotel, I would recommend to review such a report at least with a monthly frequency to avoid the business moving off beyond control. Larger hotels even provide such reporting on a weekly or even daily basis to really micromanage their financial successThe importance of profit and loss statements for independent hotels1. HIGHLIGHTING CAPITAL FLOWSPeriodic P&L reports are essential for the success of your hotel, as they highlight where your profits are coming from and where your expenses are going. For this reason it is a key tool you want to make data-driven decisions on expenses and revenue at an operational level.2. UNDERSTANDING PRECISELY HOW EACH DEPARTMENT IS PERFORMINGYour P&L statement provides a close scrutiny of departmental performance across your hotel. It also allows you as the hotel manager to analyse this performance compared with your overall and departmental budgets per week, month, quarter or year.The key benefit is that it provides you with insights to identify financial performance weaknesses and strengths. You can then act accordingly to make improvements, such as through cutting hotel costs, enhancing underperforming areas, or investing in new revenue growth streams.The P&L is of course strongly linked to your other two essential financial statements:1. Balance Sheet and Liabilities (A&L) Statement2. Cash Flow StatementThe P&L feeds both these statements. Therefore, its correct and accurate structure, execution and understanding is critical to help small and independent hotels keep a tighter rein on cost control.The simple 5-step plan for an effective hotel profit and loss statement templateImplementing the following four steps will provide a strong foundation from which to develop an effective P&L report:1. Sound management of all revenue operations, producing accurate and timely numerical information for your hotel accounts department (sales figures, expenses and so forth)2. Periodic accounts department preparation of accurate and insightful P&L reports to deliver to management3. Management analysis of the P&L with the purpose of identifying where the hotel is meeting or exceeding established goals / budgets and where improvements can be made. Management must determine the correct course of action to take in order to maximize outcomes, based on the information provided by correct and accurate P&L statements4. Hotel management oversees and implements the previously decided course of action regarding improvements and the resolution of problem areas5. Periodic reviews of the entire P&L workflow process, from drawing up your P&L reports to interpretation and implementation of decisions based on their insights. Rigid commitment to a review process helps you to identify where further improvements can be made and what is and isn't contributing to the provision of value-added data and informationKPIs and elements of a hotel P&L statement:For the specific case of hotels, the most important KPIs to look at in our Profit & Loss statement are the GOP (gross operating profit) and NOI or NOP (net operating income or profit)Working out your GOP (gross operating profit)1. Add the revenue and costs from all operational departments (restaurant, bar, banquets, front office, housekeeping, engineering and others).2. Deduct all the undistributed, fixed and overhead costs to work out your NOI (net operating income) and EBITDA (Earnings Before Interest Taxes Depreciation). This is basically the profit generated from the hotel's own operations.A hotel P&L statement includes the following elements:1 . REVENUE OR TOP LINEThis is typically itemised into individual revenue sources. These include room turnover, food and beverage revenue (restaurant, breakfast, bar, room service), and if applicable, events, activities, spa membership and gift shop income, among other possible revenue sources.Once you have the figure of the total sales revenue, the cost of sale (commissions that are paid to different sales channels, for example to the OTAs ) should be diminished to obtain your gross profit.2. COSTSa) Operational expensesThese are the operational costs for delivering the services of each revenue source, for instance: restaurant, bar, banquets, front office, housekeeping, cleaning, engineering and others.b) Undistributed expensesOverheads such as administration, staff, and property-related costs.c) Fixed expensesThese costs remain constant. They include property tax, property-related costs such as building and/or equipment rental, amortization, depreciation, insurance and the interest to pay on loans or debt, such as from loans, lease and insurance.d) Interest, taxes, amortization and depreciation3. EARNINGS OR BOTTOM LINEDifference of deducting the cost from the revenue. It is also known as net income, profit or earnings.Here's a sample hostel profit and loss statement:1. REVENUE OR TOP LINETo calculate the total revenue generated:Room RevenueFood & BeverageBreakfast RevenueBar RevenueRestaurant RevenueRoom Service RevenueOther Departmental revenue:EventsActivitiesSpaTelephoneGift ShopParking2. COSTSa) Operational expenses:RoomsPayrollCleaningLaundryOtherF&BFood CostBeverage CostPayrollCleaningLaundryOtherOther departments: spa, events and othersPurchasing CostsPayrollOtherb) Undistributed costs:Administration, excluding what has been taken into account already for being related to services of the hotel.Marketing and distribution expenses, you can take into account: cost of commission to OTA, cost of metasearch, marketing expenses and other sales channels costStaff not directly related to rooms, including F&B, spa and events staffCleaningOtherc) Fixed expenses:Property taxProperty rentalEquipment rentalInsuranceBy applying the following formula we obtain our NOI (net operating income) or EBITDA (Earnings Before Interest Taxes Depreciation Amortization):Revenue - Expenses before Interest, Taxes, Depreciation and AmortizationTo conclude with the P&L statement, the final step is to calculate the following:InterestTaxesDepreciationAmortizationThe above sample is of course a simplified version of a hotel P&L statement. Your accounting department may wish to break your own P&L statements down into more detail to aid greater understanding and provide deeper insight.A final wordTo understand your P&L as well as possible, what it boils down to, simply, is this: total sales minus total costs equals hotel profits. While it doesn't need to become complicated, the more detailed your P&L, the better for your understanding and insight regarding overall hotel operability and performance.Any hotel management business that wishes to achieve healthy financial results, should invest a good amount of time to build a well structured profit and loss statement, and review it monthly with the members of the hotel executive and management team. It is a key step to your success!Download your free copy of a sample hotel P&L statement in Excel or PDFAs ever, please let me know your thoughts!Cheers,Patrick Landman @ Xotels

The Importance of Understanding the Profit and Loss Statements.

Hotel F&B·14 December 2018
As CEO of a hotel management company that has generated over €190 million in the last year, I can tell you how important it is to control every detail of your business’s finances, both on the revenue and cost side.
Article by Jasmita Banga

Hotel Market Snapshot: Jaipur

Hotelivate Private Limited ·12 December 2018
Hotel SupplyThe number of hotels in Jaipur has expanded rapidly in the last six years, with the inventory almost doubling and developments no longer being confined to Luxury or Upscale positioning alone. The emergence of branded supply across all categories of hotels offering services at various price-points, supports the rising demand as well as the upswing in the domestic leisure travel to the city. This can be directly linked to Jaipur maturing as a market and its hotels now catering to wider segments than those served in the past.Figure 1: Number of Branded Rooms in JaipurKey Demand SegmentsJaipur has traditionally been dependent on the patronage of higher-yielding Inbound Travellers and Groups has witnessed a slowdown in this demand over the last couple of years. However, Domestic Leisure and Group demand, primarily from Delhi NCR, Mumbai, Ahmedabad and even Bengaluru, has not only compensated for the lower share of foreign demand but also helped reduce seasonality in the business. Moreover, with MICE demand emerging from both corporate as well as social functions, Jaipur now frequently hosts big-ticket destination weddings and large-scale conventions.Catering largely to this demand as well as the leisure segment, the branded luxury and upscale hotels are moving away from the city's buzz and are now opening at the quieter outskirts of Jaipur, especially towards Kukas. While Le Meridien took the lead on this back in 2003, the Fairmont and the newly opened JW Marriott added to the branded space here. There is also a healthy supply of independent hotels in the vicinity, which have established themselves as prominent wedding hotels. Jaipur has traditionally been known as a leisure destination. Hence, while a luxury vacation amidst royal settings can still be enjoyed within the city, hotels like the Alila Fort Bishangarh and the Lebua resorts, with their limited inventories and niche products offer upscale leisure options before you drive into the main city.Lastly, the commercial demand in Jaipur stems from banks and PSUs as well as traditional industries such as gems and jewellery as well as handicrafts and other artisan products. The demand generators driving this Commercial segment, though on a relatively smaller scale, are located in different clusters which include the old industrial areas like Malviya Nagar, Sitapura, Jagatpura as well the various Special Economic Zones and industrial hubs being developed around the city.Figure 3: Three Year PerformanceThe increased domestic demand capture helped Jaipur bounce back strongly, but this pace slowed towards the end of 2016 with the impact of demonetisation on MICE and leisure business. Key hotels within the city like the Rambagh Palace, The Oberoi Rajvilas and Jai Mahal Palace still remain high profile, aspirational to many and what most would relate to when one thinks of hospitality in Jaipur. For most other hotels though, across all segments, room rates have been a struggle and only now are hotels beginning to emphasise on value growth rather than driving occupancies alone. Losing out on the comparatively lower paying corporate MICE has helped some hotels maintain if not drive their rates higher.We do foresee the upward trend in domestic travel to continue in the short term and in fact, gain further momentum as connectivity to Jaipur improves from its various feeder markets. The wedding segment demand here is ever growing and so is Jaipur's appetite for larger conventions. On the supply front, we are currently tracking a small pipeline of projects - of the total new supply stated to enter Jaipur by 2024/25, only about 1,400 rooms are under active development. This is in addition to the existing hotel expansions and we expect it to be easily absorbed by the consistent growth in demand. On account of favorable demand-supply dynamics, our outlook for Jaipur remains positive for the short to medium term.For more information, please contact Jasmita Banga on jasmita@hotelivate.com

Is It Time for National Privacy Legislation?

Hospitality Technology Magazine·10 December 2018
Recently I learned about the Starwood Hotels (Marriott International Hotel Chain) data breach and the approximately 500 million guests that may have been affected, dating back to 2014.

Guest Privacy - It's Your Business

JMBM · 8 December 2018
That obligation has become increasingly complex due both to the vulnerability of hotel companies to breach, and the enactment of laws and regulations, worldwide, that impose additional burdens on hotels - the EU's General Data Protection Regulation, California's Consumer Privacy Act, as well as industry developments have further heightened the concerns with guest privacy and securityThis focus must be seen in the context of two key issues: first, that hotels collect large amounts of data from their guests, both directly and through third parties; and second, that the hospitality industry has a checkered track record in protecting personal information. Both these demand that the hospitality industry take a renewed focus on data securityData CollectionHotels and hotel companies collect tremendous amounts of information, directly and through others, including vendors, credit card companies, websites, use of wifi and other systems. The fact that hotels are increasing reliant on technology - and responsive to guest demands for increased connectivity - increases both the amount of information and the risk involved in collecting and processing information.The increasing incorporation of technology into hotel operations can lead to more breaches. Hotels are seemingly in a race to become more innovative - consider the trend to allow guests to bypass the need to go to the front desk by using their mobile devices to select a room, check-in, receive texts when their room is ready, and even unlock the door to their room. Guests are encouraged to use mobile devices to customize their stay by requesting items, ordering room service, planning activities, or purchasing upgrades. Not only does this trend increase the likelihood of a breach by adding new access points to the system; these programs collect even more data, making a hotel breach more valuable.Hotels are also pressured to expand Wi-Fi networks, share data with OTAs, and proliferate other interconnected systems, making the hospitality industry more vulnerable to a data breach. Each of these factors increases the number of parties that have access - authorized or otherwise - to hotel data, and increase the number of threats to the industry.Breach VulnerabilityTrustwave's 2018 Global Security Report reported that nearly 12% of the incidences investigated by Trustwave originated at hotels - the third largest share of data breaches, preceded only by retail and the food and beverage industries, which share many of the same vulnerabilities. The hospitality industry possesses a number of factors that make them attractive to hackers: large volumes of valuable information, multiple vectors for accessing information, large workforces and dependence on vendors, to name a few. There are, however, a number of trends that make hotels more vulnerable. However, there are other reasons that contribute the frequency of cyberattacks on hotels.One of the key issues facing the industry is the prevalence of outside vendors who provide key hotel functions. Almost every breach involving hotels that have been reported over the past several years generated not with core hotel functions - check-in and check-out, reservations, etc. -- but from companies engaged by hotels to provide services to the hotel. Virtually every major hotel chain has suffered a data breach through point of sale merchants - each of Hyatt, Marriott (and before its acquisition by Marriott, Starwood), InterContinental, Hard Rock, Four Seasons, Trump and Loews has reported at least one breach in the past two years, and many have reported multiple breaches.Third parties are a common source of breaches for many industries, but the hotel industry is particularly reliant on third parties for many functions. In addition to credit card processing, hotels look to third parties for reservation services, payroll, human resources, asset management, maintenance and improvements - many hotels have determined that third parties are better qualified to provide specialized services, and thus have access to hotel systems. Many hotel companies have not fully recognized the need to monitor vendors and require them to implement adequate secure standards.It is not surprising that hotel brands are particularly vulnerable. Brands often select vendors for multiple properties and often for an entire flag. Individual hotels may have little, if any say, in the vendor, the terms of engagement, and the impact of a breach. Moreover, even when a weakness is discovered, the cost of remediation may be untenable - a security breach involving key-operated door locks required the replacement of almost every door lock in the United States! At the same time, under the typical hotel management or franchise agreement, the hotel owner is required to bear the cost of a breach, whether in terms of direct costs (including notifying potential victims and the increased cost of cyber liability insurance) and the indirect cost of diminished trust in the hotel.The widespread dependence on third party vendors is a greater problem because hotel systems are widely interconnected. To follow up on the point of sale example, these vendors must tap into basic hotel systems in order to allow for room charges and financial reporting. Hotel operators want and need single point access to hotel operations, meaning that information from separate systems must be accessible and shared by a variety of systems. Even where direct access is limited, varying systems may share a single hotel network, and often a wireless network; the network itself has the potential of breach, which can impact all systems. Ultimately, hotels face the dilemma that the system as a whole is only as strong as its weakest link, and a single vulnerability may expose the entire system.A variety of other factors exacerbate the vulnerability of hotels:Multiple Systems. Hotels use a variety of different systems for operations, ranging from off-the-shelf, commercial programs to specialty programs. Each of these programs presents the potential for breach and, as noted above, a single weakness can create a weak system. Moreover, the transfer of information from one system to another is, in itself, a source of weakness.Legacy Systems. Along with the existence of multiple systems, many hotel systems are legacy systems that were never designed with security as a key element. Legacy systems are a particular weakness.Unclear Lines of Responsibility. As the hospitality industry has developed, there is rarely a unity of ownership and management; instead, most hotel properties are owned by one party, which has entered into a franchise agreement to operate under a particular brand, and managed by yet another company. While each of these entities shares responsibility for data security, it is often unclear who is ultimately responsible - it is the manager, who operates the hotel, the franchisor, who selects or approves systems, or the owner, who has financial responsibility for the venture? The lack of precise responsibility can lead to a vacuum in leadership.The Human Factor. Hotels rely on large numbers of employees, many of whom have access to hotel information systems. Most data breaches can be traced to individuals, whether acting maliciously, negligently or with complete innocence, and training hotel personnel is time-consuming and expensive. Added to this, many hotels have high turnover rates and uneven training in privacy and security, further complicating creating a culture that promotes security.What Should Hotel Companies Do?While creating a secure environment is a daunting task, hotel owners and operators can and should begin the process, and the most important thing owners can do is to take responsibility for the security of the properties they own. Rather than leaving the issue to franchisors and managers, all involved should take actions that will start the process of creating a data secure environment.Take Control. Cybersecurity cannot be relegated to a single party; owners, operators and brands all need to take an active role in reducing cyber risks. Even where one party might contractually assume responsibility for security, all parties must conduct their operations so as to promote security. If a franchisor establishes effective security guidelines, it does no good if the manager ignores those guidelines. Taking control means conducting a detailed risk analysis of your enterprise, and determine what risks must be avoided, what risks can be assumed, and what risks must be shifted to other, including insurers. With that analysis in hand, a company can make realistic business decisions that reduce cyber risk.Prepare for the Inevitable. It is often, and accurately, said that a data breach is a matter of "when," not "if." With that in mind, all parties should be prepared to react to a breach by having a well-constructed and tested incident response plan in place - reacting in the midst of an emergency is ineffective and counterproductive. Similarly, in light of the prevalence of ransomware, wiperware and other threats, firms need to have robust and effective backup programs that allow them to recover and protect their guests, employees and properties. Finally, preparing for the inevitable means identifying means of mitigating damages, which must include obtaining effective cyber insurance that addresses and covers the actual damages hotels face.Respond to Breaches. Much of the criticism of hotel companies has been not just to the perceived insecurity of their systems, but to delays in responding to breaches. The Hyatt and Hilton incidents noted above, as well as the FTC's action against Wyndham, are all based on failure to take the existence of breaches seriously. Hotels, like all companies, need to have in place and have tested effective incident response teams and plans, including identifying all internal and external sources (attorneys, security consultants and public relations, among others) who will respond to a breach.Create a Culture of Security. Probably the hardest task, but arguably the most important, is to create a top-to-bottom culture of cybersecurity. Every individual in the organization, and every affiliate and third-party vendor, must take the task of cybersecurity seriously, and take on the responsibility of creating a cyber secure environment.A New Legal LandscapeWhile the hospitality industry continues to grapple with data breaches and the vulnerability of existing systems, recent legal developments in Europe and in the United States will have require hotel companies to re-evaluate how they collect information, how they process it, and how to comply with varying and conflicting requirements.GDPRThe European Union adopted the General Data Protection Regulation (GDPR), which became effective on May 25, 2018. The GDPR is a watershed event that will impact every business that collects personal information, wherever located, and it is likely that no industry will be more impacted that the hospitality industry. Other companies can choose not to do business with EU citizens; some companies have determined that it is impossible to comply and have actually closed. That is not an option for hotels. Hotel companies need to understand the goals and requirements of the GDPR. The nature of hotels and the various data holding sources such as OTA bookings and PMS systems escalate the regulation for travel and hospitality industries.The consequences for non-compliance can be extreme: The maximum fine that can be imposed for serious infringements of GDPR is the greater of EUR20 million or four percent of an undertaking's worldwide turnover for the preceding financial year. There is only limited experience in enforcement actions under GDPR, and those experiences have been inconsistent. No one knows yet how European regulators will apply GDPR it to firms based outside the EU, but there are already public interest groups that are targeting multinational companies, and it seems likely that there will be some fallout.GDPR is based on general principles, which allow leeway - and confusion - for companies. The rules of the road are likely to become clearer as the regulation is implemented, but for now, each company must make hard decisions. GDPR requires that an organization both comply with its principles and document compliance. It is more than just adopting a new privacy policy; it requires concrete actions, and recording those actions.And GDPR is not the end of the story. The EU is actively pursuing the adoption of an "ePrivacy Regulation." The e-Privacy Regulation will, in many respects, go beyond GDPR and create additional challenges for companies that have contacts in the European Union.CaCPAThe California Consumer Privacy Act of 2018 (CaCPA) addresses many of the concerns and requirements of GDPR. Companies that take prompt action to comply with the California Act and the GDPR will likely gain a substantial advantage over competitors who wait. While CaCPA has already been amended, and while there are a variety of attacks CaCPA that create uncertainty, businesses need to consider immediate steps to avoid the significant penalties for non-compliance. Businesses must be in full compliance on the effective date of January 1, 2020. It will not be adequate to start compliance efforts on that date.Addressing both the GDPR and CaCPA requires new policies and procedures. Hotel companies need to take initial steps to ensure compliance by creating a standardized approach for handling consumer requests for personal information; develop procedures for responding to consumer requests and data collection and processing tracking procedures to understand what data is collected, where it resides, how it is maintained, and who is responsible for it. Importantly, hotels will need to analyze the legal basis for collecting and processing personal information - businesses will need to explain their legal rationale for exemptions to the consumer's right to have their information deleted.Finally, each hotel company must review its public-facing website disclosures, including adding a description of consumers' rights under the Act, listing the categories of data collected and a conspicuous link titled "Do Not Sell My Personal Information."The hospitality industry is facing both continuing challenges protecting the personal data of guests, as well as grappling with a new legal landscape. Companies need to recognize that while the trials are great, success will create trust in the industry's most important commodity - its guests. A comprehensive approach can give companies the chance not only to confront these issues, but create brand value in doing so.Reprinted from the Hotel Business Review with permission from http://www.hotelexecutive.com/

I feel sorry for Marriott...

Pertlink Limited · 4 December 2018
THAT'S AWFUL - but in all honesty, it was an accident waiting to happen.All of the major robberies, and with this I include hacks who embark on unapproved removal of an asset - successful or failed, have focused on BIG targets - whether it be the US elections, Beyonce's jewels, banks, Brinks trucks, the Royal Mail train in 1963, UBER, Hyatt, Target, Home Depot, Cathay Pacific, Dunkin Donuts, USPS, DELL, EMC, Yahoo, or an Apple Store. These are all high-profile targets which have been like honeypots to these felons. Marriott, which now includes Starwood, has grown so huge, it inadvertently put itself firmly and squarely in their sights and became a sitting target. It was really just a matter of time before the inevitable happened - and they would be hit.Sadly, but not surprisingly, we live in a world which is also unfortunately populated by people with malicious intent who either do this for kicks or are commercially driven based on the potential value of the data which can be sold or exchanged for crypto on the dark web. One may even be tempted to classify this event as an act of cyberterrorism or espionage. And let's not forget the lawyers - the wolves at the door [aka Ambulance chasers], just waiting to lay stake to a class action claim. It's a sad reality - and so I feel sorry for Marriott.As a Consultant to the industry, [and in full transparency, I have done work for Marriott so I have had a close perspective on how they operate], I know for a fact that this hotel group and so many other companies go to great lengths and expense to exercise duty of care and use their best endeavors to protect the data given to them for safekeeping so they can provide the best services to their clients. They constantly implement and update hardware defenses, employ tokenization and various encryption protocols for PCI DSS compliance as well as perform extensive vetting of software and hardware vendors, hosting/cloud providers and employees who handle the data. And while we are on the subject of vetting perspective vendors, look at the recent hoo-hah surrounding Huawei and the position some governments took in regards using them for their 5G data networks.Some of the data collected by hotels are for Government compliance, and some for marketing purposes - but the overarching reason is to provide great personalized service. The heavy burden of keeping that data safe is only compounded by government legislation imposed in certain countries and jurisdictions, which add yet another layer to the firewall - one of those being the recent GDPR [General Data Protection Regulation] introduced in Europe on 25th May 2018. I'm very sure more jurisdictions will follow to include the Cybersecurity laws of China, and who knows what Brexit may bring if they install physical borders for the movement of people, then it's almost foreseeable, data flow controls will follow.But the inevitable reality is that there will be individuals, corporations, some possibly state-sponsored, lurking in the dark with evil intent. Do you really stand a chance against them and their specialized tools? As fast as the security device companies find a new way to secure or encrypt data - someone cracks it with some kind of wizardry or an even bigger hammer. We've seen many instances where companies such as Apple have released a new version of a software, only to have it cracked the next day - and so the process of closing that breach has to happen with panic-stricken Elves working overtime. Don't kid yourselves, this is a full-time problem internally and externally - akin to shoring dikes when flooding occurs. Once you sandbag part of the wall, another crack appears and so on.For the last forty years, hotels have, albeit gradually, embraced technology to help process, control and digest the enormous amounts of personal and transactional data that passes through its walls with one major element being Central Reservations [CRES] often with GDS connections. Some of these systems have been around for a very long time and could probably do with an upgrade - maybe utilizing Blockchain. When people make bookings - we use that data to allocate accommodation, provide various services, and associated logistics. The technology came with a promise to make things better - it was to enhance manpower, provide faster and more accurate access to data, and let's not forget, deliver personal service - every Hoteliers dream, by matching the guest's expectation. However, when you collect something valuable like terabytes, petabytes or even zettabytes of personal data about people - that's such an attractive honeypot.I am hopeful that the data forensics team will comb throughany crumbs or fingerprints that may have been left behind -and do whatever it takes to seek out and bring the infiltrators to justice.One has to ask oneself - Is there a solution? Well, I for one, don't have an answer for this - I suspect though it will get worse before it gets better, and that's a sad fact also. The more data we expose, be it to places like Hotels or on Social Media, the more likely it will be targeted and used for dastardly purposes and so I repeat myself when I say, "I feel sorry for Marriott" and I can feel other hoteliers thinking - "there but for the grace of God, go I".But as is often the case, we need a disaster to happen before things get fixed and so hopefully, this will be a loud enough wake-up call for technology suppliers, governments and industry bodies to find a solution. And to these entities - I throw down my gauntlet 4th December 2018

What Is Leadership?

The Hotel Financial Coach · 4 December 2018
Leadership can be a confusing application. Just google leadership and you will get so much information it can make your head spin. I am going to try and simplify the definition of leadership in this article. I am writing this because I believe the idea of leadership and how it's applied is very straightforward and quite practical when its used effectively. I also know that when a person has a clear vision of what's required to move ahead, the trip speeds up.I have learned, over the past 35 years in the hospitality industry, that leadership is about two things. These two things are communication and development. We don't need a longer list because these two nouns encompass everything we need when it comes to being the person who leads in their world. This being is an important distinction from the typical doing part. I learned much of this from the people I have worked with, some great examples and some rather poor ones too. Let's start at the beginning with communication. Being an effective communicator means you are faultless with your words. This ideal is one that will separate you from the field. Every word you say, in every conversation, with the entire universe, forms your personal DNA. If you say disparaging things about another person or situation, that's how you will come across. Make promises or commitments you don't honor, and you instantly and forever lose credibility with your network. As a leader, being able to communicate effectively boils down to being a positive influence in any situation, making a positive environment even better by adding to the situation in a positive way. Even more importantly, don't jump on the negative wavelength and perpetuate the gossip or the complaining. Find the good in everything. My mother would always say, If you have nothing good to say, then say nothing at all. This is what she meant: when you repeat something negative, everyone in your world sees you as part of the problem, not part of the solution. To be a good leader, be the one who has a solution or an idea that can move situations/problems in the right direction. Don't follow the sinking, smelly ship of complainers and criticizers. Try this the next time you are in a business conversation. Replay what you said and ask yourself, Did I contribute anything positive to this situation or was I also negative? Either way, its just a habit and being aware is the first step to correcting it.The other side of communication is what you are talking about. Its critical that the people you lead get the essential information they need to make the best decisions. Talking about the core values mission, strategy, competition, innovation, and numbers is important. But speaking to the individuals wants and desires is essential! Again, don't blame the home office when you get some tough assignments. Find a way to make it a positive challenge. Just thinking how can we pull this off and still make our numbers this quarter is so much more empowering than the office version. They would have you marking your spot with a diatribe of superlatives directed at those clueless people from head office. They have the nerve to say they're here to help. Going down the path of being a victim is not what will motivate people. Having the can-do attitude is the formula that is required. It does not mean you're not realistic with your team, but it does mean you are the one they can count on for a positive direction toward the situation, ALWAYS!.As a leader, developing your staff/team is a way to move forward. The more you work on bringing others up onto the stage, the greater the impact you will have. People want to work and be involved with organizations that are going to help develop them, especially in hospitality where the competition for talent is so narrow. What you do to help people succeed in their own careers is the difference a good leader has on their radar every day. The key to your leadership success is your team continuously growing with personal prosperity! It's that simple. There is a saying that I use often at my speaking engagements: If serving is beneath you then leadership is beyond you. Serving your team is a tough pill for many to swallow because we think its the other way around. We typically come out of the box in our leadership positions and think that I'm the boss and people need to listen to me, they need to serve me. This is the wrong approach, and it will not work effectively. Sure, having your expectations and layering in some fear with your team sounds like the classic recipe for leadership, but its the cowards way and it's not effective...Developing your people means serving them. Service in this medium means helping people succeed. Don't get all squirmy at the idea of service. It does not mean you are laying down and abdicating your role or responsibilities. Your service delivery is, first and foremost, accomplished by your communication. Someone comes to you with a problem and you don't tell them what to do. What you do is help them find their own solution. The result is so much more powerful if it comes from them. It's just your communication delivery that accomplishes this. Ask great questions and don't give orders and directions. Another powerful way to communicate is to become good at making agreements. The flip side of the agreement is the ugly cousin from out of state: the expectation.Leadership is about helping others succeed. You accomplish this by being impeccable with what you say and always putting the team's needs and development above your own.
Article by Michael C. Sturman, Demian Hodari and Michael J. Turner

Agree to Agree: Aligning Hotel Owners' and Operators' Goals

EHL · 3 December 2018
Hotel owners increasingly rely on hotel management companies to operate their hotels through formalized hotel management agreements (HMA). Separating ownership and operations supposedly benefits both parties: owners are able to invest in hotel real estate and access the professional operating expertise of hotel management companies, while operators can generate important income streams, expand any brands they may have, and earn profits, all without having to invest in the underlying real estate.Although both parties have a vested interest in the hotels success, their different sources of income, risk profiles, and investment strategies mean they often have different interests, which may lead to misaligned and possibly even conflicting goals.For example, because the vast majority of an operators fees are derived as a percentage of the hotels sales, owners are concerned that operators may focus on increasing sales rather than profits.Operators are also strategically focused on the reputation of their brands and their hotel-level decisions may support this at the owners expense.In addition, operators tend to emphasize customer relationships and long-term success of their business, while owners are more likely to have a short-term focus that emphasizes payback and returns.Furthermore, because operators rarely (if ever) share in the owners profit from an eventual sale of the real estate asset, their decisions may not be aligned with increasing the assets value, even though this is of paramount importance to owners.The risk for owners, therefore, is that an operator, although acting as the owners agent, may in fact be tempted to act in ways that are not in the owners best interests. This is why owners spend considerable resources to monitor, control and/or influence the management companys decisions and actions, including hiring asset managers.While management companies often point out that an HMAs incentive fee clause helps align the two sides interests, as they only earn profits when they generate these for owners, past research has shown that hotels rarely generate such incentive fees.This implies that such hotels are not, for the most part, generating the profits necessary for owners to pay incentives to the operators. While there could, of course, be extenuating circumstances impacting a hotels performance, the general lack of incentive fees suggests that owners may seek other ways to align management companies interests with their own.Given the growth in hotel management agreements, and their importance to both owners and operators, we were surprised not to find any research examining the actual goal alignment of owners and operators once the agreement had been signed.We thus set out to study the degree of owner-operator goal alignment.Furthermore, while greater alignment might suggest a more unified vision for the hotel, it does not necessarily mean the property would perform any better. In fact, less alignment could possibly mean that the management company, which has professional management expertise, might be operating the hotel optimally, even if not in line with the owners goals.We also looked at the relationship between goal alignment and hotel performance.We investigated these questions though a unique survey where we matched the answers of owners and management company representatives in 64 different hotels.Specifically, we examined their level of agreement about the priority of 21 different objectives over the coming two years and across five functional areas (Human Resources, Finance, Sales and Marketing, Property, and Operations).Hotel performance, meanwhile, was measured by the owners who rated 16 different aspects of performance related to the five functional areas.Our statistical analyses involved two parts. We first used correlation analyses to look at overall effects. We then used a series of regression analyses to look at the effects of alignment on hotel performance after putting in place controls for alternative explanations that could have arisen from property, individual and/or situational characteristics.Overall, the goal alignment we discovered was, on average, 3.31 out of 5 (where 5 indicated higher alignment). While it can be difficult to interpret the substantive meaning attached to averages, an average only somewhat higher than the mid-point (as is the case here) suggests a moderate degree of goal alignment amongst the sampled hotels. The average level of hotel performance was 4.29 on a scale of 1 (low) to 6 (high). Although there was a relatively wide range of performance scores (from 1.44 to 5.81), the results suggest that our sampled hotels were, overall, performing reasonably well.More importantly perhaps, we found that goal alignment was significantly correlated with hotel performance. In other words, the greater the goal alignment, the better the hotels performance. In order to eliminate some possible explanations for this relationship, we controlled for the effects that some other variables, such as the GMs experience, the presence of an asset manager, and the hotel size could have on its performance. We found statistical evidence confirming that alignment does in fact have a positive effect on hotel performance.Our results therefore suggest the need for owners and management companies to agree upon a core set of common goals for their hotels, as such alignment is linked to superior operating performance. While each party will clearly have its own objectives, an ability to align these will end up better serving each party as superior operating performance should ultimately result in higher fees for most operators and higher asset valuations, as well as returns for owners.Researchers and practitioners often recommend that, in order to create a win-win situation, owners and operators need to consider and agree upon a wide variety of issues in the negotiation of management contracts. While we unequivocally agree with this sentiment, it may be even more beneficial for hotel owners to, first, spend as much time and resources on selectingthe right hotel operating company and maintaining the relationship after the contract has been signed.This may mean selecting a company whose vision and goals for the property are well aligned with their own or one whose goals and vision are different but enticing.This is important because goal misalignment has often resulted in costly legal battles involving, among other things, accusations of management companies not fulfilling their responsibilities as owners agents. Owners are thus advised to have detailed discussions with different management companies, not only to ascertain their analyses and plans for the hotel, but to compare these with their own.An owner may, as well, realize from these discussions that it should in fact defer to the management companys plans, which could in turn also help align their objectives.We thus also suggest that management companies fully commit to ensuring that their hotels owners not only know managements plans for the property, but also the underlying reasons for these decisions, as this may help achieve owner support. A healthy discussion should hopefully lead to better and more aligned objectives, which should benefit both parties and help ensure a better long-term relationship.FULL PAPER: Hodari, D., Turner, M. and Sturman, M. (2017). How Hotel Owner-operator Goal Congruence and GM Autonomy Influence Hotel Performance.Acknowledgements: This study relied on the support of the hotel owners and members of the Hospitality Asset Managers Association (HAMA) of Asia Pacific, Europe and the Middle East & Africa, the European Hotel Managers Association (EHMA), and The Master Innholderswho graciously provided the data used in this study.
Article by Michael J. Turner and Demian Hodari

How Important is Strategic Management Accounting to Hotel Managers?

EHL · 3 December 2018
While hotels have long used traditional management accounting practices, their use of contemporary strategic management accounting (SMA) techniques has not been as widespread. As researchers, this intrigued us because studies conducted outside the hotel industry had found that the relationship between firm strategy and firm performance was significantly enhanced through the use of SMA techniques.In our recent publication in the International Journal of Hospitality Management, we set out to determine which type(s) of hotel strategy act as the key precursor(s) of hotel property SMA use, and whether the use of SMA had a positive impact on hotel property performance.So what exactly are Strategic Management Accounting (SMA) techniques?At the hotel property level, they involve the collection of long-term, externally-focused and forward-looking information for the purpose of:Customer profitability analysis - involves calculating profit earned from a specific customer or customer segment. The profit calculation is based on costs and sales that can be traced to a specific customer or to a specific customer segment;Benchmarking - the comparison of company performance to an ideal standard;Competitor cost assessment - the provision of regularly-scheduled and updated estimates of competitors unit costs;Strategic pricing - the analysis of strategic factors in the pricing decision process. These factors may include: competitor price reaction, elasticity, market growth, economies of scale, and experience;Value chain analysis - involves viewing the organization as a link in the chain of all value-creating activities;Integrated performance measurement - a measurement system which focuses typically on acquiring performance knowledge based on customer requirements and may encompass non-financial measures. This measure involves departments monitoring those factors which are critical to securing customer satisfaction;Competitor performance appraisal - the numerical analysis of a competitors published statements as a part of an assessment of a competitors key sources of competitive advantage;Attribute costing - of specific product attributes that appeal to customers. Attributes that may be costed include: operating performance variables, and after sales service; andStrategic costing - the use of cost data based on strategic and marketing information to develop and identify superior strategies that will produce a sustainable competitive advantage.To conduct our study, we gathered data via a survey from 80 hotel properties.Our primary finding was that the key precursor to hotel property SMA usage is a hotel propertys adoption of market orientation business strategy; and where this is the case, superior hotel property financial performance was in evidence.So what exactly is a market orientation business strategy?A hotel which adopts this type of business strategy will tend to operate in a highly competitive market, and therefore puts their customers at the center of their strategic and operational thinking. To implement this strategy, the hotel will need to gather market information related their target customers needs, as well as of their competitors capabilities, to deliver superior customer value. Knowing this will enable the property manager to discontinue product offerings that add no value, and to include only value-added services.Realizing that in a competitive environment, competitors capabilities and target customers needs are in a constant state of flux, there is often a feedback loop and learning is essential. The focus is on offering only those products for which customers find value and are willing to pay. We find that the information generated through adoption of SMA techniques assists managers with these needs, and they enjoy superior hotel property performance.Sales orientation business strategyOn the other side of the constellation is the sales orientation business strategy. A hotel which follows such a strategy will usually only do so where they compete in a market with a low level of competition. Hotel managers are able to offer their product to the market in way that is somewhat divorced from or at least shows little correlation with customer and competitor considerations. Management considers that there are few, if any, alternatives for customers in their market and so they see little merit in expending the resources and effort needed to gather competitor or customer information (e.g., through SMA). Instead they are able to set a price up to the maximum customers are willing to pay. Our findings suggest that the further a hotel moves away from a market orientation business strategy, the less benefit there will be from adopting SMA techniques.Hospitality industry: highly competitive industryIn summary, while there may remain some locations globally where hotels operate in less competitive markets, the overarching trend is toward hotels facing higher levels of competition. Where there is greater competition, there will be a need for hotels to adopt a market orientation business strategy, and our findings highlight that such hotels will be unequivocally better off in terms of superior hotel property performance by adopting SMA. This article is based on the following research paper:Turner, M. J., Way, S. A., Hodari, D., & Witteman, W. (2017). Hotel property performance: The role of strategic management accounting. International Journal of Hospitality Management, 63(May), 33-43.Access paper here
Article by Bob Braun

Not a Good Day for Marriott

JMBM · 2 December 2018
Data breaches are back in the news, and this time, its a well-known hotel industry player: Marriott International. The company announced today that unauthorized access to their systems going back several years has exposed the names and other personal details of over 500 million guests. For hoteliers, this situation can be avoided by using the Global Hospitality Group Risk Assessment Audit, a comprehensive tool that combines your internal resources with our expertise in analyzing your risk profile, both for compliance purposes and to create effective data security strategies. Bob Braun, senior member of JMBMs Global Hospitality Group and Co-Chair of the Firms Cybersecurity & Privacy Group, sums up what Marriott is facing and what lessons other hotels can learn from this incident, below.Not a Good Day for Marriott | by Bob BraunIts unlikely that anyone in the hospitality industry perhaps anyone who watches the news hasn't heard about the data breach at Marriott. Marriotts pre-eminent position in the hotel industry, and the very size of the breach, with an estimated 500 million individuals impacted (putting it second behind the Yahoo breach) make this noteworthy.What Happened?While some of the information is available, most of the details have yet to be filled in. However, there are some key takeaways that every hotel owner, operator and brand should consider:First, this breach dates back more than 4 years, to 2014, prior to Starwoods acquisition by Marriott. This highlights a key problem with data breaches in general, and a particular problem for the hospitality industry: data breaches are difficult to discover, creating not a one-time problem, but a continuing issue. In this case, Marriott reported that the intruders encrypted information from the hacked database, possibly to avoid detection by any data-loss prevention tools when removing the stolen information from the companys network, further complicating the discovery and analysis of the breach.Marriotts statement also detailed the information that was compromised, which it said includes some combination of name, mailing address, phone number, email address, passport number, Starwood Preferred Guest account information, date of birth, gender, arrival and departure information, reservation date and communication preferences. The theft of this information raises the possibility of creating significant damage to individuals, and its ramifications will be felt for a long time.One concern that needs to be considered is that Marriott was aware of potential issues at Starwood. Just after Marriotts acquisition of Starwood, Starwood disclosed a breach involving more than 50 properties. According to Starwoods disclosure at the time, that earlier breach stretched back at least one year to November 2014.As we have noted earlier, while the size of this breach is breathtaking, Marriott is not alone. Virtually every major hotel company (and many smaller brands) have been impacted by breaches. This highlights that hotel companies are an attractive target, both for the vast amounts of information they collect, as well as systemic issues (multiple legacy systems, extensive use of vendors, and a variety of access points).There will be a significant cost to this breach, including both direct costs (including breach notification and remediation, responding to regulatory and private actions) as well as reputational costs, translating into potential loss of business. And hotel owners operating under Marriott brands will undoubtedly bear at least part of the cost, as Marriott implements new policies, procedures and systems, and as consumers reconsider the security of Marriott systems.Industry ChallengesThis breach comes at particularly sensitive time, as privacy laws in the United States and abroad are becoming increasingly strict. Marriott will have to report and consider its obligations not only under United States laws which are fragmented, and will include virtually every state, as well as the federal government but also the impact of the European Union General Data Privacy Regulation, which itself is enforced by a variety of data regulators. Beyond this, other countries ranging from India to Canada to China and Russia have varying regulatory schemes which Marriott must address.What Do Hoteliers Need to Do?The Marriott data breach, however it ultimately plays out, should be a wake-up call for the hospitality industry. Owners, operators and brands need to create effective and comprehensive policies, procedures and systems to address an increasingly dangerous data environment. Existing processes often a patchwork of uncoordinated documents simply will not work in todays new environment, which demands attention not only to the ever-increasing sophistication of hackers, but also the adoption of new laws and regulations that impose greater responsibility, and impose greater potential liability, on the collection, retention and use of personal information.The JMBM Global Hospitality Group has joined with the JMBM Cybersecurity and Privacy Group to offer a Risk Assessment Audit and cybersecurity protocols geared specifically to the hotel industry. The Risk Assessment Audit is a comprehensive tool that joins together your internal resources (including information technology, information security and corporate governance) with our expertise in analyzing your risk profile to create an inclusive suite of findings, recommendations and strategy, both for compliance purposes and to create effective data security practices. For more information, contact Bob Braun at 310-785-5331 or rbraun@jmbm.com.

Hospitality Financial Leadership Going Down The Road - Part 1

The Hotel Financial Coach ·28 November 2018
This title belongs to a classic 1970 Canadian movie about two guys from Nova Scotia, Joey and Peter. They moved to Toronto to seek their fame and fortune. As luck and the writers pen would have it, they found little of either. My story is about my trip from New Brunswick to Alberta, my version of trying to make a go of it in the big bad world.It was 1983 and I had finished two years of hotel school and two years of working at the resort in my home town. My position both summers and winters was working in the bar and then I became the hotel receiver for my final summer. Upon finishing my final year of hotel school it made sense to move out of the bars into a real job." The advice from my culinary teacher when discussing this idea was sobering. He said, You're no different to any potential hotel when it comes to getting hired. Your hotel paper means nothing." He continued, "What will set you apart is how you show up to the job interview and what difference you can make." I thought at the time he was mean spirited, but I now know how true his words were.I applied for two positions: one at the front desk and the other in stores and receiving. I knew the Controller and his assistant because they helped me during the winter months with my supplies, time sheets and deposits. During the two winters I worked there, the only position available in the hotel was in the bar, aptly named Sir Williams." In early April, I learned I would become the receiving and storeroom clerk during what was most likely my last summer in my home town. Because my home town is a resort town, only busy for the warm months, I knew I had to make a move if I wanted to kick start my hotel career into second gear. Staying in my home province was not likely as there were just no year-round jobs as everything was seasonal.The new job was great. I learned a lot about food and beverage products. I was exposed to food preparations that I had never seen on my plate at home. My typical day started with filling the requisitions from the main kitchen, loading up the carts and then delivering them to the main kitchen. There was always some politics around the delivery." My boss, the Food and Beverage Controller and the Purchaser, told me it was the kitchen's responsibility to pick up the carts from the storeroom, but the Chef told me it was my job to deliver the food to the kitchen. Well, two things won the contest. One, the Chef said, When you're done with the morning orders, go see the ladies in the pantry and they will feed you! The second part was just how nice the pantry girl was. Free food, good food and a pretty smile was a small exchange for the trip up the elevator.I learned about the cardex system and the month-end closing process. Albert, the F&B Controller, taught me how to calculate the food and beverage costs.Step 1: Opening inventory plus purchases.Step 2: Subtract the closing inventory. Step 3: Subtract any credits (like cafeteria and bar food).I worked from 6.30 am until 3:00 pm with a half hour break for lunch. The mornings were spent on the food side and the afternoons on the beverage side. Mornings consisted mostly of delivering food to the kitchen and receiving food from several suppliers at the back door of the hotel. It was the same door the staff used to enter the hotel. Incidentally, I was also directly across the street from the General Managers house.One aspect of the job that I found very interesting was the weekly visit from the General Managers wife. You see, she got most of her groceries and all of her beverages from the hotel. She would show up and "go shopping" in my storerooms, which consisted of a huge walk-in refrigerator/freezer and a dry goods storage room. She would supplement her shopping with me. She would give me a grocery list, which she also delivered to chefy for all the items she needed that were too bulky to remove from my storerooms. The requisition she gave me for the liquor, beer, wine and minerals was impressive. When the "shopping" was done it was also my job to deliver the goods to their house. I didnt mind this one bit as the GM had two daughters who were always happy to help unload the cart.Having this inside look at how the hotel subsidized the General Managers household was fascinating stuff for someone as green as me, especially at month end when the head controller would come by to review the month-end cost calculations. He was most interested in the "credit to cost" for the General Managers house. I remember the first month the head Controller asked to see the copies of the beverage requisitions. I also remember how the discussion between him and the cost controller was quite interesting given the rather large sum of dollars being delivered across the street. The controller was questioning the accuracy of our figures, but not for long as he looked at the requisition book and it revealed the quantities and description of the items being ordered.You see, it was part of the deal, in those days, to provide the GMs household with food and beverages. The problem was this cost needed to be reported to the owners and to corporate. Politics being what they were, having such big dollars to run the GMs house must have been a problem. I am not sure at all what happened on the books, but I am sure that my part was not the end of the story.The summer I spent as the storeman and receiver was a great education. I think I learned more that summer than I did in two years of hotel school. Midway through the summer the Personnel Department (thats what we called people resources back then) would post available jobs from other hotels on the information board. There was no email, the fax machine was just a toy for the elite and the video cassette recorders, beta and VHS, were still battling it out. Heck, CDs were not even on the scene yet. As the summer went on, the job postings were the topic of a lot of "after work and evening" beverage debates. All of my hotel friends were in the same boat as I was, just trying to figure out the next part of their migration. We had all spent the summer out east and our next move was to head west to the mountains and the ski resorts. That was the path most of us were looking toward.Applying for several jobs, I was disappointed to not receive an offer until mid-September. It was for a job at the biggest resort as a dining room busboy. My schooling, the two years of experience in the bars and the Receiving Department, didnt amount to anything when it came to my next job. I was upset and those "mean spirited" words of my culinary instructor came back hard. He was right, my college training and even my work expertise didnt mean crap. I was back at the bottom of the ladder.

JMBM Announces Sale of Marriott Warner Center Woodland Hills

Hotel Law Blog | By Jim Butler·26 November 2018
The Global Hospitality Group® of Jeffer Mangels Butler & Mitchell LLP is pleased to announce the recent sale of the Marriott Warner Center Woodland Hills. Located in the Warner Center business development in Woodland Hills, CA, the 478-room hotel sold for over $100 million. JMBM represented the seller in the transaction.

Hotel Technology Tax Incentives

mycloud HOSPITALITY·25 November 2018
R&D Tax Savers firm members had the distinct pleasure of presenting on hotel EV charging stations at the HX: The Hotel Experience trade show on November 12 to 13 at the Javits Convention Center in New York City. EV Charging is one of the many newer technologies installed at hotels on a national basis. The hotel industry is at the center of technology improvements and 61 percent of hoteliers plan to increase technology spending from prior year amounts. Hotel owners and hotel project designers are eligible for R&D tax credits for their technology initiatives.

HVS Hotel Development Cost Survey 2017/18

HVS ·22 November 2018
In 2017/18, the national lodging market continued to climb to new heights. In 2017, hotels in the United States operated at the highest occupancy and average rates ever recorded, with additional growth across both metrics in the 2018 year-to-date period. Hotel development activity correlates directly with the ebbs and flows of hotel-sector performance. As the market continued to reach a new peak for the current development cycle in 2017, developers pursued hotel construction and redevelopment at a pace not seen since 2006 and 2007, and the pipeline of new hotel projects gained momentum. HVS has tracked hotel development costs for the last three decades, collecting data from actual hotel cost budgets during our assignments. This year's sample reflects the largest sample HVS has analyzed given the number of hotels in the pipeline, as well as our growing presence in 40 U.S. markets. This 2017/18 survey reports per-room hotel development costs based on data compiled by HVS from hotel projects proposed or under construction during the 2017 calendar year. With the availability of more data, we elected to add a redevelopment category to account for projects that did not include ground-up construction, such as those that involved a complete renovation, conversion, or adaptive reuse. Thus, our data now reflect ten product categories: budget/economy, limited-service, midscale extended-stay, upscale extended-stay, dual-branded, select-service, full-service, lifestyle/soft-branded, redevelopment, and luxury hotels. The HVS Hotel Development Cost Survey sets forth averages of development costs in each defined lodging product category. The survey is not meant to be a comparative tool to calculate changes from year-to-year, but rather, it reflects the cost of building hotels across the United States in 2017. As will be discussed, the averages set forth in this survey are greatly affected by the types and locations of hotels being developed at this point in the development cycle. Our goal in sharing this publication is to provide a basis for developers, investors, consultants, and other market participants in evaluating hotel development projects. Given that development costs for hotels are dependent on a multitude of factors unique to each development and location, this report should not be relied upon to determine the cost for actual hotel projects or for valuation purposes, but rather, it is intended to provide support for preliminary or actual cost estimates, as well as to show a comparison across the various categories.Supply and Demand Dynamics Allowing for Increased Hotel DevelopmentWithout a doubt, 2017 served as another banner year for hotel occupancies and average rate (ADR). STR reported national year-end 2017 occupancy and ADR at 65.9% and $126.72, respectively, with both metrics increasing to 67.7% and $130.37 in the year-to-date period through September; this reflects a 0.5% and 2.5% increase in occupancy and ADR, respectively, when compared to same year-to-date period in 2017. Except for a few markets, such as Chicago, Minneapolis, and Orlando, where RevPAR levels were negatively affected by an increase in supply that exceeded demand, most U.S. markets experienced the exact opposite in 2017. Demand levels across the country generally exceeded increases in supply, which, coupled with rising ADRs, resulted in higher RevPAR levels across the country, as illustrated below.A deeper look at the supply-and-demand picture across the nation helps to explain the rise in these metrics. While the number of rooms available in the U.S. increased by 6.5% from 2010 through 2017, or an average of 0.9% annually, overall rooms sold grew by approximately 22%, or an average of 2.8% annually, during the same period, resulting in the rising occupancy and ADR levels that the nation is now experiencing and that is ultimately translating into higher RevPARs.Following these eight years of consecutive growth since 2009, analysts agree that we are likely to be reaching the top of the cycle in terms of hotel occupancy. It is these record RevPAR levels that have continued to prompt new hotel development, as the likelihood for the feasibility of a project resulting from increasing revenue and NOI levels is now, more than ever, viable. In 2008 and 2009, new supply entered the market in excess of 2.0% of the prior year's available supply, as many projects that opened during that time had started construction in late 2007 or early 2008. However, the pace of growth in new supply slowed substantially to an annual average of 0.6% from 2011 through 2015. Yet, as previously shown, accelerating occupancy and ADR dynamics, coupled with the availability of favorable financing, once again increased that pace to 1.5% and 1.8% in 2016 and 2017, respectively, as illustrated below.EXHIBIT 3: U.S. Change In Supply and DemandThe 1.8% increase in supply in 2017 represented approximately 90,000 new hotel rooms, and the pace of new supply growth continued to accelerate in 2018. According to the American Hotel & Lodging Association (AHLA), as of year-end 2017, 189,000 new hotel rooms were under construction across the country, representing an imminent supply increase of 3.7%. In October 2018, despite the opening of approximately 100,000 hotel rooms over the prior twelve months (a 2.0% increase over the prior year), the number of hotel rooms under construction remained relatively unchanged at 190,000, as proposed hotels moved from the planning phase to the construction phase, further illustrating that the pace of hotel development and new supply growth continues its momentum. In 2017 and 2018, the markets with the highest supply growth included Dallas, Denver, Nashville, NYC, and Seattle. These markets reported new supply increases over 4.0%, more than double the national average.Although 190,000 rooms are currently under construction, with an additional 206,000 in the planning phase, these 396,000 rooms will not all enter the market at the same time, but rather over the course of two to four years, as each project completes the development process over the course of time. Furthermore, the rapid increase in construction costs will cause developers to delay some projects indefinitely, or cancel them altogether, as competition for construction labor and materials among various product types, such as commercial, residential, and public works, continues to increase. Nevertheless, assuming most of these projects do enter the market during the next four years, this would represent an average annual supply increase of nearly 100,000 rooms, in line with supply increases over the last two years. While the feasibility of hotel development in some markets may have been previously hindered by stringent financing, high land costs, lower RevPAR levels, or the lack of available brands, these factors have been largely offset by improving dynamics within each of these factors, which is reflected in the increasing numbers of projects under construction or in the planning phase. As an example, while typical loan-to-costs ratios for new hotel development remain near 60% (relatively low when compared to 2006 and 2007), new financing vehicles such as PACE financing or the USDA's Business & Industry Guaranteed Loan Program have created the possibility for higher leverage for some projects that fit these programs' requirements. Additionally, options for development have continued to expand as many new brands, some affiliated with the most dominant companies, continue to gain momentum and acceptance with lending institutions.Macro EnvironmentThe positive momentum experienced thus far, not only in the lodging market, but also in the national economy, has come with at least one headache for hotel developers: the steady increase in labor and construction costs. According to the Turner Building Cost Index, which has tracked costs in the non-residential building construction market in the United States since 1967, the index increased by 5.0% in 2017 and by 5.51% in the 2017/18 trailing twelve months ending in June 2018. According to Turner, the index has increased year-over-year since 2011, outpacing inflation since 2012. Rider Levett Bucknall, which also provides a quarterly construction cost report, illustrated a rise of in its construction cost index of 4.2% in 2017, with metropolitan areas such as San Francisco, Los Angeles, Seattle, Portland, and Chicago reporting increases between 5% and 8% per year. The Turner Building Cost Index is determined by the following factors considered on a nationwide basis: labor rates and productivity, material prices, and the competitive condition of the marketplace. The change in the Turner Construction Cost Index compared with the change in the Consumer Price Index (CPI) during the same period is illustrated in the following graphic.Long-term construction inflation is normally double that of consumer inflation. Since 2013, the rate of change in the Turner Cost Index has outpaced the rate of inflation, illustrating how construction costs continue to rise at a steady pace. Construction inflation during growth years can accelerate faster, such as those shown in the illustration above. The Turner Cost Index registered increases at a rate of 10.6%, 7.7%, and 6.3% in 2006, 2007, and 2008, respectively. Although we can safely say we are nowhere near those figures yet, construction costs have been slowly creeping upward since 2011 and are now steadily increasing above 5% annually, although certain U.S. markets are experiencing cost increases well above this level. With national unemployment registering 4.1% for 2017, and decreasing further in 2018, shortages in skilled labor were evident throughout the year. The widespread damage inflicted by the hurricanes in Texas and the Caribbean, along with the record-setting wildfires and mudslides throughout California, further exacerbated the tight labor market in the U.S. during 2017. However, a presidential executive order expanded federally funded apprenticeship programs by redirecting $100 million to industry groups to develop training programs for trade workers. The private sector also stepped in, with The Home Depot Foundation, as an example, investing $50 million into its Home Builders Institute apprenticeship programs. According to the Bureau of Labor Statistics, construction employment increased by 210,000 by year-end 2017, compared with a gain of 155,000 in 2016. Despite the gain in construction jobs, 149,000 construction jobs remained unfilled by year's end, illustrating the continued dearth of labor in the construction sector. While higher wages typically follow the tight labor market, these increases were not yet fully evident in 2017. Despite construction wages rising the most among all employment categories, these increased only 1.3% in 2017, still below the pace of inflation. On the other hand, material costs increased at a pace of 4% to 6%; a few key materials increased more rapidly, including lumber, steel, aluminum, and cement. It is important to note that the costs of materials in 2017 do not yet reflect the potential impact of the tariffs implemented by President Trump in 2018. However, many remain watchful of the impact that the steel tariff (25%), the aluminum tariff (10%), and the looming trade war with China may have on the cost of materials in 2018 and beyond.Hotel Development Cost CategoriesThe Uniform System of Accounts for the Lodging Industry (USALI) provides industry participants with a common language for analyzing the financial performance of a hotel. However, no such system exists for hotel development budgets. Evaluating the completeness of a budget is often challenging, as different line items are used, and some components are unintentionally omitted. Based on our experience in reviewing actual developers' budgets, as well as preparing the annual HVS Hotel Development Cost Survey, we have developed the following summary format for hotel development budgets, which forms the basis for the presented cost categories. We find that these categories are meaningful for hotel professionals when undertaking an analysis relating to hotel feasibility, and they provide a basis from which to analyze proposed projects. The following illustration shows the five categories defined by HVS, as well as the typical items that each include.The categories are not meant to be all-encompassing but do reflect the typical items in a development budget. In construction accounting, development budgets are generally presented in far greater detail than for general investment analysis.Data Collection and Sample SizeIn 2017, HVS collected actual hotel construction budgets across 46 states. While not every construction budget was captured (due to a variety of reasons, including incomplete data, skewed data, or development attributes), the construction budgets sampled span the United States. Furthermore, construction costs vary greatly in different parts of the country. In this sample, the highest construction costs per key, as would be expected, were for projects in New York City, while select high-barrier-to-entry markets in California, Texas, and Florida also exhibited high costs per room. Conversely, the lowest costs per room were evident for limited-service hotels in highway-adjacent or tertiary markets throughout the country. Our selection includes complete and reliable budgets that form the basis for this year's survey. The budgets included projects that reflected both ground-up development and the redevelopment of existing buildings. Approximately 10% of the total budgets were for projects where all or a portion of the building was existing; as such, these have now been categorized under a separate "redevelopment" category. When comparing the average cost of redevelopment projects against ground-up projects, as would be expected, redevelopment projects exhibited much higher site-acquisition costs as a percentage of total costs, as the acquisition of the site typically includes both the land and an existing structure. Conversely, for these projects, total construction and site-improvement costs were lower as a percentage of total costs, given that some building and site-improvement cost savings are realized through working with an already existing structure. Because this is the first year for this category, we studied the cost variances further to quantify any potential difference that is generated through redevelopment deals. As illustrated below, for the full-service and lifestyle/soft-branded hotels, which are the most common product types for redevelopment projects, the average cost variance was 11% when compared with ground-up projects. It is important to note that this differential should not be extrapolated to an individual project. In some cases, the cost of redevelopment may exceed the cost of a new build for the same project due to the complexities of adaptive reuse.Lastly, we also examined the lodging product tier (STR chain scale) breakdown of our data set against the national data from STR. According to STR, approximately 65% of all hotel rooms planned to open over the next three years in the U.S. are categorized as upper-midscale or upscale. By comparison, our five categories that include upper-midscale to upscale brands comprised 64% of our total sample size; as such, our data are considered representative of the development pipeline for the nation.Per-Room Hotel Development CostsAs noted previously, we have changed our categories this year to include hotels that were part of a redevelopment project, as opposed to ground-up construction. The averages reflect a broad range of development projects across the U.S., including projects in areas with low barriers to entry and in high-priced urban and resort destinations.EXHIBIT 4: 2015/16 Hotel Development Cost Per Room AmountsAs illustrated above, budget/economy hotels averaged a development cost of nearly $80,000 per room in 2017. However, it should be noted that this was the category with the least development activity in our survey, as the land and construction costs necessary to develop this product are not typically justified by its revenue potential; thus, new construction is often not feasible. Limited-service and extended-stay hotels (midscale and upscale) illustrated average costs per rooms in the mid-to-high $100,000s and represented the most popular product type, with over 50% of the projects in our survey falling in these three categories. Select-service and dual-branded hotels both had similar average costs per rooms, at nearly $220,000. Quite noticeable is the disparity in development costs from select-service to full-service and lifestyle/soft-branded hotels, with the latter product type costing, on average, $100,000 more per room than a select-service hotel. Lastly, the cost to develop luxury hotels continues to increase, with this product costing, on average, just over $600,000 per room; the most expensive hotel in our survey, which is currently under construction, has a development cost of $1.8 million per room. Over the last 42 years that HVS has conducted the development cost survey, a trend has remained, which is worth illustrating further, and this is the general consistency of the percentages of development costs per category across all ten product types, as illustrated above. The one exception, as would be expected, is for the redevelopment category, where site acquisition costs are noticeably higher and site improvement costs are lower. As such, with this information, we believe developers are now increasingly able to find the support necessary to estimate total costs for individual projects; particularly, if the two most important factors, land costs and building and site improvement costs, have been determined (as these two cost categories add up to approximately 75% of a hotel's total development budget). Below we present a summary of how costs are allocated across all categories, based on the results of this survey.ConclusionThe budgets analyzed in this survey are provided directly by the developers, owners, and lenders on both ground-up and conversion hotel projects during the course of an entire year. We believe the results of the survey provide a wealth of information, as the survey combines the data from actual construction budgets organized across ten product types. However, there are also limitations, as the results comprise unique hotel projects that cannot be replicated by the inherent nature of hotel development. A multitude of factors affect a hotel's development budget. As such, we recommend that users of the HVS Hotel Development Cost Survey consider the per-room amount in the individual cost categories only as a general guide for that category. The averages in each cost category do not add up to the sum of the categories, as the total costs shown in the preceding tables are from per-room budgets for hotel developments and are not a sum of the individual components. Construction companies are the best sources for obtaining hard costs and FF&E costs for a specific hotel project. It is also advised that developers consult more than one source in their hotel development process to more accurately grasp the true costs of development. As always, HVS remains available to assist in this process. All individual property information used by HVS for this cost survey was provided on a confidential basis and deemed reliable. Data from individual sources are not disclosed.Other contributors: Suzanne R. Mellen, MAI, CRE, FRICS, ISHCMegan ThunemLizzette CasarinAstrid Clough McDowell

Expectations vs. Agreements

The Hotel Financial Coach ·19 November 2018
In life, few things make us less productive and more distant than other people's expectations of us. Expectations are everywhere, at work and at home. People detest others expectations.Uncommunicated expectations were not productive, especially when real work and strong relationships were required. Yet uncommunicated expectations were cast everywhere and they were weak.If I had a complaint in my world, it quickly became an expectation that someone else needed to fix. I tended to fixate over the injustice and in doing so I created my expectations. What I saw was that this was completely ineffective for getting things to change. Complaints were very easy to ignore and diminish; however, requests were not easy to ignore. Once we made a request we were heading in the right direction, because on the other side of a request we now have the ability to make an agreement.Let's take a hotel example. Currently, I was having a very hard time getting other managers to prepare detailed monthly forecasts and get these to me by the 30th of the month. I sent a schedule and reminders. I spoke at the department head meetings about the deadline, but I still didn't get a high success rate on submissions. It was always a struggle to get others to do what I expected. Without the forecast, I was left with two very unattractive options: do it myself or go without it. Both options meant I was shortchanged because others were not living up to my expectations.Now, I had two alternatives: 1) Complain about it, which I had done for years without results, or 2) Make another request. This was the pivot point.If I was willing to admit that my current status was due to my expectations, and I could bring myself to ask the other party for agreement, the conversation might go something like this."Peter, will you help me? I want to include your numbers, not mine, as part of the detailed forecast. Will you complete your part and get it to me by noon on the 30th?"Now it might not be easy for Peter to say, "Sure, no problem."But now the exact expectation was known because it was what was asked for. Or the request might get reviewed in a different light like, "I could, but that means I'm going to have to rearrange my week because my assistant is on holiday and our second office computer is dead."This was what I wanted to hear. This was the foundation of an agreement as now both parties asked for something. It was no longer the case of my having a single expectation. Now there were multiple balls in the air; some were mine and some belonged to other people.Turn the unmet expectation into a request and the request into an agreement like this: "OK, so I will send the systems person to your office today to switch out the second computer, but I'm not sure what I can do to help you rearrange the rest of the week."To which Peter replied, "No worries, with the computer replaced I can manage. I will gladly get you my forecast by the 30th."Let's break it down and figure out what happened in this example:I changed my language from a tired, self-centered expectation into a request.Peter asked for my help with meeting his department's needs and then, in return, he will complete my request.I committed to help him with the computer issue.He, in turn, was positive and in agreement in his response to meet my request.This communication exchange was the foundation of an agreement. It passed the test of an agreement because it had four parts, two for me and two for Peter. The test was "give and get." In this example, Peter got his computer fixed and gave me the information on time. I gave the resources to fix the computer and I got the report on time.Before the request and the agreement, it was just me asking. I wasn't giving anything and what it boiled down to was I had an expectation of Peter, but no agreement. That was a weak negotiating position to accomplish any task.Now, some people are reading this and thinking, "I'm the boss and people need to do as I say" or "I don't have time to make agreements with everyone". These issues are partly true. But if expectations aren't getting met, there is nothing to lose in trying this technique.A commitment to drop expectations and start making agreements instead worked best. Yes, it took time to make agreements and find out how to help other people, but it was well worth the investment.

Hospitality Financial Leadership: What's Missing With Labor Planning Tools?

Hotel Online·12 November 2018
I’m looking for an end to end solution to labor planning and I have yet to see one that brings it all home. Let me explain what I mean.

What's Missing with Labor Planning Tools?

The Hotel Financial Coach ·12 November 2018
I'm looking for an end to end solution to labor planning and I have yet to see one that brings it all home.Let me explain what I mean. In a hotel that budgets and forecasts labor hours, productivity, and business volumes and uses a labor planning tool to generate schedules, we need an end to end tool or set of tools that ties everything to do with labor together. Budgets, Forecasts, Schedules and Variance Analysis all need to be geared to the same measure.So now that you're confused, let me paint you a picture. For me to paint this for you it's imperative that you use productivity measurements in all your financial reporting - hours per room occupied and hours per customer served in F&B. If you don't use these in your budgets, forecasts and actual financial reporting - you should. If you don't, I'm sorry to say that the rest of this article will probably be of no use to you. If you use labor as a percentage of revenue or as a cost per room occupied that's OK, but not nearly as effective as hours per.Here is the scenario. You're in the last throes of budget 2019. You have all your numbers together and you are proud to say that the rooms and F&B labor productivity budgeted next year are better than the 2018 re-forecast. You made sure of it and your year-over-year statements prove it. Well done. You have taken the approach that you will run your hotel more efficiently next year than this year. After all that's what you get paid to do, right? Who would put forward a budget that says to the owners, "By the way my plan is to have the hotel operate less effectively next year wasting resources and consuming more costs." You're just not going to be the one who makes that kind of fatal move.Now let's imagine it's January and the budget is approved. You need to move into the new year with the business plan for 2019 in hand. With labor, you turn the ideas that are in your budget into reality with your Operation Managers. They need to put into action the ideas you conceived in the budget to achieve the increased efficiencies. This is where the rubber meets the road. You have a quick look at the month of January and you see the budgeted productivity for rooms is 1.255 hours per room occupied. Last January the productivity was 1.291. You have some work to do.Let's move from 10,000 feet down to the ground. In your hotel, you have a labor planning tool. Your departments use it to generate their schedules and they measure their schedule to the labor standards. Here is where it all falls apart. This is the missing piece and the missing link to your budget. The labor standards are essential to produce the schedules, but they must also produce an overall productivity by the same key areas we track on the financials. The labor planning tool must be programmed to spit out the scheduled productivity and analyze the actual vs. the scheduled and the budget/forecast. End to end we must always be using productivity. I have said this before and I'll say it again, "We need to be fascinated with productivity!" If we were making cars it would be hours per car; in the hotel business, we're focused on rooms, F&B, and non-operating department productivity.I am sure someone out there has put this all together in their financial modeling system and it also seamlessly feeds their labor planning tool. I would love to see your system in action. If you're not 100% sure about what I am referencing, that's OK. Call me and I can explain further.In my past life, I worked with a great financial modeling tool and a "so-so" labor planning tool. The stewards of the labor planning tool could not, or would not, see the value of having the productivity as another measure in their system. They were firmly stuck on the labor productivity standard, which ultimately meant nothing because the standard changed frequently. All that was missing was a simple additional measure which would have divided the hours worked by the anticipated and actual volume of business and voila, it would have been magic! What we ended up doing to work around this was to dump the data from the labor tool into Microsoft Excel, analyze it and see if the schedules were producing equal or better labor productivity by area, department, and division. We messed around a lot with this and very often the labor standards were producing less. This is ultimately where the labor tool sucked wind.Build productivity into each part of your reporting, planning and scheduling processes. Always be measuring productivity. Always challenge your department managers to find ways to improve productivity. Show them how the simple measurement works and have them find ways to make it better. The hotel business is a game of inches. Every day we sell hundreds of rooms and we service hundreds if not thousands of F&B customers. To do this we expend thousands of hours of labor. It all boils down to the volume of business and the hours worked and how can we get just a little better tomorrow.This article is dedicated to Dan Araujo, who analyzed all that data not so long ago. He was taken from us way to early!

How Involved are Hotel Owners in Property-Level Decisions?

EHL · 7 November 2018
Hotel owners increasingly contract hotel management companies to operate their properties. While extensive research has examined management agreements to determine the balance of power between owners and management companies, little research has investigated the actual role that hotel owners play in property-level decision making. This is perplexing because management companies generally insist that hotel management agreements (HMAs) specifically stipulate that the owner should not seek to influence the hotel's general manager (GM). In other words, in exchange for their services, management companies have generally required owners to relinquish involvement in the hotel's day-to-day business. However, hotel owners are increasingly sophisticated and institutional, suggesting they may not be content to remain uninvolved as individual or single-property owners had previously done.Management companies generally do not want owners to interfere. They tend to strive for complete managerial control because hotel operations are their area of expertise and the reason they have been hired. Their motivation for full autonomy may also be due to the fact they do not want the incentive fee bonuses on which their profits largely depend to be potentially hampered by owner interference.Owners, meanwhile, worry that management companies are not always incentivized to make decisions that are in the owners' best interests, and so they have a vested interest in monitoring and controlling the GM's decisions. Furthermore, as owners carry most of the financial risk, they argue they should be permitted a substantial role in influencing the hotel's management, even - or especially - when engaging a management company's services. Thus, while owner involvement is technically restricted in most HMAs, what owners are supposed to do and what they actually do may be quite different.Given the increase in multi-unit and institutional owners, many of whom have operational expertise and engage the services of asset managers, we investigated the actual role that hotel owners play in the operating and financial decisions of their hotels. Similarly, we were motivated to study this by the idea that even if HMAs do restrict owner involvement, management companies may be turning a blind eye to appease the owners on whom they are increasingly dependent due to their own asset-light strategies.We surveyed hotel general managers as they are the nexus between the management companies and the owners, and are best positioned to report on the owner's involvement. We received 499 responses with two-thirds of the general managers operating hotels under management agreements and the other third responsible for independent properties. While some of what we found confirmed our hypotheses, we were also surprised and intrigued by much of what the data revealed.The general managers from both independent and managed hotels acknowledged that their owners influence financial decisions to a greater extent than operational ones. While this was what we expected based on conventional wisdom, we were surprised to learn the actual extent of owner involvement. The results revealed that owners involve themselves in HMA hotels to essentially the same degree in independent hotels, with 50 percent of GMs noting that such owners have a moderate to strong influence on the hotel's financial and operational decisions. In other words, the HMA does not seem to reduce an owner's role compared to that of the independent hotels, which do not have contractual restrictions on their involvement. The general managers also reported greater autonomy in hotels that were not overseen by an asset manager.What does all this mean for owners, management companies and general managers? Some owners of managed hotels we later spoke to were surprised to see how involved many of their peers were and took this as a sign that they too could, and maybe should, become more involved in property-level decisions. Similarly, they may seek to renegotiate this involvement clause should they fail to increase their participation due to the strict enforcement of the current contractual terms.Furthermore, the results suggest that asset managers do provide owners with a greater degree of oversight and involvement in their hotels across both operational and financial issues, thereby confirming what asset managers often tout as one of the advantages of hiring them.The results raise an important question about the fundamental objective of entering an HMA. These contracts are supposed to enable owners to adopt a hands-off approach to the daily operation of their hotel, because the management company has been appointed to do so based on their managerial know-how. This, in theory, allows HMA owners to focus on the real estate side of the business.The HMA is supposed to align both parties' interests through, for example, incentive fee clauses that reward operators based on the hotel's performance. However, given the relatively high degree of owner involvement in such hotels, we wonder whether HMAs are in fact aligning owner and management company interests as far as possible. That is, are owners seeking greater involvement because in fact they are displeased with the operator's performance or objectives? According to CBRE Hotels Americas Research's Trends in the Hotel Industry, only 18.1 percent of hotels actually paid an incentive fee in 2015. While this may be due to onerous contracts requiring difficult-to-achieve performance targets, owners may also interpret it to suggest that the two sides' objectives are not as well-aligned as they want or need them to be. Our findings suggest that owners might well come to the HMA negotiation table better equipped to seek greater involvement rights if they believe their involvement can help the hotel to perform better. Given the sophistication of many owners, and their own internal management expertise and resources (including those of their asset managers), this may be a positive development in the important owner-operator relationship.This is the first article in a three-part series about the evolving relationships and roles of hotel owners, management companies and their general managers. In our next article in this series, we explore how hotel owners and operators can better align their objectives to benefit both parties.Note. This article is based on the following research paper:Hodari, D., Turner, M.J., Sturman, M.C., and Nath, D (2018). The role of hotel owners across different management and agency structures. International Journal of Hospitality and Tourism Administration. Access full paper here
Article by David Lund

Understanding Flow-Thru

The Hotel Financial Coach · 6 November 2018
A good analogy to grasp the concept of flow thru is to compare it to your paycheck. Imagining I give you a $1,000 a week raise, the question then is how much will end up as your pay vs. how much got eaten up by higher taxes and other deductions?The same goes for additional revenues in your business. If revenues are $50,000 higher this month than the same month last year, how much of the $50,000 will make it through to the profit line? How much will flow?"It's great that you increased the rate and overall revenues in my hotel, but what I really want to know is how much you will keep and give me in profits." - Anonymous hotel ownerManaging flow thru in your hotel is a key attribute to understanding the profit model for your hotel. The reason it is so important to understand is the different characteristics that emerge when revenues go up or down in different departments. Measuring flow thru by department and by the key driver is the basis for understanding your hotel's real financial results and most importantly its financial potential.Here are some motherhood questions to get your flow thru imagination going.The overall revenues year-to-date are up by 1.3 million dollars. How much should flow in GOP?Occupancy is up over last year by 5% and the rate is up $15 as a result. Room revenues are up $720,000. How much should flow in room profit and GOP?Restaurant average check is up by $2 and as a result food revenues are up $10,000. How much should flow in F&B (food and beverage) profit and GOP?Liquor revenues are up over last year in my lounge by $7,000. How much should flow in F&B profit and GOP?Banquet food sales are $50,000 higher this month than the same month last year driven by higher volume and average check. How much should flow to the F&B profit and GOP?The way we calculate flow thru is straightforward:Step one - Subtract the revenues from two different periods.Step two - Subtract the profit from the same two periods.Step three - Divide the difference in revenues by the difference in the profit.All the revenue streams in your hotel have two attributes: pricing and volume. Understanding the difference and measuring the impact is the key to understanding and measuring departmental flow thru.Measuring flow thru to the prior period is normally a stronger comparison than measuring flow thru to budget or forecast. The reason being when we compare the flow thru from one real period to another real period it is more of an apples-to-apples comparison. When we compare flow thru to the budget we are comparing a real result to a projection.A word of caution, when comparing the flow from one period to another it is important to include any events that may have had an impact on the results. This is where a good memory and a great monthly property commentary come into play. Let's say that last year in the month of May we had a great group month, off the charts because of a citywide. That fact will skew the flow thru to this month. Being able to articulate the impact of past and current events is very important.Negative flow is also an important concept and calculation to master. When revenues decrease, we want to be able to mitigate the impact to the profit lines. We want to be able to retain the profit loss. If we do not act, we run the risk of losing 100 percent or even more of the lost revenue in the form of decreased profits.Rooms FlowThe rooms department is the engine in 99 percent of the hotels in the world. The greatest contributor to performance is rate and then occupancy. If my rate goes up $10 over the same month last year and I sell 18,500 rooms this month, the same amount as last year, my room revenue just went up by $185,000.The question is: How much should I be able to keep as profit?What we need to examine is what else would need to increase to compensate for the additional room revenue. This is the magic in the hotel business as very little needs to go up when my rate grows. Whether it is a transient increase or group the impact is largely the same, i.e., Very Good!Depending on my segmentation, I may need to spend some of this increased revenue on third-party commissions. I also may need to spend more on my reservation expense from my brand, depending on the mechanics of the chargeback. Other than these two cursory items no additional expense or payroll in the rooms department need be spent.Other costs that will be impacted by the increased revenues are credit card commissions, centralized fees, and management fees. A good rule of thumb is I should see 90 percent of any additional revenue flow in rooms profit and 85 percent in GOP that result from the increased room rate.Your hotel manager may take it upon himself/herself to spend a little more this month to catch up on some cleaning or other expense but it is not directly related to the increase in rate.On the other side of the equation is occupancy. Let's say my hotel this month saw an increase of six points in occupancy over the same month last year. This resulted in an additional 300 rooms sold and an additional $45,000 in room revenue. The question is how much should flow? With occupancy, it is a bit more complicated.Every time I sell a room I have both fixed and variable expenses associated with the sale. Taking the 300 extra rooms, that is an average of 10 more per day. I do not need huge amounts of additional resources at the front desk in reservations or in guest services. I will, however, need additional room attendants and housekeeping labor. I will consume more amenities, guest supplies and probably should pay higher commissions to third parties and more in reservation expenses to my brand. I will also pay higher credit card commissions, centralized fees, and management fees. So, as a rule of thumb, I should see 85 percent of any additional room revenues from increased occupancy as increased rooms profit and 80 percent in increased GOP.F&B FlowWhat is the increase or decrease in F&B revenue and where did it come from?In the food and beverage department, we need to have a much bigger calculator to see what happened and what the results should be. We want to be able to measure the increase or decrease in all the dimensions that drive our business.Profitability characteristics are very different from food sales and beverage sales. Within food sales the profitability of all the different meal periods, as well as distinguishing the relationship between outlet sales and banquets, is key.What would you rather have, dinner revenue increases or the same revenue increases from coffee breaks? Would you like to see sales increase in your outlets or in banquets - what would have a bigger impact on profit?With beverage sales, the profit margins for liquor, beer, and wine need to be understood as well as the portion of our outlets vs. banquets. When we look at the average customer price for food we also need to understand the contribution margin. It is nice to see the average cover increase but what profit do I make from the different type of sales inside my F&B operation?All of this looks complicated on the surface but it really is not. With a little analysis and some patience, we can build a model that will help us see the optimal picture for profitability in our F&B operation. With this picture, we can strive to create the optimal recipe for our food and beverage success.That is the key: Understanding what the optimal mix is and getting our sales and conference services people selling that. Getting our outlet managers and servers to understand what items have the biggest contribution to profit and have them sell accordingly. If we were selling cars, we would know the model that generates the biggest margin, and the accessories that drive profits. Our business is no different. Flow-thru and its impact is at the heart of understanding this profit model.Minor operating department flowSame principles as above: What is the difference in the top line and how much did we make in additional profits? This is valuable information for spa, golf and retail operations.The last part is sometimes the most important - in this case, it is non-operating department flow. I cannot tell you how many statements I see where there is a nice hit on the top line revenues only to have most of the potential profits chewed up in non-operating departmental creep.Administration costs, sales and marketing and maintenance flow needs to be measured and managed. If you cannot readily see this you are missing a powerful tool.Creating the flow thru measurements in your financials is relatively straightforward. Pulling out the numbers you want to see, like the change in revenue and the change in profit from the two different periods and dividing the two, is it. Display these on your financials and you will have a whole new understanding of your business and be much more effective in your ability to hold others to managing their departmental flow thru.Mastering flow thru is the key to the hotel profit maximization.Understanding where we win and pointing the team, the sellers, the operators in that direction. Creating alignment around the business model.

Hotel Budget Planning: What to Examine for 2019

Sertifi · 6 November 2018
Hotel budget season is the perfect time for you and your team to evaluate the need for new technology. However, before you move forward with purchasing new software, take a step back, and look at your existing budget. Should you reduce spend in one area and reallocate that money in another area? Do you need to increase your overall budget? These are normal questions to think about. One of the best investments you make for your team and hotel is in new technology to maintain a competitive advantage.I recently went through the process of reevaluating my own personal budget when I became a first-time homeowner. Making the transition from renting to ownership meant a new set of responsibilities. I took a closer look at my current budget and determined where I needed to curtail expenses and shift money around to purchase additional items. Additionally, I kept in mind that whatever I bought should be a long-term investment without compromising on quality and what I liked aesthetically.If you're still focused on hotel budget planning, here are 5 key factors to examine so you'll have a successful upcoming year.1) Look Around Your IndustryWhen it came to furnishing my new home, I looked to the current home decor trends to determine what I'd like to invest in. Some trends were timeless, but there were other ideas that I knew would never suit me. While I'm still on the fence about which specific style I'll incorporate throughout my home, it's been helpful doing the research because I'm learning about colors, patterns, and how best to utilize different spaces. I want my home to grow alongside me so when the time comes to sell it, the home value will have appreciated.Regardless of what industry you work in, it's always a good idea to pay attention to what's trending in your respective space. Those trends can dictate where your hotel's team should concentrate their resources and efforts to better communicate and connect with your guests. If you want your hotel to be viewed as an innovative property, then it's essential to keep investing in new technology that enhances the guest experience and increases your team's efficiency.For example, AI technology is continuing to weave itself into different areas of our lives and will continue to fundamentally change the customer service experience. As of this year, 15% of American adults indicated that they've used a chatbot to interact with a company. Several hotels have embraced chatbot technology including the Cosmopolitan of Las Vegas, AccorHotels Mercure brand, and Intercontinental Hotel Group's Hotel Indigo providing a quicker, on-demand guest experience. Chatbots aren't likely to replace human interaction though. Instead, hotels can utilize this tool for handling repetitive customer inquiries freeing up staff to focus more on creating personal connections.2) Receive Guest FeedbackWhen I was in the process of purchasing my home, I subscribed to several different interior design and home decor blogs as well as online furniture stores. The amount of emails that I received was exciting, but also overwhelming because everything sounded like a wonderful idea to me. Additionally, I received all types of advice from friends and family. Their feedback has been valuable because some of the tips are relevant to my current situation. And some of the other feedback will be beneficial when I move again the future.Guest feedback is another source to examine during the hotel budget planning process. While some feedback may not be insightful, there will be instances when you extract some valuable information that helps determines where to invest in new technology.For example, let's say that your guests have commented on how the check-in process is inconvenient because they can't do it using their smart phone. Today's hotel guests are tech-savvy and heavily rely on their smart phones to perform day-to-day tasks. Considering that the average person checks their phone every 12 minutes, offering mobile-check can be a worthwhile investment. Keep in mind that when you offer an electronic method that it's user-friendly, so it isn't disruptive to the guests. And continue offering the existing method as well. Going back to the check-in example, there will always be people who prefer face-to-face interaction so offer that option alongside mobile check-in.3) Find Out Your Hotel's Goals for the Upcoming YearBefore you can determine what technology, you want to invest in, you need to have a clear understanding of your hotel's goals for the upcoming year. Here are a handful of questions you can ask yourself and your team: What areas can you improve the guest experience? What are the KPIs your team measures their success against? What are your departmental goals? Do these goals align with your hotel's goals? Once you have the answers to these questions, you can decide whether a new software solution is essential in helping you attain those goals.Another way to identify your hotel's goals is to look at your Property Management System (PMS). There should be historical data residing in there, such as your previous year's bookings and revenue numbers. By reviewing historical data, you can forecast some realistic revenue goals that you want to achieve for the upcoming year.Of course, relying on historical data and analytics isn't enough. Initiating interdepartmental collaboration and meeting with your team will help you determine what's a priority for the upcoming year and what can be put on the backburner.Additionally, think about your existing hotel technology stack. Does your hotel use several different software platforms that aren't seamlessly connected? Take advantage of software solutions that integrate easily into multiple systems to reduce operational inefficiencies. Ideally, look for tools that integrate into your PMS to reduce manual processes. Investing in hotel technology will give your property a competitive edge in an oversaturated market.4) Improve Current Business ProcessesWhen I was filling out the paperwork to buy my new place, it was a manual process that consisted of printing, scanning, and faxing various documents. At times, it was time-consuming and disruptive because I had to go out of my way to send this paperwork back to the realtor and lawyers I was working with.There are some manual tasks that can be crippling to your productivity, which in turn impacts the guest experience. While that varies with each organization and department, take time to evaluate the manual processes that exist within your team. See if there is a way to take a specific process and automate it so that your team can focus on more pressing matters. Productivity isn't the only advantage in streamlining processes. Repetitive tasks can lead to human error but automating certain tasks can reduce the likelihood of that occurring. For example, rekeying guest credit card information is a manual task that can be eliminated if you have a payment solution that integrates into your PMS. Or let's say your hotel uses paper-based credit card authorization forms. There's a lot of administrative work that goes into sending and receiving paperwork. Your team can create a more seamless process by choosing a technology solution that digitizes those tasks.5) Conduct a Security AuditOne area that your hotel's team should continually scrutinize is where there's a possibility for a data breach. As technology continues to evolve, so does the likelihood for cybersecurity threats. According to the Verizon's 2018 Payment Security Report, the hospitality industry fell behind at 38.5% for maintaining PCI-compliant standards. It's up to your hotel to keep cybersecurity high on their radar, and you can do this by investing in software that protects credit card data, so your team doesn't have to store it on-site or in emails. All it takes is one incident to lose the trust of your guests and create a negative perception of your hotel which could result in a loss of revenue and potential new sales. Take proactive steps to combat any potential threats. While it's easy to convince yourself that it couldn't possibly happen at your hotel, the unfortunate reality is that anyone can be exploited.ConclusionInvest in tools that help your team be proactive versus reactive. Take time to research what's going to provide a better guest experience, improve internal workflows, and enforce PCI compliance and security. It's easy to get drawn in by all the available solutions out there but find a tool that will benefit both your hotel and customers. Ultimately, investing in the right technology is what will propel your hotel forward.2019 Hotel Budget PlanningIs your hotel still busy with budget planning for 2019? If you're looking to propose a business case for new technology, then download the business case template for this hotel budget season and beyond.DOWNLOAD THE BUSINESS CASE TEMPLATEThis post was originally published on Sertifi's blog.

U.S. News & World Report - Best Law Firms(r) Recognizes JMBM as 2019 "Best Law Firm"

Hotel Law Blog | By Jim Butler· 1 November 2018
A hotel lawyer brings together numerous legal disciplines, depending on the hospitality project. That’s why the Global Hospitality Group® is part of a full-service law firm. My partners at Jeffer Mangels Butler & Mitchell LLP (JMBM) provide first-rate services to our hospitality clients and I am pleased that their efforts were recognized today in U.S. News & World Report’s list of Best Law Firms.

Hoteliers should proactively ID and mitigate risks

hotelnewsnow.com Featured Articles·30 October 2018
Asset managers should be on the lookout for declines in revenue so they can get ahead of them to protect their clients’ investments.

Trading Places

The Hotel Financial Coach ·30 October 2018
Circa 2009. Late September. I'm the regional controller for five hotels. Sitting at my desk minding my own business, doing my own work when the phone rings.It's an old friend, one-time assistant, and now the regional controller based at a hotel in another city. He explained the desire to move back to where I was but was not having much luck finding a job. His homesick wife really wanted their children educated at home. We chatted for a few moments and caught up on different topics.Then he said, "Hey, David, how about we trade jobs?""Can we do that?" I asked.Then I thought, "Wow, it's 28 years after the high school summer I planned to spend in California and didn't get to go. Now I might get the chance.""Well, there's only one way to find out," he said.We both got to work to make the job trade possible. First, I got my work visa to go from Canada to the United States. The next positive step was his application for my job was approved. It now depended on me passing mustard with the owners of the hotel in the states.A date was set for me to attend and participate in the annual budget review meeting scheduled in early November. I was briefed on the hotel's operations and finances by my friend. As the deal hinged on making a good impression on the hotel's asset managers, it was prudent to discuss how these managers operated. A total of three asset managers were scheduled for the meeting. There were two companies that owned this hotel. Convincing one of the companies was an expected breeze. The second company had two ladies managing the asset. They had a reputation for being difficult to work with.Finally, the big day arrived. I flew to the U.S. and my friend picked me up at the airport. We enjoyed a nice dinner while discussing the two ladies and the possible objections, questions and overall hot buttons to avoid.The next morning after breakfast I headed back to the room before the meeting. In the elevator I pushed the button for my floor, but as the door began to close I saw someone entering the elevator foyer. Out of habit I selected and held the door open button.I casually asked the lady, "Going up?"She smiled and replied, "Yes, thank you. What a gentleman."What a great way to start my day. I asked her, "Where is home for you?""Los Angeles."As the doors opened at my floor I said, "Have a great day.""You too," I hear as the doors closed again.Thirty minutes later in the board room, with the Hotel's Executive Team, in walks the three asset managers. Introductions were made.Who do you think the lead asset manager was? She was the one with all the clout I found out later. Yes, it was the lady I held the elevator door for. A good decision perhaps.We reviewed the budget. The hotel was not doing well as a result of some issues from the last few years and the economy. The review was painful. We were getting cut to pieces, as was the budget. "Cut this . . . You didn't need that . . . Why so much expense here . . . This should be higher . . . That was too low."The last thing on the day's agenda was discussing my appointment as hotel controller. The three asset managers, hotel's executive team and I listened as the general manager went on about all the experience and expertise I possessed. He finished his pitch. There was silence for what seemed like an eternity.Then the lead asset manager said, "I can't believe you can't find a controller in this city! Why the heck do we have to move him from Canada? With this economy do you have any idea what you're doing with our money?"I couldn't breathe, like someone sucked all the oxygen out of the room.The general manager was a talented negotiator. To defuse the discomfort, he smiled and said, "It's been a long day for us all. I suggest my team leaves the four of us to finish this discussion."Fine!" she almost stomped her foot, somewhat perturbed.Then I spoke. I didn't plan this, it just came out, like opening a champagne bottle, pop: "Please allow me. If you bring in a local person without the brand experience, he or she will be at a great disadvantage compared to me. I see from our day together how I can save you 10 times what it will cost you to move me here. Knowing how to navigate inside this hotel brand is invaluable."With that, the general manager excused the team for a much-needed drink. The day culminated with a reception and dinner in the hotel's largest suite. It felt like a celebration after a boxing match where the opponents took time to kiss and make up. For the next 30 minutes the verdict hung in the balance. My friend was sure the deal was dead. So was I. But the tiniest bit of hope lingered. The hope wasn't based on anything tangible other than our need and want for this deal to happen.The general manager arrived at the reception with a somber look. I was sure I was heading home tomorrow empty handed. Instead I heard, "Welcome aboard, Mr. Lund."San Francisco, here we come!

Hospitality Financial Leadership: Trading Places

mycloud HOSPITALITY·29 October 2018
Circa 2009. Late September. I’m the regional controller for five hotels. Sitting at my desk minding my own business, doing my own work when the phone rings.

Delos, EDGE Partner to Advance Healthy Building Management Systems

green lodging news | By Glenn Hasek·16 October 2018
EDGE Technologies and Delos announced a collaboration to explore the integration of their respective platforms and capabilities toward advancing the deployment of smart-healthy building management systems for commercial buildings. Delos’ DARWIN Wellness Intelligence, paired with EDGE Technologies’ all-inclusive building technology platform, has the potential to deliver the most comprehensive confluence of data, data analytics and real time space optimization to benefit users and owners within the commercial real estate industry.

Positioning: Bringing brand equity to the bank

hotelnewsnow.com Featured Articles·16 October 2018
Positioning defines the unique value your brand delivers to customers—and every business decision can contribute to or take away from your brand’s equity. A “brand equity bank account” can help fortify your brand and lead to business growth.

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