One of the macroeconomic trends that has continued to influence how hotels operate has been the high level of inflation, driving prices for businesses and consumers higher and higher throughout 2022 and so far into 2023. With the news that the annualized rate of inflation fell in April to 4.9%, the first time the metric has been below 5% over the last 2 years, We are finally seeing signs of relief for the broader economy.
This positive news indicates two broader points important to hospitality companies in our post today: that demand for travel is starting to ease relative to the highs we witnessed in 2022, and the cost of supplies for the inputs that make up hotel development and operations (labor, building materials, FF&E, consumables, etc.) is also beginning to level off. This allows us to take a better look at the strength of the supply chain of the hotel industry, removed from the craziness of the 2022 travel rebound, and perhaps gather some insights on how supply chain management (SCM) can influence hotels in the years to come.
Supply Chains Weigh on the Bottom Line
A hotel’s supply chain has the distinction of being relatively simple in its inputs but complex in its synthesis of the various components to deliver its final product. A hotel on the surface isn’t a complex machine needing upwards of 20,000 discrete pieces to come together in an assembly line (think of a cell phone or an automobile). Rather, a hotel seeks to replicate the experience of home (a clean bed, a meal, a workout routine, etc.) away from your home, and mostly uses finished goods to do so.
Providing for all the comforts of home at a reasonable price is, nevertheless, no easy task when the cost and availability of products is unpredictable. If anyone remembers how scarce and expensive toilet paper was during the pandemic, they’ll no doubt understand how hotels struggled to secure their share of that pie. The YOY price increase of items like toilet paper and cleaning chemicals was between eleven and twelve percent between 2021 and 2022 during the peak summer travel period. Even as recently as March 2023, the YOY percentage increase in these categories is still double digits. As the CEO of Kimberly Clark put it in a recent earnings call, “If the price goes up on bath tissue, it generally doesn’t mean you’re going to use the bathroom less, right?”. Indeed, this is true weather at home or on the road.
The same trend applies to many categories of hotel supply inputs, from linen and terry to food and labor. Hotels, feeling the squeeze, have raised room rates similarly, with average daily rates (ADR) growing at a 10% annualized rate in Q1 2023 compared to Q1 2022. All this really means is that although the industry has rebounded to near or at its 2019 highs on many fronts, the industry will soon exhaust what it can do to support the bottom line. Costs can be passed on to the consumer for only so long before demand softens. Furthermore, other rumblings in the broader travel market, from Airbnb’s cautious 2023 Q1 report to Sonder’s abysmal outlook and free cash flow downgrade are a harbinger of perhaps more woes to come for the industry.
Getting Smarter about Supply Chain Management
What we advise our clients with regard to their supply chain is to take an active approach to supply chain management, both in hotel development and operations. For inspiration we can look at a few examples of what we’ve done and what top industry performers are doing to take control.
Embrace the New Normal
The “new normal” in hospitality operations has been the case for quite some time, resulting from staffing and supply difficulties. Aspects of this new normal include no daily housekeeping service, more targeted and restricted F&B options, flex staffing positions, and other service modifications. Ascension Associates argues that for the most part, these modifications are here to stay. Guests have adjusted to these changes quite well all things considered, and when framed in certain ways, such as a commitment to sustainability or an offering of privacy, guests tend to prefer some of these modifications, depending on the trip purpose and hotel type. These service adjustments can ease the strain on a hotel supply chain as it allows managers to better gauge demand and shift resources more easily between the areas of greater and lesser need.
Lock down Labor
While we mentioned aspects of the new normal that affect labor above, even with reduced or flexible staffing in hotels it will become even more important to keep quality, dependable employees on the books. Even with unemployment at historic lows (3.4% as of April 2023), hospitality jobs have not quite returned to pre-pandemic levels, and there are still over 1.5 million hospitality job openings in the U.S. alone. In addition to trying to fill these roles, hotels are especially susceptible to job losses as employees look for work in higher paying or less stressful fields.
Ascension Associates advises hotels to take a more proactive approach to their workforce, through monetary and non-monetary means. Employers should have discussions with their employees about their compensation, their benefits, their development, and their plans for the future, before stress and anxiety sour an employee’s outlook. Additionally, employers can get creative about their incentives that keep top performers engaged and happy, including profit sharing initiatives and job shadowing opportunities. Locking down a hotel’s labor, the most expensive aspect of hotel operations, is one less worry for managers trying to control fluctuating costs.
Build and Design Systematically
For new hotels, designing and building with an eye toward the future should drive the decisions made today. Whether that’s a focus on sustainability, scalability, or market needs, the planning that companies do today is critical for keeping the supply chain manageable. Some companies are even making their supply chain the driving force behind new hotels, with one example being Hilton Hotels’ newest brand Spark. Hilton Supply Management (HSM), the company’s SCM division, was instrumental in planning the economy brand from the start, in order to get the brand off the ground quickly. HSM made critical decisions on FF&E, lighting, materials, even color palettes in order to get the best pricing in the market while also making sure the materials were widely available so the brand could scale expediently.
While this is an extreme example of the power of the supply chain in hotels, it’s this type of innovative decision making and integration that hotel brands need to have in the complex SCM environment of 2023.
Working with Procurement Experts
Ascension Associates works with a proven team of procurement experts at LLM Purchasing. This New York based procurement firm knows the hospitality supply chain inside and out, and can help clients source and outfit their properties in a timely fashion while keeping costs down. The team at LLM has seen the abrupt changes in hotel supply chains, and while much has returned to normal, some aspects are here to stay. “The purchasing environment in a post-pandemic world has gone through many changes. The most prominent being material shortages, shipping complications, and unpredictable lead times” says Layne Wolfe, partner at LLM Purchasing.
The team has had to double down on the non-material aspects of their business, but the results have led to success, both for LLM and for their clients. “The most important lesson we’ve learned at LLM is to keep building solid vendor relationships.” Layne continues. “Having vendors on your side to source new materials, push production, and use their contacts to help you is absolutely crucial…” No matter the economic environment, focusing on relationships with vendors, employees, and clients can dramatically improve complicated supply chain outcomes.
For more information on the hospitality procurement environment or with help purchasing for an upcoming project, connect with LLM Purchasing here. For integrated project management and procurement solutions, touch base with us at clients@ascension-consulting.com or through our online form.