Interesting conversation with a hotel owner

[TexasHusker]

During my conversation with a hotel owner in Albuquerque two days ago, it was fascinating to listen to his "state of the union" for hotels. He is east Indian, and the owning and operations of hotels/motels have been an integral part of east Indian immigration for half a century. The entire business model fits the east Indian family culture quite nicely.

However...the hotel business is not nearly as lucrative as it once was, as customer acquisition costs are crowding out margins big-time. Here is what I mean: 20 years ago, if you wanted to stay at a Hilton, you went to hilton.com or called their reservation hotline. So as part of your franchise fee to Hilton as an owner, you got the benefit of their reservation system and it "fed" you your customers.

These days, folks are using trivago, expedia, booking.com, and dozens of other, third party sites to place their reservations. So not only does the Hilton hotel franchisee pay his ad fees to Hilton as a percentage of the sales for that guest's stay, he now also has to pay Expedia anywhere from 10 to 18 percent commission for a reservation of of their system. And even though that Expedia guest didn't make his reservation through Hilton, the hotel owner still remits a percentage of that stay to Hilton, to pay for their reservation system!

Folks think someone owning a hotel must be filthy rich and just raking it in, but the truth is, margins are incredibly slim. Labor is basically 50 percent right off the top. Customer acquisition costs are then second place at 20-22 percent. So right off the bat, you're down to 27-28 cents on the dollar left to work with to eek out a profit. Then you've got supplies, repairs, maintenance, breakfast food costs (around $7 per rented room according to him), parking lot maintenance, insurance, property taxes. So you are down to just literally a few cents on a dollar for profit.

And then when we are talking labor costs...he's suddenly looking at huge spikes in labor costs to try to attract and keep employees, and he's like "where does that money come from? I don't have a profit any more?"

We tend to look at business owners as rich people who have a lot of froth they can trim off and just pay people more. But like in my franchise business, on the typical 30 day month, the revenues don't come to me until around the 27th day. The first 27 days on the average month, I'm just paying overhead. So if we have a snow storm that month, I don't make a profit. If we have rainy weather for a week, I probably don't make a profit that month. There isn't anything left. The monies were used to pay for the bills. And this month, even though we've had a great month, I will be in the red, as I have three pay periods in the month. So I will be around -$24,000 for May.

[ua_guy]

"Change or die" was the subject of a series of great lectures from one of my most favorite business professors.

Natural selection not only applies to the natural world, it applies similarly in business. Only the strong will survive. Only the competitive will come out on top. Moral hazard is a real thing, as is changing regulation, and market forces.

At some point, I'd expect a disruptor to come along. AirBnB is a good example, but I'm not sure how that's working out in the long run.

[TexasHusker]

"Change or die" was the subject of a series of great lectures from one of my most favorite business professors.

Natural selection not only applies to the natural world, it applies similarly in business. Only the strong will survive. Only the competitive will come out on top. Moral hazard is a real thing, as is changing regulation, and market forces.

At some point, I'd expect a disruptor to come along. AirBnB is a good example, but I'm not sure how that's working out in the long run.

I had some really good professors. None of them were successful business owners, though. In my business classes, I often found it ironic that folks teaching business had little-to-no actual business experience, many of them career professors in the protected world of academia.

Theory and reality are often two different things.

[ua_guy]

I had some really good professors. None of them were successful business owners, though. In my business classes, I often found it ironic that folks teaching business had little-to-no actual business experience, many of them career professors in the protected world of academia.

Theory and reality are often two different things.

I found that more in Economics courses. People entrenched in academia. They do provide a certain value though.

The last two years of the program were awesome. Upper level courses taught by a lot of successful business owners and ex-industry talent. A handful of them were teaching for fun in their later 50’s.

But back to the point, what I said isn’t untrue. When businesses don’t provide value, can’t make a profit, they disappear. Despite rising wage costs, job growth and profits have come to increase over time….for businesses and industries which evolve.

[corn18]

I had some really good professors. None of them were successful business owners, though. In my business classes, I often found it ironic that folks teaching business had little-to-no actual business experience, many of them career professors in the protected world of academia.

Theory and reality are often two different things.

Very true. We run into the same thing hiring military officers, especially general officers (Generals and Admirals). Just because you can lead 100,000 men/women in combat, doesn't mean you can run a profitable business.

My daughter is a GM at a franchise sub shop. The margins are terrible. Labor is the biggest cost and retention is terrible because they only pay $9.25 to start. If you only own/operate a single location, you are going to be broke.

[TexasHusker]

Very true. We run into the same thing hiring military officers, especially general officers (Generals and Admirals). Just because you can lead 100,000 men/women in combat, doesn't mean you can run a profitable business.

My daughter is a GM at a franchise sub shop. The margins are terrible. Labor is the biggest cost and retention is terrible because they only pay $9.25 to start. If you only own/operate a single location, you are going to be broke.

why don't they just raise wages to $15 an hour? Problem solved.

[disneysteve]

retention is terrible because they only pay $9.25 to start.

why don't they just raise wages to $15 an hour? Problem solved.

The question becomes what is the solution? For some 20 years, we've had a business environment with stagnant working class wages, rising prices, ballooning corporate profits fueling an unprecedented bull market, and outrageous growth in executive compensation creating an insane level of income inequality.

The minimum wage hasn't changed since 2009. You can't keep paying the same amount you were paying 10-15 years ago and then complain that you're having trouble filling your job openings. You can't have it both ways.

Who the heck can afford to work for $9.25/hr? Even a high school kid would struggle at that rate if she needs to buy a car to get to and from work and not have her entire paycheck be eaten up by gas, insurance, maintenance, and loan payments. And forget finding full-fledged adults to do those jobs who need to buy health insurance and pay rent and utilities.

I'm not a big cheerleader for the $15 minimum wage but I also don't see how continuing to pay the same amount as in 2009 is in any way a feasible plan.

[disneysteve]

the truth is, margins are incredibly slim. Labor is basically 50 percent right off the top. Customer acquisition costs are then second place at 20-22 percent. So right off the bat, you're down to 27-28 cents on the dollar left to work with to eek out a profit. Then you've got supplies, repairs, maintenance, breakfast food costs (around $7 per rented room according to him), parking lot maintenance, insurance, property taxes. So you are down to just literally a few cents on a dollar for profit.

like in my franchise business, on the typical 30 day month, the revenues don't come to me until around the 27th day. The first 27 days on the average month, I'm just paying overhead. So if we have a snow storm that month, I don't make a profit. If we have rainy weather for a week, I probably don't make a profit that month. There isn't anything left.

I've heard stories like this over and over for years, and yet people keep running these businesses, so what's the benefit? Why keep doing it? I understand the whole entrepreneurial spirit and independent streak and "not working for the man" but at the end of the day, why do it? There must be something that makes it worth it.

I'm not a business owner so I can't see it from the other side. I've always been an employee and for 30 years all I hear is complaints from the owner and management about all of the problems, rising overhead, long hours, need to trim expenses, and how to keep things profitable. All the while, I show up, do my job, and get my paycheck every 2 weeks without fail no matter what is happening behind the scenes. That has allowed me to build a 7-figure portfolio and be on the glide path to early retirement. Is the same true for all of these business owners who apparently take a loss if there's a couple of rainy days this month? And I mean that question sincerely. I'm not mocking anybody. I have great respect for people who set out on their own but if there's truly no money in it or very little money, what's the benefit?

[ua_guy]

why don't they just raise wages to $15 an hour? Problem solved.

When reading up on burgernomics (it's a thing), it's estimated that the average fast food business owner's turnover cost PER WORKER is over $4,000. It's believed that if wages (not even minimum wage) but if starting wages in fast food are raised to $15/hr, the industry could realize 5 Billion in annual savings.

Let me break that down. If the average fast food worker is part-time, working 1040 hours per year, It works out to be another $3.84/hour that the employer is literally throwing away, per employee.

When wages are raised, performance metrics can be raised. Turnover is reduced. People begin to "want" to work at an establishment, versus having to.

Tex, you look at the issue of raising wages purely as an expense, and that's just not true.

[TexasHusker]

The question becomes what is the solution? For some 20 years, we've had a business environment with stagnant working class wages, rising prices, ballooning corporate profits fueling an unprecedented bull market, and outrageous growth in executive compensation creating an insane level of income inequality.

The minimum wage hasn't changed since 2009. You can't keep paying the same amount you were paying 10-15 years ago and then complain that you're having trouble filling your job openings. You can't have it both ways.

Who the heck can afford to work for $9.25/hr? Even a high school kid would struggle at that rate if she needs to buy a car to get to and from work and not have her entire paycheck be eaten up by gas, insurance, maintenance, and loan payments. And forget finding full-fledged adults to do those jobs who need to buy health insurance and pay rent and utilities.

I'm not a big cheerleader for the $15 minimum wage but I also don't see how continuing to pay the same amount as in 2009 is in any way a feasible plan.

Very few people actually earn minimum wage. No one running a business is paying even close to what they were in 2009. I’m 43% higher myself, since 2011.

So that’s a misnomer.

[TexasHusker]

When reading up on burgernomics (it's a thing), it's estimated that the average fast food business owner's turnover cost PER WORKER is over $4,000. It's believed that if wages (not even minimum wage) but if starting wages in fast food are raised to $15/hr, the industry could realize 5 Billion in annual savings.

Let me break that down. If the average fast food worker is part-time, working 1040 hours per year, It works out to be another $3.84/hour that the employer is literally throwing away, per employee.

When wages are raised, performance metrics can be raised. Turnover is reduced. People begin to "want" to work at an establishment, versus having to.

Tex, you look at the issue of raising wages purely as an expense, and that's just not true.

“It’s believed”? Minimum wage workers will always turnover, because they are making minimum wage. Set it at what you want.

Performance metrics for a bus boy? Lol.

[TexasHusker]

I've heard stories like this over and over for years, and yet people keep running these businesses, so what's the benefit? Why keep doing it? I understand the whole entrepreneurial spirit and independent streak and "not working for the man" but at the end of the day, why do it? There must be something that makes it worth it.

I'm not a business owner so I can't see it from the other side. I've always been an employee and for 30 years all I hear is complaints from the owner and management about all of the problems, rising overhead, long hours, need to trim expenses, and how to keep things profitable. All the while, I show up, do my job, and get my paycheck every 2 weeks without fail no matter what is happening behind the scenes. That has allowed me to build a 7-figure portfolio and be on the glide path to early retirement. Is the same true for all of these business owners who apparently take a loss if there's a couple of rainy days this month? And I mean that question sincerely. I'm not mocking anybody. I have great respect for people who set out on their own but if there's truly no money in it or very little money, what's the benefit?

What money there is in a business is a different, and good, topic.

All this is is a discussion about pressures of a particular business owner. I suppose “sell a cabin and deal with it” or “quit complaining” are valid responses, but it sure kills fun - and maybe insightful - dialogue on economics, and makes for a very dull discussion board.

Maybe we need to stick with discussion who is open on Memorial Day, and which coupons do you keep.

[disneysteve]

Very few people actually earn minimum wage. No one running a business is paying even close to what they were in 2009. I’m 43% higher myself, since 2011.

So that’s a misnomer.

I do realize that the Federal min wage is not what the min wage is in many places. Individual states and even individual cities set their own minimums at some level higher than the Fed.

My point, though, is that ultimately you need to pay an amount that people are willing to accept to do the job being offered. $9.25/hr is more than the Federal minimum wage of $7.25 but it's still hardly enough for anyone to survive on. That's only $1,600/month if you work 40 hrs/wk and 52 wks/yr. As we all know, many jobs don't give out full time hours so that they can avoid paying the benefits required to full time workers. They keep everybody under that threshold, so folks might only actually earn $700 or $800/month. Is it really any wonder that employers have trouble filling those positions?

[TexasHusker]

What is enough for someone to survive on? And if a amount is arbitrarily decided upon as the minimum, let’s say $15 an hour, how many months after that goes into effect, is it no longer a “living wage”? The cities that have come in and set high minimum wages, did it increase actual buying power? Of course not. A dishwasher or busboy are never going to have a lot of buying power, because those folks will always be earning the minimum. It could literally be $100 an hour, and they’d have the same buying power with their wage in 6 months as they do now.

We are witnessing this precisely with all free money being handed out currently. Prices are everything are way up.

You can’t increase buying power with the stroke of a pen.

[disneysteve]

What money there is in a business is a different, and good, topic.

All this is is a discussion about pressures of a particular business owner.

So let's discuss that.

What is the motivation for this hotel franchisee to keep busting his butt week after week? What's your motivation for maintaining your salons when there are months where you not only don't make a profit but you even operate at a loss? What's the end game? If you aren't making enough to draw out a healthy income for your efforts, why keep doing it?

Or are all of these owners actually crying their way to the bank? Is a 3% profit margin still a worthwhile amount of money? Maybe they're grossing $500,000/month so that 3% margin earns them 180K/year. Nobody ever wants to share actual numbers so it's hard to understand how much of an issue it really is.