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Inns Suffer Less Than Hotels by Robert Mandelbaum

The Professional Association of Innkeepers International (PAII) recently released the 2002 Industry Study of Operations, Marketing, and Finances for Bed-and-Breakfast and Country Inns. The study was prepared with the assistance of Michigan State University and PKF Consulting.

PKF In the 2000 PAII Study, I speculated on the vulnerability of Bed and Breakfast (B&B) and Country Inns to economic recessions. The report was produced in the summer of 2001, five months into an economic recession, but before the impact of the terrorist events of September 11.

At that time, we proposed that B&Bs and Country Inns possessed several operating characteristics that would shield them from the negative affects of an economic recession that had historically hurt the U.S. hotel industry. A summary of these mitigating characteristics follows:
• Orientation towards leisure travelers
• Income levels of guests
• Guest loyalty
• Rural location
• Value of the B&B/Country Inn experience
• Owner/operated management structure
• Strong seasonality

Little did we know in the summer of 2001 that these favorable operating characteristics would be put to an even greater test later in the year. The impact that the September 11, 2001 terrorist attacks has had on the U.S. travel industry has been well documented. Never before was the industry forced to deal with both an economic recession and a domestic terrorist attack of unheralded proportions. This one-two punch influenced all segments of the U.S. lodging industry in a negative way. However, some forms of lodging did fare better than others and experienced less severe declines.

In this article, I look back to see how well the favorable operating characteristics listed above influenced the performance of B&Bs and Country Inns from 2000 to 2002. Then, the performance of B&Bs and Country Inns is compared to the performance of the U.S. hotel industry during the same time period. The analysis was performed on a sample of “Same Store” Inns and hotels, thus eliminating any skew in performance data based solely on a change of properties in the study sample.

Fewer Guests, Better Yield

Both U.S. hotels and Inns experienced declines in occupancy from 2000 to 2002. As stated above, the vast majority of lodging facilities in the country could not escape the impact from the overall decline in travel that resulted from both the economic recession and September 11. On a relative basis, however, B&Bs and Country Inns endured less of a decline in occupancy than did hotels in general.

Despite experiencing a decline in demand, Inns were able to achieve an increase in the average daily rate (ADR) paid by guests. In fact, the increase in ADR more than offset the decline in occupancy, thus resulting in an actual increase in the RevPAR (rooms revenue per available room) for B&Bs and Country Inns from 2000 to 2002. The increase in ADR can be attributed to some of the operating characteristics previously mentioned – income level of guests, peak seasonality domination, and guest loyalty.

Unlike their B&B/Country Inn counterparts, U.S. hotels have suffered from significant declines in the average daily room rates from 2000 to 2002. The combination of declining occupancy and ADR resulted in double-digit losses in RevPAR for U.S. hotels during the past two years.

Top Is Better Than Bottom

Given the strong contribution of rooms revenue, B&Bs and Country Inns also outperformed U.S. hotels in total revenue performance. Both B&Bs and Country Inns enjoyed increases in total revenue from 2000 to 2002. On the other hand, limited-service and full-service hotels both suffered from double-digit declines in total revenue.

While both B&Bs and Country Inns were able to improve their revenues from 2000 to 2002, only the Country Inns were able to transfer this improvement to the bottom-line. From 2000 to 2002, B&Bs grew their total revenue 2.8 percent: however, their operating profits declined 17.5 percent. This implies an increase in operating expenses. A review of the financial statements for “same inn” B&Bs finds the greatest expense increases in salaries and wages, advertising and promotion, and insurance. It should be noted that the increase in insurance costs had plagued both hotels and Inns. The increase in advertising and promotional expenses can be viewed as a necessary response to declining occupancy.

While Country Inns were the only lodging segment we studied that experienced an increase in profits from 2000 to 2002, it should be noted that the tremendous increase in revenue (buoyed by a 42 percent increase in F&B revenue) helped to offset substantial increases in operating expenses. In fact, the 19.5 percent increase in Country Inn operating expenses was the greatest among all lodging segments. Like their B&B counterparts, Country Inn managers had to deal with tremendous increases in labor costs, food costs, and insurance.

Unlike Inn managers, hotel managers slashed and cut their operating expenses from 2000 to 2002. During the past two years, limited-service hotel managers were able to decrease their operating expenses by 5.1 percent, while full-service hotel operators dropped their expenses by 8.7 percent. Despite acting in such a frugal fashion, hotel managers were still unable to offset their large declines in revenue. Operating profits for U.S. hotels declined more than 20 percent on average during the past two years.

Characteristics Conquer

Clearly, the ability of Inns to maintain their top line revenues helped them to endure the economic recession and September 11 aftermath that has plagued the U.S. travel industry the past two years. In fact, management’s inability to control expenses can be blamed for B&Bs showing a decline in their profitability, and Country Inns missing the opportunity to convert their revenue increases to even greater increases profits.

When evaluating the list of the unique operating characteristic B&Bs and Country Inns enjoy, you can make a direct link between these characteristics and the ability to maintain revenues. In my opinion, these unique characteristics more than rose to the occasion to offset the negative impacts of an economic recession and terrorist attack.

Robert Mandelbaum is the Director of Research Information Services for the Hospitality Research Group of PKF Consulting. To purchase a copy of the 2002 PAII Study, please call (805) 569-1853, or visit the PAII website at www.paii.org.

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