Hotels provide retail operations primarily for guest convenience and satisfaction, and are, in general, only a small part of total hotel revenue. Of the properties in the Trends® in the Hotel Industry database of PKF Hospitality Research, LLC (PKF-HR) that reported retail sales and expenses, retail sales made up just 0.9 percent of total hotel revenue in 2012.
Retail operations vary greatly depending on the type of hotel. The retail department at large full-service, resort and convention hotels often includes clothing stores, gift shops and newsstands. Limited-service, select-service, and extended-stay properties frequently operate just a kiosk or mini-mart located next to the front desk that sells items mainly for the guest’s convenience, 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 2,037 properties in the Trends® in the Hotel Industry database of PKF-HR 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 – 2012 (most current data available) to gain an understanding of historical trends. All of the properties analyzed managed their own retail operations. Properties that leased their retail operations were excluded from the analysis.
Sales Still Down
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-HR studies, while room revenues have steadily increased since the depths of the 2008/2009 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%). Although retail offerings at convention properties are similar to those at resort hotels, the volume of sales at convention properties was much lower than resorts on both a dollar per occupied room ($1.56) and percentage of total revenue (0.6%) basis. The ratio of retail revenue to total revenue among the other property types ranged from 0.4 percent at limited-service properties ($.39 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 in 2012. This is still below the 2008 level of $.63, but improved over the 2009 value of $.51 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% of department revenue), labor costs (15.2%) and other direct operating expenses (4.1%), retail departments returned an average 33.0 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 that are 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 for PKF Hospitality Research. Gary McDade is a Research Analyst. Both work in the firm's Atlanta office. To purchase a copy of the 2013 Trends® in the Hotel Industry report (2012 data), please visit http://www.pkfc.com.
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