Spending more to become the most cost-efficient hotel operator

"You cannot save your way to success. You must invest," is how Andrew Carey, CEO of Newport Hospitality Group (NHG), started our latest interview.

As a management company with a portfolio of select and full-service hotels across the Eastern Seaboard, we focused our discussion on what leading management companies such as NHG are doing to continually produce above-benchmark results for their owners during these turbulent past few years.

Entering any market interruption, be it a pandemic or a recession, most hotels look to tighten the purse strings and cut costs wherever possible. But as Carey demonstrated, pervasive redlining may not achieve the desired result of maximizing returns.

"It's all about knowing where to save and where to staunchly preserve your budgets. You don't want to dilute services viewed as meaningful to guests, nor do you want to accrue a huge maintenance backlog. But perhaps the real magic was keeping our well-oiled sales teams in place so that they were ready to go full bore as restrictions were lifted."

The term that we kept coming back to during our discussion was 'operational maximization', wherein the savviest hotel operators know what combination of costs will deliver the greatest bang for the buck.

The word 'combination' is essential here. For performance optimization, we cannot treat each operation as siloed, mutually exclusive entities. Instead, we must grasp their interdependency and how they all compound in myriad ways to produce the cumulative effect that guests perceive as great service. Aiming to always be cheaper may backfire — cutting ubiquitously can create weak links in the value chain.

Five elements that increase revenues

With the trend towards market consolidation and larger management companies, NHG stands in contrast with only 55 properties under management — almost all of them flagged. The company's size has led to a 'higher touch' approach in terms of:

• Bespoke operating strategiesDeployed property by property rather than from a central playbook.
• Empowerment of local leadershipDecisions made closest to the guest, by the people accountable for them.
• Service-based training attuned to each marketStandards travel; context does not.
• An associate-centric cultureThe single biggest lever against turnover, and the slowest to rebuild once lost.
• Consistent regional sales effortLocal relationships, sustained through every cycle — not paused to save payroll.

From the summer of 2020 onwards — representing the initial reopening from the pandemic — NHG delivered above-market RevPAR growth, or an index over 100, for 77% of its properties, with a companywide compounding annual growth rate of 63% from 2020 to 2021.

This performance figure is what Carey cited as evidence for why not cutting costs and keeping teams intact will result in less revenue lost during tough times and the ability to bounce back faster. "More often than not, the best hotel operations aren't necessarily the cheapest."

One department, the whole story

Consider the maintenance backlog leftover from 2020 as many hotels redlined the engineering department to save as much as possible. While some properties closed, others stayed open only to witness a stark change in guest profile whereby guestrooms suffered a lot more abuse, resulting in additional maintenance.

Bringing a hotel back online in 2022 and dealing with any other pandemic-born damages requires a set procedure of systems checks, fire safety, equipment work and parts replacement. Not only does this take time — resulting in a number of OOS rooms that curtail topline revenues — it also creates a subsequent bottleneck for getting underway on new projects.

Take a hotel that needs to upgrade its hot water system, replacing a dozen or so boilers at a time. First you have to bring your maintenance team back and refamiliarise them with the property. Then you address higher-priority concerns left over from the pandemic. Only then can the team properly assess the situation, get budgetary approval and order parts. With supply chain disruptions and inflation, this order will likely come with greater costs and weeks of extra waiting. If you wanted the upgraded system online in time for summer peak 2022, the time to start was autumn 2021.

A small city example

In early 2021, NHG bought and ramped up a Home2 Suites by Hilton property in Brunswick, Georgia. Even in a turbulent travel year, the Home2 Brunswick still achieved an annual RevPAR in 2021 of almost $83 — 18.7% above market based on STAR Report data, with Q1 2022 RevPAR already at $105. Budgeted 2022 rooms revenue was projected to grow by 40% year over year, with ADR up over 18%.

"These results represent the cumulative effect of our hands-on management style where spending more in certain areas disproportionally increases guest scores and revenues, protecting the bottom line. The real secret is knowing where to focus your spend — and despite all the business intelligence software, there's still an art to knowing where."

What this means for hotel development in Indonesia

The lesson translates directly. In Indonesia, the temptation during pre-opening and early operations is to value-engineer everything that doesn't immediately show in the OS&E invoice — engineering bench depth, sales infrastructure, training hours, leadership salaries. Each cut is rational on its own line. The cumulative effect is a hotel that opens fragile and stays that way.

The owners and operators who outperform their comp set over a five-year horizon are almost always the ones who spent slightly more on the things that compound — people, preventive maintenance, and local relationships — and slightly less on the things that don't. Operational maximization is not a budget exercise. It is a discipline of knowing which line items are actually load-bearing.