Closing a Hotel for a Short Period - Is It The Right Thing To Do? By Ian Graham Wednesday, 29th May 2013
Some things to consider when taking this important decision; Recent work in Greece has reminded us that in some situations, it is received wisdom that hotels should close for a number of months 'when demand is low'.
The question is, is closing always the best option?
A hotel is essentially a fixed cost business - the reciprocal being that the marginal cost of a room night or a meal is very low.
Let's just think about the variable costs:
That's it. So if you close a hotel for a day or for a week, you save next to nothing.
If you close for around a month, you still save very little but you do get the chance to recuperate vacation entitlement and give yourself the opportunity to do some essential Front of House repairs and maintenance, i.e. you manage the balance sheet but not the P&L.
If you close for more than a month, you can choose to lay off some front line staff, perhaps you close one of the restaurants, or close down one of the floors. But the semi-variable costs you "save" will be pretty minimal and in your closing down and reopening processes, you will incur incremental redundancy and training costs.
Whether you close for a week, a month, or a quarter, you need to keep the elevator maintenance agreement in place, the freezers need to stay on as well as the air conditioning, management and the accountants stay, and the marketing team remains in post etc. So in my opinion I don't think there is much scope to save money with semi-variable expenses - there may be some savings, but they won't be huge!
Let's use an example: a hotel with 11.5m of revenues, 1.5m of EBITDA and a cost base of 10m.
The variable costs might be:
Food Cost of Sales 0.7m
Beverage Cost of Sales 0.2m
MOD Cost of Sales 0.6m
Management Basic Fees 0.4m
And let's say another 0.5 can be prised out of the other areas e.g. travel agent commissions.
So the costs we can avoid by closing are just +/- 2.4m out of a cost base of 10m = 25%.
The rest of the costs will continue to be incurred.
If the hotel is closed for more than just a week or two, say for three months, there is some scope to save additional costs. But I suggest it is likely to be less than 25% of the other 8m, so maybe 2m. Because management stays on, real estate taxes need to be paid, insurance and energy needs to be consumed, sales and marketing continues, and the chef and his top team stay in place.
All of these considerations leave me thinking that the costs of keeping a three-month closed hotel ready to re-open are of the order of (10.4m-2.4m-2m) = 6m per annum = 0.5m per month. And that's without the costs associated with closing (redundancy) and re-opening (hiring and training)!
Personally I think this is a cost that a responsible owner would avoid like the plague. So I do not understand why hotel owners and operators decide to close, even for short periods. Even the man in the street will recognise that it is extremely uncommon for hotels to close for a week, and even more unusual for hotels to close for three months.
Ian leads and contributes to complex advisory assignments for hotel owners and operators around the world, leveraging his deep understanding of the goals of the guest, the hotelier, the investor, the lender and the brand owner - and all this from a unique base of experience that has seen him working on hotel issues in more than 60 countries.
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