Monthly Profitability: London Hotels Full Of Energy | Deloitte Reports
Latest results from the HotelBenchmark Monthly Profitability Survey for London reveal this year is off to a cracking start for hoteliers across the capital. Year-to-April 2005 results show Income Before Fixed Charges (IBFC) has grown 7% per-available room (PAR) adding an additional £450 PAR to the bottom line. Total revenue has also increased by 7% but despite this, the profit conversion ratio remains virtually unchanged from the same...
Latest results from the HotelBenchmark Monthly Profitability Survey for London reveal this year is off to a cracking start for hoteliers across the capital. Year-to-April 2005 results show Income Before Fixed Charges (IBFC) has grown 7% per-available room (PAR) adding an additional £450 PAR to the bottom line. Total revenue has also increased by 7% but despite this, the profit conversion ratio remains virtually unchanged from the same period last year at 43%.
Although revenue growth has been strong, costs have also risen, with total departmental costs growing 4% and undistributed operating expenses increasing 11%. Energy costs in particular have risen sharply up 22%. Despite the burden of rising costs, revenue growth has mitigated the effect on the bottom-line.
At the end of last year, the HotelBenchmark Survey by Deloitte expanded its coverage of monthly profitability data across London. In addition to tracking the profitability of the whole of London, the survey is now segmented by three average room rate bands - under £90, £90 - £160 and over £160. The following analysis highlights the performance of each segment during January-to-April 2005 compared to the same time frame in 2004 to enable a better understanding of the trends impacting the industry.
Under £90 sees the highest rate of profit growth
Across the different average room rate bands there has been a marked variation in performance. The highest rate of profit growth was in the under £90 segment, where IBFC has increased 18%. The under £90 band is also the only segment to have recorded an improvement in the ratio of profit to revenue, up 6% to 49.4%. In all other segments the profit conversion ratio has fallen.
As illustrated in the table below, IBFC in the £90-£160 segment has risen by just 5% despite a 7% growth in total revenues. This has resulted in the profit conversion ratio falling nearly 2% to 41%. Meanwhile, the over £160 segment has seen profits dip 2% despite a 2% rise in total revenues. This has contributed to a 3% fall in the ratio of IBFC to total revenue, which now stands at 37%. This lower profit conversion ratio is attributable to the increased number of facilities that hotels in this segment traditionally offer relative to hotels in the lower average room rate categories, which render higher operational costs.
London profitability performance per available room year-to-April 2005 v 2004
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FIT no phone home
Consistent across all segments has been the continued decline in telecommunications income. Telecom revenues have declined 18% so far this year, whilst the related direct costs have only fallen 1%. Guests have shunned fixed-line telephones in favour of their own mobile devices which are often more convenient and cost-effective to use. Yet they still expect in room phones, and employees are still required to man hotel switchboards for incoming and internal calls.
The Technology, Media and Telecommunications team at Deloitte predict that by the end of 2005, there will be two billion cellular mobile subscriptions worldwide - making this the most widely adopted technology of all time. With the shift in technological developments here to stay, a number of hotels now offer wireless services, complimentary broadband access and 'mobile' phones that can be used anywhere on the property. Traditional in-room faxes are being confined to the business centre which is increasingly becoming a venue for retrieving emails, accessing the internet and printing email attachments.
Annual pay-rise
Telecommunications contribute a very small portion of hotel profits, demonstrably more significant are employment costs. Whilst structural changes can be made in terms of staffing, payroll costs are subject to outside factors such as increases in the minimum wage and national insurance contributions. Total payroll costs per available room in London have risen 5% year-to-April 2005, representing an average of 28% of total revenues. Consistent with the focus on service and the provision of additional facilities, the over £160 segment has the highest proportion of payroll to revenue at 31%.
Food for thought
There is a compelling reason for focusing on rooms department where an incremental £1 on the average room rate converts to 74p in profit. However, full-service hotels also require careful measurement and management of ancillary departments in order to maximise revenues and improve profitability. Of these ancillary departments, the most significant is food and beverage (F&B) representing 29% of hotel revenues in London.
The profitability conversion of F&B is significantly lower than the rooms department at 31% versus 74%, reflecting the higher cost of sales and payroll expenses. Furthermore, F&B revenues have remained static whilst costs have crept up 1%, eroding profitability. The over £160 group is the only segment to see F&B profits increase, up 5% year-on-year, fuelled by a 2% increase in F&B revenues.
The bottom-line
As we look into the future profitability levels remain challenged particularly from rising energy costs caused by the increases in oil prices. Year-to-date energy costs are up by more than 22% and there appears no respite on the horizon. Furthermore, the continued decline in profitability from telecommunications and the threat of rising payroll costs will hamper a hotel's ability to convert top-line revenues into operating profit.
That said the opportunity to improve profit conversion in areas such as F&B, together with more robust room pricing should enable the initial profit growth seen so far in 2005 to be maintained for the remainder of the year.
Our Monthly Profitability Surveys need you
For the last six years Deloitte has run Monthly Profitability Surveys in London and Germany. Every month the survey reports on 28 line items down to IBFC to help hoteliers understand how their performance measures up.