Until the Dust Settles, Zero-Based Budgeting is Indispensable
Some forecasts make sense. George Carlin once astutely predicted the night’s weather: dark. On the other hand, handicapping the future—especially the economy—is a fool’s errand. Here’s what Jamie Dimon once said about it: “No one can forecast the economy with certainty.” If the CEO of JPMorgan Chase can’t do it, good luck to anyone else.
His comment rings more true than ever. COVID-19 cast the hotel industry into a free fall and just as the global recovery began to germinate, along came inflation, supply-chain distress, labour shortages, exploding energy and fuel costs and a host of other severe issues that make running a hotel and making money off running a hotel very challenging.
Because predicting the future is impossible even in stable, copacetic times, hoteliers need to turn to other future-proofing or future-cushioning methods. At the recent 2022 M3 Partners Meeting, HotStats’ COO Michael Grove presented on a range of topics focused on the full profit-and-loss statement and his biggest piece of advice for the audience was this: Amid near- and long-term volatility, zero-based budgeting is essential.
Grove’s presentation elucidated why zero-based budgeting, a method of budgeting in which all expenses must be justified for each new period starting from a zero base, was so necessary given the fluidity of the global economy and, ultimately, its impact on hotel operations.
These issues and questions, as Grove pointed out, included:
- Will conference, tours, groups and corporate travel return to 2019 levels?
- The labour challenge
- How inflation has impacted the cost lines
- The energy crises
Grove first illustrated the pandemic’s effect on worldwide profits and how it’s changed the landscape. “To begin with,” he said, “it’s worth reminding ourselves of the importance and magnitude of the U.S. hotel industry’s share on the global scale, which has only grown during the pandemic.”
In fact, almost half of global profits are produced in the U.S. and that share only rose as the pandemic slackened, evidenced by the chart below. A massive 47 percent of hotel profits are achieved in the U.S., up 6.6 percentage points since 2019, the result of myriad variables, including a large domestic market and staycation trend.
Meanwhile, severe lockdowns and restrictions in Europe and Asia-Pacific sent their percentages down as the Middle East received a boost in Q4 2021 from Expo 2020 in Dubai.
And as conference and banqueting retrenched from 2020 onward, rooms department revenue increased:
The recovery continues, but it’s uneven across regions, with the U.S. almost back to attaining pre-pandemic profit on a nominal basis, as Asia-Pacific, plagued by severe COVID restrictions in China, still has far to go.
Within the U.S., asset classes reacted differently to and during the COVID pandemic. As luxury hotels fell the fastest and farthest, they popped back the quickest and the most—now eclipsing 2019 GOPPAR. Extended-stay, limited-service and select-service saw the least vacillation while full-service hotels fell flat, but are now back to 2019 levels.
The biggest pain point for hoteliers—and employers globally—has been labour: sourcing it, hiring it, keeping it. For the hotel industry, labour across the board is still down versus baseline 2019, but is rising in the housekeeping and F&B departments. Hotels in the U.S. added 22,000 jobs in April.
As labour costs remain somewhat muted, other expenses across the P&L are surging. The breakdown below shows how inflation is causing a rise in hotel operating costs, from room expenses to utilities.
The topics that Grove pointed to from the top, he tried to give answers to with the data. To recap:
- Conference and corporate segments are returning to key markets
- The labour challenge continues with struggles in recruitment and retention of staff compounding inflationary increases in pay
- Inflation: Increased costs are slowing the profit ramp up, however, much is being offset by efficiencies
- The energy crisis means it’s time to revisit ROI on energy-reduction projects, with owners making more of a pivot to ESG measures