Managing admin & general expenses to mitigate revenue losses
Hospitality industry revenues, expense dynamics and profitability levels have always been greatly dependent on the global socioeconomic environment. Over the last few years, that environment was affected by events such as Brexit, trade wars, record supply levels, and social unrest. Now in 2020, the landscape has been altered in a way no one thought possible due to the global effects of the coronavirus pandemic.
Hoteliers now face unprecedented challenges in driving profits. Since the pandemic started, the U.S. has seen total revenue per available room (TRevPAR) decline 57.6% and gross operating profit per available room (GOPPAR) fall 78.8% compared to the same time last year. The steeper decline in GOPPAR comes from expenses remaining high even with declining demand. A main reason behind those high expenses has been undistributed operating expenses, which have grown at an annual rate of 1.3% on a per available room (PAR) basis over the last 12 years. During that same 12-year period, room revenue, total revenues, and GOP have grown at a rate less than 1.0%.
Among the undistributed operating expense departments, Administrative & General (A&G) has produced the highest costs PAR and the largest increases overall. This has been a trend consistent across the globe with worldwide A&G costs rising 3.8% in 2019. The region that experienced the largest A&G expense PAR in 2019 was the Americas, which had realized 5.3% growth on a 0.4% revenue increase. Our focus for this article is the reason behind this recent rise in A&G costs as well as how hoteliers can use data to find new forms of cost control.
What is the A&G department?
The A&G department includes all expense accounts related to the operation of a property and are separated into two categories: 1) Labor costs and related expenses, 2) Other Expenses.
Labor Costs and Related Expenses
- Payroll expenses associated with salaries, wages, service charges, contracted labor, bonuses and payroll-related expenses for employees and contractors.
- Positions included in this department are management, accounting, general support, human resources, purchasing and receiving, and security.
- Audit charges, bank charges, cash overages/shortages
- Centralized accounting charges, cluster services, complimentary services/gifts
- Contract services, corporate office reimbursable, decorations
- In-house entertainment
- Legal services, loss and damage, provision for doubtful accounts
- Security, training or uniform costs
*Credit Card Commissions could also be included in this category, but STR displays this expense on its own.
Breaking down A&G data by labor costs and other expenses, we are easily able to identify that other expenses are driving overall departmental growth. A&G other expenses increased 17.3% in 2019 versus a negative change for both total labor (-0.9%) and credit card commissions (-3.7%). On an annual growth rate basis, A&G other expenses had grown 2.7% over the last five years, versus growth of 1.7% for labor and only 0.2% for credit card commissions.
To pinpoint exactly which other A&G expenses are driving the increases is more complex due to variance by company—and many companies do not submit detailed P&L data for many expenses, including A&G. However, by utilizing the 2019 data that did show detailed A&G expenses, we were able to group those line items that produced growth into five general categories: Financial, General Operating, Indirect labor, Legal and Professional fees, and Miscellaneous.
From these categories, financial-related expenses, which includes items like bank charges/fees, overages & shortages, financial adjustments, and credit & collection expenses, accounted for 52% of all other A&G expenses with an expenditure of over $60 million (USD). Over $20 million was spent on the general operating expense category, and it accounted for 22.4% of the total other A&G expenses. The large expenditure for this category shows a focus on the guest experience as it includes guest relations expenses, decorations, office supplies, equipment rentals, and complimentary gifts and services. While these types of expenses are important, they are more controllable and an area of opportunity to cut costs, especially in a distressed environment.
Indirect labor-related expenses include items such as uniforms and uniform cleaning, security, HR/payroll processing and service fees, travel-related expenses, and training. This category expenditure was close to $18 million in 2019, but only accounted for 15% of total other A&G expenditures. Many of these expenses are not easily controllable, but during a period of lower employment, this category is likely to see a decrease in expenses. And even though legal and professional related expenses produced the most growth from 2018 (92%), they accounted for the smallest portion of other A&G expenses and would be a more difficult area to cost cut. Miscellaneous expenses, with no specific detail of expenses, accounted for 7% of the total other A&G expenses with an expenditure of over $8 million—so another potential area of cost cutting.
*Keep in mind these are just the expenditures we gathered from those data providers that provided STR with detailed information. Total expenditures are much larger on an absolute basis if you were to include all data providers.
Given the current environment, many hoteliers will have to remedy operational practices to combat lower demand and revenue declines. While 2019 looked nothing like the current environment, it will become an important benchmark for the future, a recovery goal for hoteliers. While overlooked in the past, undistributed operating expenses should be an area of cost cutting that could prove to be a vital and necessary step in navigating the recovery. The A&G department is just one area that presents potential savings, but every line item under the P&L should be scrutinized as every dollar of savings could mitigate the impact on the bottom line. To learn more how our P&L program can help you, please click here.