With all the chatter in the industry about an anticipated downturn, no one expected the apocalyptic...
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With all the chatter in the industry about an anticipated downturn, no one expected the apocalyptic scale of the COVID-19 pandemic. While still reeling from the sudden shock that has brought the industry to its knees in the space of a few weeks, its important to remain focused on the path to recovery. We will get through to the other side of this and the resilient will come back stronger than before. With that in mind, it may help hotels to examine the actions of businesses that have withstood down times in order to emulate this behavior as we stabilize and quickly build back a strong industry foundation.
A McKinsey study of large corporations, while quite different than a unit level hotel, revealed interesting patterns. Many of these will apply to organizations large and small1 . McKinsey consultants tapped data from 1,000 organizations between 2007 and 2011. They determined the most resilient companies employed a distinct set of behaviors. These best performers not only flourished throughout the recession, they outpaced poorer performers who struggled to catch up once the recovery began. The top quintile of companies delivered EBITDA margins 25 points higher than the bottom quintile.
THREE PRIMARY POINTS COMPRISED THE TOP COMPANIES’ PLAYBOOK. THEY MAY BE WORTH CONSIDERING FOR YOUR HOTEL:
COST CONTROL The most resilient companies cut operating costs by $.50 for every $1 change in revenue before the recession started. The non-resilients started with higher cost structures and didn’t start to cut back until the recession began in earnest. The top companies continued to control costs with the same rigor well into the recovery.
ORGANIZATIONAL STRUCTURE The top companies enabled accelerated decision making by flattening the organization. This increased intervention speed and cost savings. It also enhanced alignment from senior management down to unit level to ensure that everyone operated on the same game plan.
BUSINESS EVALUATION There was a high degree of focus on the areas of strong and weak performance. The goal was to remove friction in the system and discontinue any business element that dragged down overall performance. This evaluation was ongoing, which let management move quickly.
No doubt, the world is different in 2020. Hotels have had years to master cost control. They can claim expertise in labor management, despite external factors like sharp increases in hourly wages and limits on sourcing qualified staff to run hotels. Nonetheless, these factors aren’t likely to diminish in a downturn; they may worsen. Digital disruption has caused significant changes in all industries since the last recession. Running hotels is different from running large corporations, but some lessons apply to each when preparing for a downturn. There are many levers of performance in a hotel in both good and bad times, the critical ones for operators are almost always around the same three factors: labor, revenue acquisition and guest’s likelihood to return.
2020 HOTEL COST CONTROL
According to McKinsey, resilient companies are masters of cost control and tie these efforts closely to shifts in revenue. During the last recession, many hotel organizations put a stringent focus on operating costs and have continued to pump those brakes.
The most typical approach when faced with a downturn is to set absolute cost cutting targets. But if tied to the pace of revenue growth, a hotel would intentionally remove costs at a faster rate and may do a better job of maintaining a threshold on guest satisfaction. However, given the challenges of rising labor rates, it may be difficult to achieve a $.50 reduction for every dollar reduction in revenue growth strictly on labor, but tracking all costs against revenue changes will be critical. In the quest to identify cost saving opportunities, systematically tracking acquisition costs offers significant opportunity.
Thanks to a costly digital market, hotels in the U.S. are now paying 15 percent to 25 percent of guest-paid revenue to acquire their customers. By contrast, in 2008, this metric was closer to 10 percent to 15 percent. Managing these costs requires tracking them, but acquisition costs are scattered on most hotel P&Ls. Some costs, such as wholesale commissions, don’t appear at all. Commissions, loyalty costs, channel and transaction fees and sales and marketing expenses have been viewed in part as a “cost of doing business” and largely as a fixed fund with incremental increases each year.
Some owners are asking their management teams to view these investment funds with fresh eyes and to align spending to a planned optimal business mix target. That means a hotel has a target for each type of business such as OTA, Brand.com and GDS, as well as each rate category such as government, consortia and Rack/BAR. The total spending pool is set based on segment and channel targets and is capped for cost control purposes.
If a hotel oversteps a predefined OTA target and overspends on commissions, that limits the funds to pursue digital campaigns through Brand.com. This is a new opportunity for a hotel to manage a meaningful cost category. It gives the revenue team a dual focus, which lets them control costs. In the digital market, they not only have to source their demand, they have to do it as efficiently as possible given what’s available in their markets. This shifts them from a top line focus to one concerned with flow-through to profit.
2020 HOTEL ORGANIZATIONAL STRUCTURE
The McKinsey list of resilient companies fl attened their organizations and demonstrated quick execution whether they were proactive in anticipating changes in the market or reacting to the unexpected.
Hotel revenue generation teams have traditionally been highly siloed: revenue management looks after pricing/inventory; sales targets business travel (BT); and group sales and eCommerce work to grow website traffic. While there is often coordination, it’s largely in execution, not in funding decisions. Because each has a separate budget and staffing, outreach and business mix, targets haven’t always driven the spend of the overall funding pool. In order to flatten the organization, you just need to follow the money.
Spending must align with the opportunities by segment and channel. For example, instead of assuming the sales team should go after all the business travel (BT) or group business it can find, determining if the business is in “maintenance” or “growth” mode, may result in a more informed staffing decision. If the agreed target for the Brand. com business is $1 million, spending needs will be very different than if it’s $100,000. Some hotels have shifted to having heads of commercial or revenue operations direct revenue generation efforts. This ensures coordination, particularly around spending. Breaking down the silos to holistically consider sales, digital and promotional needs driven by known quantified opportunities will result in a more tightly aligned organization. As a result, it will be able to ensure customer acquisition funds are deployed most efficiently for the hotel’s highest and best use.
2020 HOTEL BUSINESS EVALUATION
In the third and fi nal element from McKinsey’s playbook, resilient companies (due to their nimble organizational structure) target and quickly take action on areas of strength and weakness. They evaluate the business, remove friction from the system and move fast to act on opportunities. In a hotel setting, this relates to thoroughly understanding market opportunities with as much granularity as possible. No hotel can afford to go after all corporate or all group business in its market; to be on every digital shelf; or to participate in every OTA or brand promotion.
For example, a hotel can’t afford to pursue corporate accounts that don’t boost profits while ignoring government or weekend group business that does. There aren’t enough funds to function like this. And in a slowing economy, these funds must be meted out with care. It’s hard to break habits hardened by decades of behavior. Hotels have measured performance essentially using one primary top line metric, RevPAR index. This doesn’t account for acquisition costs, even though they’re second only to labor costs at 15 percent to 25 percent of guest paid revenue. Hotels are competing for many types of business in their market and the legacy concept of comp sets implies (usually inaccurately) that the primary – and perhaps secondary – comp set is receiving most of the business a hotel wants to pursue.
The fact is that in almost all U.S. markets, 20 to 30 hotels are getting the business that may be a match for any given hotel. But longstanding habits may prove myopic when focused on a short list of 5 to 10 hotels. This legacy paradigm can result in a serious misalignment between spending and real opportunities. According to Kalibri Labs’ database of more than 33,000 hotels, with an optimal business mix at 100 percent, most U.S. hotels are running between 75 percent and 85 percent of optimal. That could be worth $250,000 to a small hotel and millions to a larger one.
Knowing how much business exists in a market is no longer enough. Hotels have to narrow their focus to the right mix of opportunities that will yield the highest profit contribution. Sales leaders may direct the teams to “group up” without determining the best time for that to happen. Business travel (BT) sales often pursue all agency accounts that appear in their market, without considering their impact on profit contribution – or if they’re worth chasing at all. They don’t always stop to realize that some BT business is inferior to loyalty member rates or Rack/BAR but that requires a shift in funds from sales to digital. This ties back to the single pool of acquisition funds. How much should a hotel spend on sales payroll? How much on digital? And how much on promotions? A downturn may force many to seek a response to these age-old questions, but the good news is that data and technology have finally matured enough to answer them. 
For 20 years, hoteliers focused efforts on “revenue management” on the assumption that it would deliver optimal outcomes. But this discipline isn’t designed to match spending with opportunity. Even the most talented practitioners would struggle to surface sales, marketing, promotional and digital opportunities using tools for pricing and inventory management. However, revenue strategists could evolve to evaluate the best acquisition targets and use this information to determine how to right size a hotel’s spending.
SUMMARY
Cue the economic downturn, and this playbook is no longer a “nice to have” approach, but rather, a critical one. Resilient management teams will tackle the challenges of the digital market with new ways to think and operate. Driving a hotel’s business to the highest level of revenue capture can make a material difference in flow-through to profit contribution and asset value, determining whether it limps along or sails successfully through the downturn. And if McKinsey’s study has any application for hotels, the winners will likely develop techniques that involve new skills in managing costs, a nimble organization and decision-making process, and a reset on the way hotels evaluate performance.
1 Kevin Laczkowski, Sean Brown, Mihir Mysore, “Stronger for Longer: How top performers thrive through downturns”, McKinsey & Company, Dec 2019
