A look at COVID-19’s potential impact on hotel expense ratios

As a result of COVID-19, hotel operators have been forced to make tough decisions, including the most basic one on whether to keep the lights on. Many were required to close their doors after municipal mandates were put in place and some decided to remain open, despite record-low occupancy levels, to house pandemic-related first responders and other essential personnel related to the fallout from the spread of coronavirus, largely in place of more traditional sources of demand during “normal times.” Depending on the type of hotel and its service level, the decision to close or remain open varied across markets.

Many hotels remained open despite severely diminished cash flows, which in many cases fell into the red and resulted in owners being unable to satisfy debt obligations. Hotel operations have fixed and variable components to their expense line items, with the latter tied to demand levels. From food costs and cost of goods sold to franchise and sales and marketing fees, hotel expenses vary greatly among different hotel types and locations. Many of the traditionally fixed expense components will become more flexible in the future as hotel operators adjust to the “new normal” and learn (by necessity as a result of COVID-19) to operate more efficiently, with certain fixed expenses morphing into variable expenses to aid the bottom line.

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After thorough analysis of 2019 profit and loss statements in our Trends in the Hotel Industry database, we isolated fixed and variable components as part of key departments to include rooms; food-and-beverage; administrative and general; and sales and marketing. The following charts portray potential changes to the variability of expenses for these select departments for both limited-service and full-service hotels. The charts include fixed and variable percentage ranges for three periods: before COVID-19 (using 2019 actual financial data), the immediate and ramp-up period following COVID-19, and the short- to medium-term period post COVID-19. Our assumptions are largely based on feedback from operators and industry professionals.

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COVID-19 operating levels are unprecedented for the lodging industry. Many limited-service hotels are cutting staff by more than 70 percent, maintaining fewer than five full-time employees on payroll. From observations within different markets, some of the key positions that remain actively working are the general manager and either a housekeeping, security, and/or front-desk supervisor. Similarly, full-service hotels are operating with limited personnel and amenities. Although not always forced by city mandates, many of the hotels that offer food-and-beverage options opted to shut down or drastically limit that amenity offering. From discussions with hotel operators, full-service hotels that remained open during the height of the pandemic altered their operations to mirror more closely those of limited- or select-service hotels. In April, a torrent of layoffs and furloughs within the leisure and hospitality industry led the U.S. economy to its worst month of job losses in modern history, with more than 7.7 million industry jobs lost across the country. The pandemic has forced hotels to slash operating costs, including those traditionally thought to be fixed, such as full-time labor.

Expenses and Impact

COVID-19 has forced hotel operators to take a hard look at their expenses to see where there might be opportunities to reduce costs in the pandemic environment. Full-service, convention and resort hotels already utilize outsourced labor for a portion of their staffing needs, such as banquets, housekeeping, and F&B. We believe there will be an increase in outsourced labor across the industry as extended-stay, limited-service and focused-service hotels adopt outsourcing practices for several operating departments. Furthermore, there is the potential for the hotel room itself to be reimagined to have fewer touch points in an effort to promote a safer and more sanitary product. From remote controllers and light switches to doorknobs and glassware, hotels will likely find ways to mold the customer experience to limit touching of these and other items within the guestroom and public amenity areas. Hoteliers will be encouraged by a shift in culture to invest in innovative technologies to limit these touch points, such as using digital keys, digital payments via mobile phone and replacing menus with QR codes, among others. F&B outlets likely will adopt social distancing practices within their spaces, re-concept the “traditional” full-service restaurant experience and utilize improved forecasting tools to limit surplus of food and overage of staffing.

Another major department which may experience changes is the sales and marketing department. Familiarization trips and site visits by meeting planners might partially be replaced by virtual tours in an effort to maintain social distancing and cut costs to the department. It will be essential for hoteliers to creatively attract groups to their hotels without incurring major expenses. For example, hotel sales managers might be encouraged to offer more soft-cost concessions such as complimentary upgrades or meeting planner signing bonuses, which have less of an impact on the bottom line. Although the aforementioned sales and marketing expenses are variable expenses by nature, hoteliers might be forced to cut back on these. Rooms, F&B and sales and marketing are considered by many to be the running engines of the hotel. These departments will need to adapt by evolving in practices and shifting fixed-in-nature expenses to tie more into business volume.

The economic impact of COVID-19 likely will influence hotel operators as they uncover fixed expenses with potential to evolve into variable expenses in an effort to become more efficient. The shift to greater variability in hotel expenses might force hotel operators to think outside of the box in areas such as the annual budgeting process, which could lean more toward creating zero-based forecasts, as well as the outsourcing and centralization of certain functions within the hotel. Forecasting tools will become more important as hoteliers master the art and science of forecasting occupancy levels and demand for their services. Lateral thinking will become the “new norm” for hoteliers as they reinvent common industry best practices.

Mark VanStekelenburg is a managing director and practice leader for CBRE Hotels Advisory. Kannan Sankaran is a senior director for CBRE Hotels Advisory. Andy Hartley is a director for CBRE Hotels Advisory. Vanessa Gonzalez is a consultant for CBRE Hotels Advisory.