Addressing labor costs and retention, as well as F&B
profitability top of mind for managers who are creating more incentive-based
deals.
NATIONAL REPORT – Management companies were in the headlines
quite a bit in 2024 with ongoing consolidation, company shake-ups and
never-ending back and forth between owners and operators on fee structures.
A few key takeaways emerged as we spoke to owners and
operators about what’s next in the hotel management arena: managing labor costs
will continue to be crucial; getting more serious about making food and
beverage a profit center is paramount; and more incentive fee models that
reduce base fees and let managers more appropriately participate more on the
upside.
The labor challenge
The labor cost piece of the management equation is still
priority number one, according to Noble Investment Group Senior Vice President
Dustin Fisher.
“The labor cost in a flattening revenue growth environment
continues to be our primary area of focus, both with our managers and on markets
we select to invest in,” Fisher said.
The labor cost in a flattening revenue growth environment continues to be our primary area of focus, both with our managers and on markets we select to invest in.
Dustin Fisher
To offset higher labor costs, Fisher said a lot of operators
are trying to add more bespoke offerings that drive revenue – whether it be
through additional services, parking, F&B or other amenities.
“You see roles starting to exist in organizations primarily
focused on food and beverage, or how to make a hotel more of an experience than
just a traditional, transient-oriented box,” Fisher continued. “You’ll continue
to see that, and we’re trying to design most of our new hotels to cater that
way, too.”
Fisher said Noble is also trying to cater to more mid- and
small-sized groups. “It’s these kinds of approaches and incremental revenue
that even helps you justify the feasibility of a new development or an acquisition,”
he added.
Raines Company Managing Partner Grey Raines echoed the need
to dedicate more resources to F&B.
“For a long time, as owners and operators, you always wanted
to admit you were in the hotel business, and you wanted to shy away from the
fact that you were also heavily in the food and beverage business,” Raines
said. “We better be focused on it… COVID taught us you can no longer afford to
have a division or an outlier, whether that’s a courtyard bistro or a
full-service restaurant to be just amenities anymore. Amenities lose money. You
need your F&B outlets to be profitable and that drives organic success
throughout the entire property. When you have that culture of, well, we’re
going to make money on our rooms and get by everywhere else – it’s just not
sustainable.”
Raines wouldn’t go as far to say his company would create a
dedicated F&B division and it will probably continue to sit within the
operations team. “But we continue to invest in people and technology to succeed
in the F&B world,” he said.
For Gencom, who plays more in the luxury space, Alessandro
Colantonio said he has seen an evolution where the luxury brands are more open
to bringing in third-party F&B operators.
“Not only does it bring the buzz, the foot traffic and all
the social media that comes with some of these major F&B operators, but it
kind of lets the brand focus on what they do best, which is driving rate,
driving occupancy and profitability,” he said.
Right-sizing
While making F&B a profit center can certainly drive the
top line, Hospitality Ventures Management Group (HVMG) Executive Vice President
and Chief Growth Officer Woody Woodward discussed a more basic issue
surrounding labor challenges: attracting and retaining talent at the property
level.
If you have a great GM, that can be a great leader, doesn’t just print out the schedule every week and instead is really immersed in the product and the team that they have, you’re going to have a successful property, right?
Woody Woodward
“We talk about how technology and AI can help on the expense
load, but it honestly comes down to the talent you have on property and the
talent you have above property,” Woodward said. “If you have a great GM, that
can be a great leader, doesn’t just print out the schedule every week and
instead is really immersed in the product and the team that they have, you’re
going to have a successful property, right?”
Woodward also lamented a bit about having the right size
management company. “The bigger you get the more you have to attract and
retain. “And the larger you get, there is diminishing returns when you scale
either too fast or you scale too much.”
More broadly, Woodward talked about a more focused strategy
as a management company generally creating better performance.
“What scares me on the management side is trying to stretch
and doing something that really isn’t within your guardrails,” he said. “That
can put a lot of strain, not only on those types of assets and that ownership
group that you're taking on, but on your resources in general as you spend some
much on trying to figure it out. Then problems start to happen with what you’re
good at because your not focused on your strengths.”
Woodward said HVMG has done research to look at what they
are best at and what types of ownership groups they work best with. As a
result, he said it helps them “stay within their guardrails.”
Fee structure options
Multiple management company sources referenced changes in
agreements with owners that focus more on the bottom line and resulting
incentives.
I’m seeing more owners look at an incentive model to hit certain NOI or profitability thresholds.
Bryan Postema
“I’m seeing more owners look at an incentive model to hit
certain NOI or profitability thresholds,” said Bryan Postema, COO at Driftwood
Hospitality Management.
At the higher end of the market, Mark Keiser, president of
development at Viceroy Hotels & Resorts, added that owners have a lot of
negotiating leverage today because growth hasn’t been as prolific with higher
inflation and interest rates.
Keiser added that they are still focused on long-term
contracts with appropriate base fees, as well as alignment on the incentive fee
level.
“Our success will be in generating NOI per key for our
owners, and if we have an incentive fee that captures appropriately the upside
is more relevant as opposed to moving from 3% to 5% on food and beverage, for
example. We’re still making it – but based off of driving returns to our owners,”
Keiser said.
Woodward added that HVMG has taken management of a property
with a negative NOI and ownership needing to sell within 18 months. They asked
HVMG to come in and improve margins and quality scores. If HVMG hit certain NOI
thresholds they would receive a share on the backend of the sale.
“We helped them with a little discount in fees on the front
end,” Woodward added. “We were also aligned and knew their objectives… These
types of deals have worked out well for us.”