Investors guide to your next Hotel Development

What external factors affect the hotel market?

A number of factors affect the performance of the hotel industry. These drivers include:

  • Domestic trips by US residents: Trends in domestic travel, especially business travel, and the total nights spent away from home directly affect demand for accommodation. As the number of trips made by US citizens rises, demand for hotels and motels to house them increases.
  • Consumer Confidence index: Changes in consumer confidence influence decisions that individuals make concerning expenditure on entertainment and traveling, particularly during a recession.
  • Consumer spending: Consumer spending levels have a direct effect on travel demand. When consumers are spending more overall, they are more likely to spend some of their money on travel and accommodations.
  • Inbound trips by non-US residents: Trends in international visitor arrivals and their lengths of stay influence demand for accommodation. A rise in inbound trips positively affects demand for hotels and motels.

Who are the key competitors in the hotel market?

As specified above, there are 74,372 hotels in the United States.

The market leaders (in terms of market share) include Hilton Worldwide Holdings Inc. (13.7%), Marriott

International Inc. (13.5%) and InterContinental Hotels Group PLC (7.5%).

The rest of the market is comprised of many smaller players.

What are the key segments of the hotel market?

A hotel is an establishment that provides lodging and, often times, meals and other services for travelers and other paying guests. A motel, on the other hand, provides lodging for motorists in rooms usually having direct access to an open parking area.

A particular hotel or motel can be classified by a number of characteristics, including whether it provides full or limited service, whether or not it is located in a metropolitan area, the state or region in which it is located, its price or rate level, the number of rooms, and whether it is independent or part of a chain operation.

Hotels and motels can also be segmented by room price rates. The establishments with room rates in the highest 30 percentile that are located in local or metropolitan markets are classified as upscale or luxury. The middle 30 percentile is classified as mid-priced, and the lowest 40 percentile as either economy or budget.

Overall, sales from hotels account for 87.4% of industry revenue and 82.0% of industry employment, though they account for only 44.0% of industry establishments.

Hotels that consist of 25 or more rooms provide 83.6% of industry revenue (with 62.7% of industry revenue coming from guest room rentals, 12.5% coming from food and alcohol sales, 4.2% coming from conference and meeting rooms and 4.2% coming from other charges), while hotels that offer fewer than 25 rooms only constitute 3.8% of industry revenue.

Motels provide about 12.6% of industry revenue. The relative proportion of revenue from each of these segments has been relatively stable over the past five years, although motels experienced some growth at the expense of higher-priced hotels during the recession.

How do hotels generate revenues and profits?

Clearly hotels generate revenues and profits from selling out their rooms.

However, as specified above, other key sources of revenue to consider are food and alcohol sales, and selling conference and meeting rooms.

What are the key financial metrics and costs in the hotel market?

The key financial metrics in the hotel market are as follows:

Profit

Industry profit is measured as earnings before interest and taxes. Industry profit have averaged 15.5% of sales in recent years.

Purchases

The industry’s major expenses are purchases and cost of sales, such as bedding and room supplies. Many hotels also provide meals and liquor, either in individual rooms or in separate restaurants or dining areas.

Last year, purchases were estimated to account for 29.9% of an average operator’s revenue.

Wages

Labor is required in many aspects of hotel management, from front-of-house activities, such as front desk, concierge and related activities, to all back-of-house activities, including general management, accounting, marketing, room cleaning and servicing the kitchens, bars and restaurants.

Many hotel jobs have a low skill and training requirement, and employees can be hired on a part-time or casual basis. Because of this practice, many hotels have high staff turnover.

Therefore, there is a constant need for recruitment and training, which can be costly. Some operators have outsourced part of their staff services to specialist staff-recruitment agencies to lower recruitment costs.

Last year, industry wages accounted for approximately 25.7% of total industry revenue.

Rent and Utilities

Rent and utilities on average comprise 7.6% of hotel revenue.

Other Expenses

Marketing costs and royalty fees are another significant cost for those industry participants that operate on a franchise basis. Franchisees typically pay an annual fee of 4.0% to 6.0% of total revenue.

Other major costs include repairs and maintenance, promotional costs, commission paid to agents, bookings and internet fees, accounting and legal costs, motor vehicle expenses, stationery and printing, insurance and other administrative and overhead costs.

What are the key financial metrics and costs in the hotel market?

The key financial metrics in the hotel market are as follows:

Profit

Industry profit is measured as earnings before interest and taxes. Industry profit have averaged 15.5% of sales in recent years.

Purchases

The industry’s major expenses are purchases and cost of sales, such as bedding and room supplies. Many hotels also provide meals and liquor, either in individual rooms or in separate restaurants or dining areas.

Last year, purchases were estimated to account for 29.9% of an average operator’s revenue.

Wages

Labor is required in many aspects of hotel management, from front-of-house activities, such as front desk, concierge and related activities, to all back-of-house activities, including general management, accounting, marketing, room cleaning and servicing the kitchens, bars and restaurants.

Many hotel jobs have a low skill and training requirement, and employees can be hired on a part-time or casual basis. Because of this practice, many hotels have high staff turnover.

Therefore, there is a constant need for recruitment and training, which can be costly. Some operators have outsourced part of their staff services to specialist staff-recruitment agencies to lower recruitment costs.

Last year, industry wages accounted for approximately 25.7% of total industry revenue.

Rent and Utilities

Rent and utilities on average comprise 7.6% of hotel revenue.

Other Expenses

Marketing costs and royalty fees are another significant cost for those industry participants that operate on a franchise basis. Franchisees typically pay an annual fee of 4.0% to 6.0% of total revenue.

Other major costs include repairs and maintenance, promotional costs, commission paid to agents, bookings and internet fees, accounting and legal costs, motor vehicle expenses, stationery and printing, insurance and other administrative and overhead costs.

Steps to Starting a Hotel

If you want to start a hotel, follow these steps:

  1. Determine the type of hotel you would like to start (e.g., how many rooms, luxury vs affordable, etc.)
  2. Determine the ideal location(s) for your hotel
  3. Determine whether you will build your hotel from scratch or renovate an existing structure
  4. Speak with architects and others who will be involved in building/renovating your hotel to determine costs
  5. Speak with local government to understand zoning and permit issues and associated costs
  6. Develop your hotel business plan that details your strategy, plans and financial projections
  7. Present your plan to investors and lenders to raise the required funding
  8. Build/renovate your hotel
  9. Recruit and train your hotel staff
  10. Purchase the required systems (e.g., reservation system, accounting software, etc.) to effectively manage your hotel
  11. Launch your pre-opening hotel marketing plan
  12. Open your hotel to the public