Hotel Labor - Big Cost, Big Issue.
PKF Hospitality Research (PKF-HR) is the research affiliate of PKF Consulting
Friday, 7th July 2006
In 2005, labor expenses remained the largest single expense item for hotel managers, accounting for more then 44 percent of total operating costs. Consequently, any trend or issue that could potentially impact labor costs must be taken seriously by hotel owners and managers alike.

This analysis is based on the recently released 2006 edition of Trends in the Hotel Industry published by PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting.

"Due to the magnitude of the expense, labor costs and issues have always consumed a substantial portion of the time and efforts of hotel managers," said R. Mark Woodworth, president of Atlanta-based PKF-HR. "Now, with news of union contact negotiations, changes to immigration laws, and proposed legislation to increase the minimum wage, U.S. hotel managers are on edge."

Several political and economic factors are brewing that may have a strong influence on hotel labor costs.

  • Union contract negotiations are under way in several major cities.
  • Proposed changes to immigration laws could affect the ability of hotels to find and retain employees.
  • Local and state governments are proposing legislation to increase the minimum wage.
To provide a better understanding of the current and historical impact of payroll and related expenses on hotel operations, PKF-HR has analyzed labor cost data from its Trends in the Hotel Industry database. Labor costs are just one of 28 different in-depth analyses found in the just-released 2006 Trends in the Hotel Industry report, marking the 70th annual review of U.S. hotel operations conducted by PKF. This year's sample draws upon year-end 2005 financial statements received from more than 5,000 hotels across the country.

Payroll and Benefits Grow

Total hotel labor costs grew by 5.1 percent in 2005. This is a full percentage point greater than the long-term annual average increase of 4.1 percent.

Labor costs are comprised of two major components; salaries and wage, and employee benefits. "The salaries and wages paid to employees grew 4.6 percent in 2005, but it was the 6.5 percent increase in employee benefits that continues to concern hotel managers," Woodworth said. "In the past three years, the rise in employee benefits (7.7 percent annually) has outpaced the growth in salaries and wages (4.0 percent annually)." Employee benefits include items such as payroll taxes, payroll-related insurance, subsidized employee insurances and meals, and retirement plans.

Managing Labor Costs

Labor is considered a semi-variable cost. Base staffing levels, plus management salaries, make up the fixed component of labor costs. The majority of jobs in the typical hotel are filled by hourly rate employees, and thus their cost is a direct function of the volume of business (number of rooms occupied, number of covers served). The payroll for these employees is the variable component.

"Hotel managers have done a very good job matching the variable part of their staffing to the level of business at their property," Woodworth noted. "This is evident given the strong historical correlation between changes in revenue and changes in labor costs." Since 1980, payroll and related expenses have remained in the tight range of 30 to 35 percent of total revenue.

"Managers fear that the proposed changes to the union contracts, immigration laws, and minimum wage will inhibit their ability to control this huge expense," Woodworth observed. "The proposed contracts and legislation would most likely contribute to an increase in the fixed component of labor expenses which is much less controllable by management. In addition, a rise in employee turnover leads to increased payments for recruiting, pre-screening, and training."

Laborious For All

In the hotel industry, lodging facilities are frequently defined by the level of service they provide to their guests. Due to the extensive services and amenities offered at resort (46.5 percent) and convention hotels (46.0 percent), these property types have the highest payroll ratios as a percentage of total expenses. On the other end of the spectrum, limited-service hotels (36.7 percent) and all-suite properties (37.7 percent) reported the lowest cost ratios. In PKF's Trends report, extended-stay hotels are included in the all-suite category.

"Across the board, the cost of labor is the biggest expense in all categories of hotels," Woodworth observed. "Even with the advent of select-service properties, hotel developers cannot avoid the human component of hotel operations."

While managing labor expenses is important, hotel managers are also aware that employees are an integral part of the lodging experience. "The interaction between hotel guests and employees has a dramatic impact on the customer experience and the success of the business operation," Woodworth said. "Therefore, a fine balance must be drawn between cost controls and guest satisfaction."

To purchase a copy of the 2006 Trends in the Hotel Industry report, please visit the firm's online store at www.pkfc.com/store, or call Brandon Culp or Claude Vargo at (866) 842-8754.

PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in New York, Philadelphia, Washington DC, Atlanta, Indianapolis, Houston, Dallas, Los Angeles, and San Francisco.
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