REPORT FROM THE U.S.—The definition of “select service” within the lodging industry might vary from person to person, but there is no doubt that properties in this segment are the most popular among developers.
Using the broadest definition of select service, this category comprised an estimated 89% of the total hotel projects under construction, according to the December 2016 U.S. hotel pipeline report from STR. (STR is the parent company of Hotel News Now.)
As the name implies, select-service properties offer limited degrees of services and amenities compared to full-service hotels. While most select-service properties do not contain extensive meeting, recreational and retail facilities, there is diversity when it comes to the offering of food-and-beverage service for sale. There are brands within the select-service category that offer retail F&B service while others do not.
To gain a better understanding of the performance of select-service hotels, CBRE analyzed a group of 233 properties that provided year-end operating statements for our firm’s “Trends in the Hotel Industry” survey each year from 2010 through 2015. One-third of the properties in the sample offer some degree of retail F&B service (e.g. Hilton Garden Inn, Courtyard by Marriott, Hyatt Place), while the remainder of the sample is true select-service hotels (e.g. Hampton Inn, Fairfield Inn, Comfort Inn).
For the purposes of this analysis, we limited our analysis to properties that operate in the upper-midscale and upscale chain-scale segments, and are affiliated with brands that are generally considered to be “select service.” Excluded from the analysis were extended-stay hotels and full-service suite hotels, as well as traditional full-service hotels, convention hotels and resorts.
Operating efficiencies
For hoteliers, a large part of the attraction of owning and operating select-service properties is the relative ease of operations. Without the extensive array of facilities, services and amenities, select-service hotels have fewer departments to manage and are more efficient to operate.
In 2015, the properties in our select-service sample achieved a gross operating profit (GOP) margin of 44.2% of total operating revenue. This compares to a 37.5% average GOP margin for all properties in our “Trends” survey. (GOP is defined as income before deductions for management fees and non-operating income and expenses.)
Like all property types, labor is the largest expense item for operators to manage. However, labors costs are minimized at select-service hotels. This contributes to the efficiency and profitability of this segment. In 2015, the combined costs of salaries, wages and benefits equaled 22.6% of total operating revenue, or $8,109 per available room. This compares to 31.6%, and $22,224 per available room for the overall “Trends” sample.
Select F&B for profits
It is generally accepted that select-service hotels with no retail food-and-beverage outlets are more profitable than full-services hotels. Within the overall lodging industry, this is true. According to the 2016 “Trends in the Hotel Industry” report, select-service hotels in the U.S. achieved a 44.6% GOP margin in 2015, compared to 36.9% at full-service properties. However, within the select-service segment, we have seen a recent shift in conventional wisdom.
In 2010, the select-service properties in our study sample that do not offer retail F&B service achieved a GOP margin of 42.9%. This was greater than the 41.9% GOP margin set by the select-service hotels with restaurants and lounges. Five years later, this trend reversed. In 2015, it was the select-service sample with F&B that achieved the greater GOP margin (45.6%) compared to the select-service hotels without F&B (42.9%). From 2010 to 2015, gross operating profits per available room at the select-service properties with F&B increased at a compound average annual rate (CAGR) of 7.5%, compared to 5.5% for the select-service hotels without F&B.
When analyzing the data, greater efficiencies in the F&B department of select-service hotels contributed to the enhanced profitability. From 2010 through 2015, F&B department profits at select-service hotels have increased at a healthy CAGR of 8.7%.
Changes in the F&B offerings at select-service hotels appear to have contributed to the increase in department profitability. Most select-service hotels have limited the hours and extent of F&B service at their outlets. Select-service hotels have pioneered the grab-and-go, and lobby coffeehouse styles of F&B service. While this has resulted in a slowdown in the pace of F&B revenue growth, is has also limited the increases in the cost of F&B operations. From 2010 through 2015, select-service F&B department profit margins have increased from 17.8% to 20.4%.
Another factor contributing to the enhanced profitability of the select-service with F&B service has been the ability to control labor costs. Labor costs measured on a per-occupied-room basis at the select-service with F&B sample increased at a CAGR of 2.6% from 2010 to 2015. This compares to 3.5% for the select-service properties without F&B. The enhanced efficiency in the use of labor at the select-service hotels that offer F&B can be partially explained by the service changes made to the restaurants and lounges.
Development decision
While select-service hotels are very efficient and profitable operations, the decision to develop a property requires additional information. In 2015, the gross operating profit per available room for our select-service sample was 40% less than the GOP for our overall “Trends” survey sample because of lower average daily rates and lack of other revenue sources.
After considering the cost of capital and desired level of return, developers need to determine if the 40% deficiency in profits can still cover the assumed lower cost of development. Then, once the decision has been made to enter the select-service segment, owners need to choose between select-service properties with or without food and beverage.
Robert Mandelbaum is Director of Research Information Services in the Atlanta office of CBRE Hotels’ Americas Research. To purchase a copy of Trends® in the Hotel Industry, please visit https://pip.cbrehotels.com, or call (855) 223-1200. This article was published in the March 2017 edition of Lodging.
The assertions expressed in this article do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please feel free to comment or contact an editor with any questions or concerns.