Financial Issues Impacting the Lodging Industry

The Financial Management Committee (FMC) of the American Hotel & Lodging Association was established to provide superior financial management expertise on issues of common interest to owners and operators of hotels and motels.

In an effort to assist hotel owners and operators, the FMC is presenting a series of monthly articles that address current and emerging financial issues impacting the lodging industry. Some of the potential topics to be discussed include the standardization of industry definitions for distribution channels and associated costs, benchmarking green and sustainable practices, cyber security, loyalty program accounting, and the impact of labor related legislation.

For this month we discuss the standardization of industry definitions for distribution channels and costs. The article was prepared by FMC committee co-chairs Cindy Braak and Kapila Anand.

The Need for Standardization of Distribution Channel Metrics


By Cindy Braak and Kapila Anand

The Financial Management Committee (FMC) of the American Hotel and Lodging Association (AHLA) is focused on providing guidance on the financial and reporting impact of trending issues impacting the industry. As an example, the FMC has the responsibility to update the Uniform System of Accounts for the Lodging Industry [1] (USALI) and is periodically evaluating other trends and evolving metrics to determine if the financial implications warrant further study and comment.

The FMC is also guided by the premise that consistent application and standardization of financial practices facilitates industry benchmarking and the ability to manage portfolio operations. "What Gets Measured Gets Done" is a famous quote attributed to Peter Drucker, Tom Peters, Edwards Deming, Lord Kelvin and others. This was apparent when industry professionals expressed a need to include more detail and definitions on the components of Rooms Revenue, in order to better align with industry practices and evolving trends. After close consideration by the FMC, those clarifications were included in the latest edition of the USALI and we believe the changes have prompted more consistency in the application of the USALI and related operating ratios. This required working closely with experts on revenue management from HSMAI, TravelClick, Kalibri Labs, experts from various lodging companies and their owners. A consequence of those conversations was also a strong desire, prompted in part by rising channel costs, to analyze Rooms Revenue by channel, as well as related costs by channel.

Benchmarking can often start by looking outside one's own industry. Shafiq Khan, Senior Vice President of Channel Strategy & Distribution at Marriott International, came to the company from US Airways, where he pioneered a series of groundbreaking initiatives which fundamentally restructured airline distribution. Shafiq is quite passionate when asked about distribution costs, "Many years ago, when US airlines found their distribution costs out of control, among the first things they did was to standardize the measurement of distribution costs within the industry so that apples-to-apples comparisons could be made. This allowed each airline to see how well it was doing versus the industry average, category leaders and laggards, and establish goals and benchmarks for itself. Those that did well shared their success with Wall Street. Over time, this focus on comparative cost metrics enabled the entire US airline industry to significantly improve their cost situation."

A key objective of the USALI is to provide hotel operators with standard methods for reporting results, which enables benchmarking. In addition to guidance around Financial Statements, USALI also provides guidance around Financial Ratios and Operating Metrics. One example is RevPAR, which is arguably one of the most common ratios used in the industry and defined in USALI. Benchmarking RevPAR has become standard practice. Standardizing the components of RevPAR is critical to ensuring meaningful comparisons. Following this logic, it seems appropriate for the FMC to focus its efforts on this emerging area of channel metrics. Craig Mason, Senior Vice President, Asset Management for Host Hotels & Resorts confirmed the need for this focus, "With the heightened attention on rapidly growing customer acquisition and retention costs, there is an urgent need to create standards to evaluate these costs in order to make informed decisions on sales and marketing strategies."

In 2012, Cindy Estis Green from Kalibri Labs and her colleague, Mark Lomanno, compiled a study entitled, "Distribution Channel Analysis: a Guide for Hotels".[2] This study will be updated and released in Q1 2016 as part of a research initiative sponsored by the AH&LA Consumer Innovation Forum. Describing one of the underlying tenets of the endeavor, Estis Green explains, "Finding a hotel's optimal channel mix and managing to that target is an imperative in a world where hotels incur customer acquisition costs of 15%-25% of guest paid revenue. Understanding the nature of demand in each market and identifying the most cost effective mix given each hotel's competitive position is critical intelligence to drive both revenue expectations and set accurate targets for sales, marketing and third party commission costs."

The FMC believes it is important to work with other industry professionals and the authors of this study to standardize industry definitions for channels and costs. It will take time but we believe the industry will benefit from his focus.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP or Marriott International Inc.

The FMC is also responsible for the production of the Uniform System of Accounts for the Lodging Industry (USALI). To purchase a copy of the 11th edition of the USALI, please visit www.ahlei.org/usali. This article was published in November 2015 by the American Hotel & Lodging Educational Institute (AHLEI). For detail information visit www.ahlei.org.

1 The Uniform System of Accounts for the Lodging Industry, Eleventh Revised Edition, presents the latest practices for recording financial information and is available in print and digital versions from the American Hotel & Lodging Educational Institute (AHLEI).

2 Distribution Channel Analysis: "a Guide for Hotels" can be found on AH&LA's website

Robert Mandelbaum
CBRE Research | PKF Hospitality Research, a CBRE Company
AH&LA

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