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Shift in Hotel Retail Impacts Revenues and Profits

Shift in Hotel Retail Impacts Revenues and Profits

Hotels provide retail operations primarily for guest convenience and satisfaction and, in general, are only a small part of total hotel revenue. For the properties in PKF’s Trends in the Hotel Industry database, retail sales made up just 0.9 percent of total hotel revenue in 2012. Retail operations vary greatly depending on the type of hotel. While large full-service, resort, and convention hotels often have clothing stores, gift shops, and newsstands, limited-service, select-service, and extended-stay properties are more likely to operate a kiosk or mini-mart that sells convenience items such as snacks, drinks, and microwavable food.

To examine the financial impact of retail operations on U.S. hotels, we analyzed the 2012 revenues, expenses, and income provided by the 2,037 properties in the Trends in the Hotel Industry database that reported retail sales and expenses. We also analyzed the annual revenues, expenses, and income of 435 properties that reported retail sales data for each year from 2007 to 2012 to gain an understanding of historical trends. Every property we included manages its own retail operations and doesn’t lease them out.

Retail revenue for all hotels in the survey sample averaged $1.80 per occupied room in 2012, which is still 27.4 percent below 2008 levels. This is consistent with the results we have seen for other non-room related revenue. As noted in previous PKF studies, while room revenues have steadily increased since the depths of the 2008 and 2009 industry recession, revenues from food and beverage, other operated departments, and rentals and other income have not grown concurrently. This is, in part, due to guests and meeting planners’ need to control their spending in light of higher room rates.

Resort hotels generated the highest retail revenue in 2012, measured on both a dollar per occupied room ($7.47) and percentage of total revenue basis (1.7 percent). Although retail offerings at convention properties are similar to resorts, the volume of sales at convention properties was much lower on both a dollar per occupied room ($1.56) and percentage of total revenue (0.6 percent) basis. The ratio of retail revenue to total revenue among the other property types ranged from 0.4 percent at limited-service properties (39 cents per occupied room) to 0.8 percent for full-service properties ($1.43 per occupied room).

Profits Almost Back
In contrast to the decreasing sales volumes, retail outlet department profits, while still below, are much closer to pre-
recession levels. Profits per available room were $149.51 in 2012, which is much higher than the 2009 amount of $116.57 but slightly below the $156.96 earned in 2008. On a per occupied room basis, retail outlet department profits were 59 cents in 2012. This is still below the 2008 level of 63 cents but improved over the 2009 value of 51 cents per occupied room.

Profit margins for retail outlets have increased above the 2007 level of 28.5 percent of department revenue. In 2012, after deducting direct operating expenses for cost of goods sold (47.6 percent of department revenue), labor costs (15.2 percent), and other direct operating expenses (4.1 percent), retail departments returned an average 33 percent of department revenue to the bottom line. The primary reason for the increase in retail department profit margins is the 14.6 percent decline in labor costs that occurred from 2007 to 2012. We attribute this decline to the growing number of hotels that have replaced their gift shops with kiosks staffed by front desk personnel.

The profit margins for limited-service, extended-stay, and full-service hotels were higher than the margins at resort and convention hotel retail outlets. Limited-service, extended-stay, and full-service hotels averaged a 39.3 percent profit margin in 2012, while profits for the more extensive operations at resort hotels were 25.1 percent of department sales. The greater profit margins at limited-service, extended-stay, and full-service properties are attributable to the nature of retail operations associated with these property types. Their retail operations are generally smaller in scale than resort and convention hotels and require little or no labor resources to operate. Retail operations at resort hotels are generally more extensive than those at other property types and often include clothing, souvenirs, news periodicals, books, and other items. These outlets are separate from front desk operations and require their own dedicated staff to operate.

Hotel owners and operators continually alter their operations to meet the changing requirements of their guests. Stimulated by the growing desire for quicker and simplified retail outlets, properties have abandoned the traditional “newsstand/gift shop” in favor of kiosks and mini-marts. This transformation has occurred in both large and small hotels. These new retail operations have proven to be well received by guests and highly efficient.

Robert Mandelbaum is director of research information services and Gary McDade is a research associate for PKF Hospitality Research (www.pkfc.com). Special thanks to Marlane Bundock, managing editor of ConventionSouth, for sponsoring the survey

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