Other Revenue Is Good Revenue | by Robert Mandelbaum | PKF Consulting
From 2000 to 2003, the average U.S. hotel struggled with a 15 percent decline in revenue. Since rooms revenue represents 68 percent of the total revenue at a typical hotel, the extraordinary declines in rooms occupied and ADR were certainly the major contributors to the fall-off in total revenue.
From 2000 to 2003, the average U.S. hotel struggled with a 15 percent decline in revenue. Since rooms revenue represents 68 percent of the total revenue at a typical hotel, the extraordinary declines in rooms occupied and ADR were certainly the major contributors to the fall-off in total revenue.
Fortunately, hotels earn revenue from sources other than the rental of guest rooms. Full-service hotels have seen their food and beverage revenues decline in recent years, but not to the same degree as rooms revenue. On the other hand, telephone revenues have declined on average approximately 20 percent per year from 2001 through 2003.
Most hotels also earn revenue from what are classified as “Other Operated Departments”. These other revenue sources can range from a spa at a destination resort to the vending machines in a limited-service hotel. In 2003, the revenue generated from Other Operated Departments represented 4.4 percent of the typical hotel’s total revenue. This ratio ranged from a low of 1.8 percent for limited-service hotels to a high of 12.0 percent at resort hotels.
Due to the decline in rooms occupied – meaning fewer hotel guests - the sales volume for Other Operated Departments also declined from 2000 to 2003. However, the 8.2 percent rate of decline for Other Operated Department revenue during this period is roughly half the 15 percent decline in total revenue. In fact, the revenue from some Other Operated Departments actually increased from 2000 to 2003.
To analyze the revenue generated by Other Operated Departments, we have extracted data from our proprietary Trends in the Hotel Industry database of hotel financial statements. Data was pulled solely from those hotels that operated a given revenue source consistently from 1999 through 2003. For example, our analysis of golf course revenues relied solely on data taken from hotels that reported golf revenue for each year from 1999 through 2003.
The following paragraphs provide insight into revenue trends for six selected Other Operated Departments.
Guest Laundry
- Of all the Other Operated Departments studied, guest laundry revenue experienced the greatest percentage decline from 1999 through 2003. During this period, total guest laundry revenue declined 9.2 percent, measured on a compound annual basis (CAG). Due to the direct link between laundry services and number of guests, it is no surprise that laundry revenue declined to such a degree. However, it is interesting to note that laundry revenue measured on a dollar-per-occupied-room basis also dropped 7.9 percent compounded annually during the same period. Therefore, guest laundry services were less in demand even for those hotel guests that did stay in the hotels during this time period.
Gift Shop
- Gift shop revenues have remained relatively stable from 1999 to 2003. During this period, total gift shop revenue declined 2.8 percent measured on a compound annual basis. Gift shop revenue measured on a dollar-per-occupied-room basis fell just 0.5 percent, indicating that there is a close correlation between gift shop revenue and occupied rooms.
It should be noted that the gift shop revenue analyzed comes from the sale if items in the gift shop. It does not include any rental revenue received from third-party gift shop operators.
Golf
- Not only has golf been a growing source of revenue for resort hotels, but it also appears to have contributed to overall improved performance of golf resorts. From 1999 through 2003, golf revenues at the hotels in our study sample increased 3.6 percent on a compound annual basis. Of note is the fact that the golf resorts in our study sample were the only group of hotels analyzed that experienced an increase in total revenue from 1999 to 2003.
Health Club / Spa
- From 1999 to 2003, the revenue derived from health club / spa operations did decline for the hotels in our study sample. During this period, health club / spa revenue did drop 3.8 percent on a compound annual basis.
It is important to note that our analysis only included those hotels that have operated a health club or spa for the entire period from 1999 through 2003. Given the number of hotels that have recently opened spas within their properties, we suspect that overall health club / spa revenues for the industry as a whole have most likely increased in the past few years.
Movie Rental
- Despite fewer occupied rooms, movie rental revenue remained flat from 1999 to 2003. Measured on a dollar-per-occupied-room basis, movie rental revenue grew 2.1 percent on a compound annual basis during these years. This trend of a higher movie rental revenue yield per occupied room is consistent with the “nesting” habits noted by hotel managers. Just as they do at home, more and more people are ordering room service and watching movies during the evening, just as they do at home.
Parking
- Of all the other operated revenue sources analyzed, parking revenue showed the greatest increase from 1999 to 2003. During this period, parking revenue grew 5.5 percent on a compound annual basis. Parking has traditionally been a revenue source that has not received much attention from management. However, given the potential high profit margins of an efficient parking operation, hotel managers are starting to focus on maximizing parking revenue in order to offset declines in total hotel revenue.
Given the contribution of rooms revenue to total revenue, as well as the high profit margin of the rooms department, management does need to prioritize their focus on occupancy, ADR, and RevPAR. However, as we have observed, some Other Operated Department revenue sources have proven to be relatively stable during recessionary periods, and we all know the cyclical nature of the hotel industry.