U.S. Hotels Staff Up; Rising Benefit Costs at Highest in 15 Years

ATLANTA | The typical U.S. hotel spent 6.3 percent more in labor costs during 2004, compared to 2003, according to the recently released 2005 edition of Trends in the Hotel Industry published by PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting. Leading the substantial jump was an 8.9 percent increase in benefits costs. Combined with a 7.7 percent increase in 2003, it is the highest two-year growth in benefit costs since 1988-1989.

Climbing out of the 2001 to 2003 lodging industry recession, hotel revenues grew 7.6 percent in 2004. The increased business volume has allowed hotel managers to re-hire workers and reinstate services and amenities, both of which require increased staffing.

"In the hospitality industry, labor is not just a necessary operating component. It is an integral part of the product," said R. Mark Woodworth, executive managing director of Atlanta-based PKF-HR. "The interaction between hotel guests and employees has a dramatic impact on the customer experience and the success of the business operation. Therefore, better hotel managers pay close attention to human resources."

Labor costs is just one of 28 different in-depth analyses found in the just-released 2005 Trends in the Hotel Industry report, marking the 69th annual review of U.S. hotel operations conducted by PKF. This year's sample draws upon year-end 2004 financial statements received from more than 5,000 hotels across the country.

A Variable Expense

At 45.9 percent of all operating expenses, labor and related costs continue to represent the largest expense item for hotels. Therefore, during the recession, with revenues falling, this was one area where cost controls had to be implemented. "In general, hotel managers do not like to reduce staffing because that could have a negative impact on guest service. Therefore, managers will cut payroll only to an amount commensurate with the lost revenue," Woodworth observed. "Historical payroll data provides a look at the careful balancing act executed by hotel management. Over the long term, labor costs have consistently run very close to 34 percent of total revenue. In 2004, labor costs were 34.4 percent of total revenue. If this trend persists hoteliers will find increasing pressure on their profit margins."

Given the increases observed in business activity throughout hotels (rooms occupied, restaurant patrons, banquet and meeting attendees) more employees are required to service the needs of the rising number of guests. "With the improvement in the economy, not only will it be increasingly difficult for hotel managers to find qualified employees, but there will be upward pressure on wage rates and salaries as well," Woodworth noted.

Government statistics also show that employee productivity gains are starting to wane after years of growth. This trend is particularly acute in the hotel industry where most operating functions are manually executed, not automated. Historically, hotels have not enjoyed the productivity enhancements achieved by other industries due to automation. The lack of productivity enhancements, combined with the relatively high degree of variable staffing requirements, has resulted in historical changes in lodging industry payrolls that have differed dramatically from those of other industries.

Employee Benefits On The Rise

There are two components to hotel labor costs: salaries and wages, and employee benefits. Employee benefits include items such as payroll taxes, payroll-related insurance, subsidized employee insurances and meals, and retirement plans. "The salaries and wages paid directly to hotel employees went up 5.5 percent in 2004. However, it is the 8.9 percent increase in employee benefits that concerns hotel owners and operators," Woodworth said. "Hotel managers struggle to balance the desire to offer their employees benefits like health insurance and 401 K matching, with the cost of providing such benefits. In addition, some benefits are government mandated, with little room for management control."

In the past two years, employee benefits have increased a total of 16.6 percent. This is the greatest two-year increase for this expense item since the 25.2 percent growth rate observed back in 1988 - 1989.

Copies of the 2005 Trends in the Hotel Industry report, which provides owners, investors, property managers, asset managers and others with detailed information on all aspects of hotel, revenues, operating costs and profits, are available at PKF's online store at www.pkfc.com, or by calling Claude Vargo toll free 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.

                      LABOR COSTS AS A PERCENT OF
                   TOTAL HOTEL REVENUE AND EXPENSES
      ----------------------------------------------------------

                             Percent of          Percent of
             Year           Total Revenue       Total Expenses
      ----------------------------------------------------------
             1987                32.5%               41.1%
             1988                32.0%               41.0%
             1989                33.1%               42.4%
             1990                32.7%               41.8%
             1991                30.5%               38.5%
             1992                33.0%               42.5%
             1993                33.2%               43.1%
             1994                33.1%               43.8%
             1995                32.8%               44.8%
             1996                31.9%               44.8%
             1997                31.1%               44.7%
             1998                30.9%               45.1%
             1999                31.0%               45.2%
             2000                30.5%               45.4%
             2001                31.6%               44.8%
             2002                33.2%               45.5%
             2003                34.8%               45.9%
             2004                34.4%               45.9%



                      CHANGE IN HOTEL REVENUE vs
                      CHANGE IN HOTEL LABOR COSTS
      ----------------------------------------------------------

                               Change in           Change in
               Year          Total Revenue        Labor Costs
      ----------------------------------------------------------
             1987                 2.6%                2.6%
             1988                 4.4%                3.5%
             1989                 4.8%                7.7%
             1990                 3.0%                1.8%
             1991                -2.3%               -1.1%
             1992                 3.6%                2.4%
             1993                 3.2%                5.1%
             1994                 8.0%                7.4%
             1995                 6.6%                6.0%
             1996                 8.0%                4.8%
             1997                 7.0%                4.4%
             1998                 5.6%                4.9%
             1999                 3.9%                4.2%
             2000                 7.7%                7.0%
             2001                -9.9%               -6.6%
             2002                -4.0%               -0.2%
             2003                -1.8%                3.1%
             2004                 7.6%                6.3%



                         CHANGE IN LABOR COSTS
                   LODGING vs ALL PRIVATE INDUSTRIES
      ----------------------------------------------------------

                               National
             Year         Private Industry    Lodging Industry
      ----------------------------------------------------------
             1989                 4.7%                2.6%
             1990                 5.0%                3.5%
             1991                 4.4%                7.7%
             1992                 3.7%                1.8%
             1993                 3.6%               -1.1%
             1994                 3.3%                2.4%
             1995                 2.7%                5.1%
             1996                 2.9%                7.4%
             1997                 3.1%                6.0%
             1998                 3.6%                4.8%
             1999                 3.4%                4.2%
             2000                 4.4%                7.0%
             2001                 4.1%               -6.6%
             2002                 3.7%               -0.2%
             2003                 3.8%                3.1%
             2004                 3.9%                6.3%

Source: PKF Hospitality Research