Recession Reality for Bed and Breakfast Inns.

By Howard Levitan, on March 2nd, 2009

1.       The Numbers Don’t Lie?  Once again we are faced with an incredible array of numbers coming out of respected professionals who are trying to figure out the impact of the National recession.  The problem is that the numbers can be made to say anything, but a careful review will show that no matter whose numbers are used, the picture is not rosy.  Take for example the Gross Domestic Product (“GDP”).  The Government released figures in January showing a decline in GDP for 2008 of 3.1 %, the worst in over a decade, clearly signaling the fact that the recession was worse than most economists had predicted.  On February 27th, after the markets closed, the Government revised the GDP loss to a whopping 6.2 %.  Stocks world-wide are tumbling on that piece of bad news, in fear of a longer recovery period.  The downward spiral seems to continue with the report that even revered investor Warren Buffet lost $11.5 billion in the net worth of his Berkshire-Hathaway Corporation. 

 

2.      What is the impact on the Inn Business.  First, it is hard to get numbers for the Bed and Breakfast Inn business separately.  Smith Travel Research (“STR”) is the most respected source of historical numbers for the Hospitality Business, but does not collect data from small properties (under 50 rooms).  One data release from STR shows that New England seemed to be holding its own relative to the US National data.  For example, December, 2008 results for New England included a drop in occupancy rate of -2.1%, while Average Daily Rate (“ADR”) decreased by -3.6%.  This resulted in a huge decrease in Revenue Per Available Room (“REVPAR”) of -5.7%.  The National figures during the same December period showed larger decreases in Occupancy of -6.8%, in ADR of -3.2%, and a REVPAR decrease of -6.6%.

 

For the Year 2008 as a whole the figures are also instructive.  New England showed a decrease in occupancy of -2.8%, but an increase in ADR of 1.9%, resulting in a miniscule decrease in REVPAR of -0.9%.  The National figures for 2008 were far worse, with a decrease in occupancy of -4.2%, but an increase in ADR of +2.4%, resulting in a decrease of -1.9% in REVPAR. 

 

The numbers from STR show that, until about September, 2008 was a growth year with higher occupancies that dropped precipitously in the 4th Quarter.  Rates were still climbing in December, as the Hospitality Business seemed to lag in discounting.  Overall, 2008 would be a down year, but only in comparison to the strong growth in the prior three years.

 

3.      New England is not the same.  One interesting thing that jumps out of the results shown by STR is that the New England States are not homogeneous.  In fact, it was clear in both the December and National results for 2008 that Northern New England (Maine, New Hampshire, and Vermont) fared much better individually than the Nation or their Southern New England counterparts.  For example, for 2008 as a whole, Vermont showed an increase in occupancy of +1.9%, an increase in ADR of 4.8% along with a REVPAR increase of +6.8%.  While the results in Maine and New Hampshire were more consistent, they were slightly worse than New England as a whole.   The bottom line was that overall, 2008 was a non-growth year, with a really cloudy picture for 2009.

 

4.      The Real Data comes from Sales Tax Revenues.  Another well respected source of industry research comes from Atlanta-based PKF Hospitality Research (“PKF”).   Utilizing results of sales tax collections in Maine, PKF reported that September lodging sales in that state dropped by -12% from 2007, and continued to drop by -2.6% in October on a year-to-year basis.  While Maine finished the year 2008 slightly ahead of 2007 (+0.7% growth in revenue), this came after 6% annual growth in the preceding three year period.  PKF is projecting as a whole a -7.8% decline in REVPAR for Maine in 2009, which would make it one of the steepest declines in recorded history since the 1930’s.  PKF also predicts that Maine will not fare as worse as others, because of its relative low cost and its rural location which fosters escape from the big cities.   Presumably this would apply to all of Northern New England with similar characteristics prevalent throughout the region. 

 

5.      Summary:  Batten Down the Hatches!  No one likes to consistently hear bad news, but there is little about the economy that seems to be saying that things are going to get better soon.  Predictions for a recovery in late 2009 and early 2010 are all that we have to go on, but most economists are hedging on those dates.  Similar to the broad-based declines in 4th Quarter, 2008, retail spending, the American consumer seems to have switched to a survival mode, and this does not bode well for discretionary spending at least until there is some better news on the horizon.  We have advised our consulting clients of the following:

 

          a.       Budget for a decrease in revenue of about 10% for 2009, adjusting expenses as much as possible to that revenue;

 

          b.       Increase spending in Marketing, particularly electronic marketing to capture market share;

 

          c.       Neither increase or decrease overall rack room rates.  Develop packages with adventure travel features which show good overall value.  Up-sell rooms whenever possible, and include value-added options with all room rates.  Partner with local businesses and cross-market as much as you can. 

 

          d.       Hold discretionary spending to a minimum and build cash wherever possible in the event that this recession lasts longer than expected.  Do not defer necessary repairs and maintenance, but this is not the year to spend money on capital improvements. 

 

          e.       Remember why you came into the Hospitality Business. It is all about the guests and not the Innkeepers!

 

          f.        This too shall pass.  Look to the future, because the past is gone forever.

March 2nd, 2009 | Category: Bed & Breakfast Consulting, Bed & Breakfast Operations, Business Profitability, Discounted Rates, Expense and Income Tracking, Financial Results, Innkeeper trends, Innkeeping advice, Optimizing Results, Yield Management, web marketing | 2 comments

Bed and Breakfast Expense/ Income Tracking

By Rebecca Levitan, on April 3rd, 2008

The only way to improve your Bed and Breakfast or Inn business is to effectively track where you are today and to make realistic goals for the future of your business. At the 2008 PAII Conference Howard Levitan of Quantum Hospitality Group will be discussing the best methods to track where your business is today and how to increase your profits using metrics and the PAII Industry Study. We hope to see you at the Conference! If you cannot attend, we have provided our slide show presentation:

Bed and Breakfast Expense/ Income Tracking

April 3rd, 2008 | Category: Business Profitability, Expense and Income Tracking, PAII, PAII Conference | Leave a comment

ARE YOU READY TO MAXIMIZE YOUR PROFITABILITY?

By Rebecca Levitan, on January 28th, 2008
Arden Dale writes in a compelling article published in the Wall Street Journal on January 8, 2008 that “Want to Sell a Business? You May Not Be Ready.” Ms. Dale goes on to state quite cogently that many small business owners are relying on the ultimate sale of their business for their own personal retirement funds. The author’s thesis is that many small business owners do not have proper financial records, detailed operational documentation, and may not have a very realistic idea about the price for their businesses. She goes on to point out that buyers are much more sophisticated than in the past and are insisting on receiving extensive due diligence materials before agreeing to any purchase. The author’s solution is to start getting the business ready to sell several years in advance, to keep proper books and records, and to improve the operating profitability as much as possible.

Sound familiar? This is what we have been talking about this for years now with our program to Achieve Maximum Profitability at your Inn well before it goes to the market. Looking at the financial condition of an Inn as compared to Inns across the Country is achieved by looking at results compared to other similar Inns. In this regard, one source of information for the smaller Inns would be the PAII Industry Study (2007-2008 utilizing 2006 financial results is the most recent version). Other sources includes our own Quantum Hospitality/Oates & Bredfeldt, LLC Standard Cost Analysis Study. In either case, the concept is to conform your own Inn’s financial performance to the Chart of Accounts set forth in the appropriate study, and to determine on an account-by-account basis whether or not your income and expenses are in line with the average Inns in each such study. I can state, without any doubt, that each time we do such analysis for an Inn, we are able to come up with potential cost savings well in excess of our charges for doing this work. We do in depth reviews of the operations of 30-50 Inns across the Country each year, and there are very few that stand up to this type of rigorous, detailed study. The result is that we are then in a position to suggest operational and expense cost savings which will improve the financial results prior to selling the Inn, irrespective of the process used to market the Inn. This is especially true about the “personal” costs and expenses that seem to always be present in the Profit and Loss Statement of the Inn. A good couple of years before any contemplated sale is a really good time to eliminate these additional costs and show some real profitability and net cash flow in the Inn.

Dale’s point about researching the price for the Inn is also well taken. Most Innkeepers look at what they think another Inn has sold for without first hand knowledge of the financial condition of that Inn. They think that if that Inn down the street sold for $X then their Inn has got to be worth more since it is “better” or “more popular,” etc. Another practice is simply to utilize the various rules of thumb like Gross Revenue Multiplier (see previous Article dated May 17, 2007 called “Best Methods for Finding the Ideal Inn”). Often Innkeepers are told to price their Bed and Breakfast Inns at 5-6 times gross sales, even though the business results do not justify such lofty pricing. The solution is to obtain professional advice as to what your Inn Business is really worth compared to other similar Inns before going to the market.

The point about written operational policies and procedures is another really important one. Two or three weeks training from the prior keepers of the Inn can not teach new Innkeepers what they really need to know in order to maintain the value of their new Inn Business in the first year. Those Inns which have written checklists and policies, training manuals, job descriptions, recipes, and stated practices for all of their operational tasks are simply worth more than Inns that do not have this documentation. Buyers will quickly figure this out in the due diligence process, and may walk or run away from a poorly managed Inn notwithstanding the price.

Finally, a word about where we seem to be on the National economic front, as it may impact the ability of Innkeepers to achieve their goals of selling the Inn. Some commentators have downplayed the impact of the Sub-Prime Mortgage Crisis on business. This, of course, is pure foolishness, and a disservice to those whose dreams can be destroyed by buying Inns at the wrong time or at the wrong price. It is now clear from the daily economic news, the plummeting real estate markets, and the rapidly falling stock market that the Country is at grave risk of a real recession, if we are not already there. This will clearly be felt in the tourism market, and all forms of accommodations across the Nation will be feeling this pinch. The Inn business survived the fall off after 911 by not falling prey to the discounting that the hotel business jumped on. We hope that the greater hospitality business has learned its lesson, but for Innkeepers, this year will clearly be a real challenge.

For Sellers, this is not good news. It will clearly have an impact on the prices that will be achievable for their Inns, especially if results take a down turn for them. It already has impacted time on the market for Inns, especially full service Inns with restaurants. Most Inns are staying on the market for 1-2 years before they are sold, even if they are at the right price. For buyers, this does created somewhat of an opportunity, with the Federal Reserve pushing interest rates back to the really low levels of the past several years, however the real key is to make certain that there is sufficient cushion in the net cash flow of the Inn to weather the likely fall off in the hospitality business caused by an economic recession. So buyers need to be very careful that they look at the reality of the financial performance of an Inn opportunity, that they make absolutely certain that there is sufficient cash flow to get by if things go bad, and that they have good working capital at the outset. Making an emotional “lifestyle” decision is not a very good idea in the immediate future (or perhaps ever!). The best performing and operating Inns will likely still be very attractive at the right price with such low interest rates, but marginal operations simply will not sell at any price. In any event, we will be there to offer help when and where needed.

January 28th, 2008 | Category: Business Profitability, Expense and Income Tracking, Inn Financials | 2 comments