We’re in the last month of the year, and by now you’ve either completed or are making last-minute adjustments to 2014 budget projections for your hotel or company. At one time, property-level budgeting was a relatively cut-and-dried process: bump up revenues by 10%, figure a 5% increase in expenses and hope for the best.
No more.
Today, property owners, asset managers and operators must deal with a wide set of variables in producing budgets that both meet ownership expectations and concur with realities of the market. Here are five trends that could alter your calculations:
1. Shifting distribution patterns
Every hotel owner and operator wishes consumers would use reservations channels that are most cost-effective for a hotel’s bottom line: typically a direct phone call or a visit to the property’s website, or the website of the brand company. Unfortunately, consumers have been trained to believe they can find better deals elsewhere, particularly at online travel agency sites.
OTAs continue to produce a lot of business for hotels, albeit at a high cost for properties. TravelClick recently reported bookings from OTAs jumped 13.6% during the third quarter, while brand.com bookings rose 5.3%. The OTA channel is a fact of life for hoteliers and will remain so for the foreseeable future. Therefore, it’s critical you understand the plusses and minuses associated with this business and plan your budgets to reflect its revenues and its costs.
2. Mandated or market-driven upgrades
Consumers and brand companies alike understood the plight of hotel owners during the Great Recession and didn’t insist on what in many cases were overdue renovations. That’s changed, and you must change with a new competitive environment that insists on smart renovations.
In some cases that’s product improvement plans mandated by brands. In others, it’s driven by guest demands. It’s important you raise rates, but that can only be done if the product you offer looks, feels and smells new and has the furnishings, technologies and public spaces guests demand.
If you’ve only been budgeting 3% or 4% of revenues for capital expenditures you have a problem if you think your reserves will cover the upgrades. It might be time to visit your banker to see about a loan to cover the project or a refinancing package that includes funds for the upgrade.
3. Threats from new supply
The conventional wisdom these days is that new hotel supply is in check. Demand is on the rise while new development has been muted. That dynamic might shift, and the change might come sooner rather than later.
According to data from STR, the parent company of Hotel News Now, as of the end of October approximately 87,000 new hotel rooms in the United States are in the under-construction phase of the supply pipeline. That’s up 28.3% over October 2012. At the same time, the total active pipeline is up 16.7%.
While those are just numbers from a PowerPoint presentation and represent the industry at large, what’s more important is what’s happening on your street corner. A new hotel or hotels built 50 miles away probably won’t affect you; a new property built across the street could hurt or even cripple your operation.
Be sure to keep abreast of development and renovation activity in your competitive set so your budget numbers reflect whatever changes might be on the horizon.
4. Rising labor costs
Should the Republican Party retain control of the U.S. House of Representatives in next year’s election, new federal minimum wage legislation will probably not be enacted for at least three more years. However, as it is with new supply, the most important government action usually takes place on a local level.
More and more local and state jurisdictions are eyeing proposals to raise minimum wages, including some plans that call for significant jumps in what employers must pay their workers.
It’s important you keep abreast of what’s happening in your area and recognize that as the national economy improves, labor shortages might reappear, forcing you to increase your wage and benefit packages to compete in the marketplace for the best talent.
Either way, it behooves you to pencil in higher costs for human resources in the coming years.
5. The unknown
Of course, it can’t be budgeted or underwritten, but the biggest thing that could bust your budget is the event or trend you can’t foresee—everything from severe weather to bird flu to economic turmoil to, God forbid, an act of terrorism, or something no one can forecast.
Even budgeting a contingency fund to counteract the unknown seems futile. You can only review your crisis contingency plans, train your staff for as many possibilities as you can and, finally, hope for the best.
If you’ve completed your 2014 budget, it might be wise to review the document to make sure you’ve covered all the pertinent bases. If it’s still a document in progress, it’s not too late to make sure your budget remains valid throughout the entire coming year.
Email Ed Watkins or find him on Twitter.
The opinions expressed in this blog do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.