Although a 2011 DLA Piper survey found that 88 percent of hotel managers expected the hotel industry to sustain higher than average growth after the end of the 2009–2010 recession, hotels have never had high profit margins. Hotel owners may improve their margins by raising rates, but lower rates by competitors may not make increased rates feasible. However, lowering operating expenses always increases a hotel's profit margin.
Identification
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The gross profit margin -- the amount of revenue left over after accounting for expenses -- fluctuates from year to year, but usually averages out to 30 percent, according to Kristin Rohlfs at the Hospitality Research Group of PKF Consulting. The hospitality industry tends to have the lowest profit margin of any industry. Industries with lower margins than the hospitality industry, such as car dealerships and construction, make up for low margins with a higher gross profit on each sale.
Sources of Revenue
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In 2011, most hotels offer more than just lodging, such as food and spa services. The average hotel receives 65 percent of its revenue from room bookings, 25 percent from food and beverage sales and the rest from other shops located on the hotel's property, according to Hospitality Advisors CEO Joseph Toy. Large properties -- especially hotels connected with a casino -- may derive an even higher percentage of revenue and profits from services other than lodging.
Misconception
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Hotel owners often try to improve profit margins by cutting rates to sell more rooms and build brand loyalty. Economies of scale, however, tend to reduce profitability per room even though total revenue increases. For instance, profit margin per available room steadily dropped in the 1990s and 2000s in conjunction with falling room rates, according to Abraham Pizam, author of "International Encyclopedia of Hospitality Management."
Tips
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The state of the hotel industry often follows the economy. Managers can maintain profitability through tough economic times by keeping expenses low. Hotel owners tend to cut labor costs first to lower operating expenses, but businesses should also look at reducing other variables costs. For instance, an establishment could install a soap dispenser rather than constantly purchasing small bottles of shampoo. Also, a building designed for energy efficiency will lower utility bills for decades to come.
