20 Jul 2015
Words Brooke Kelly

Keeping Watch on Motel Operating Costs

Doing business in today’s digital world comes at a cost. The domination of online booking agencies has added new costs for motel operators, so care must be taken to ensure profits are not eroded.

The formulas for establishing and valuing motel leases have stood the test of time. Since they were researched and formulated in the 1980s by pioneering Resort Brokers Australia managing director Ian Crooks, the assumptions on which they were based have remained consistently valid.

Yes, operating costs have risen over time. But the cost items have remained fairly constant, and profit ratios have been able to be maintained. Now, however, not only have the goal posts shifted, we’ve entered a whole new playing field.

The creeping reliance of accommodation operators on online travel agents (OTAs) is arguably the most significant change the industry has ever faced.

The cost of ensuring your motel is sold through multiple OTA websites adds a new expense to the P&L. At the same time, the more traditional marketing strategies still need to be maintained.

The challenge for motel operators is to protect their margins in today’s highly competitive online market.

There’s no doubt it is imperative for accommodation providers to adopt an online booking system that manages inventory, sells their rooms through the OTAs, and automates booking confirmation and payment.

Reports suggest large hotel chains receive up to 20% of their bookings through OTAs, while smaller operators often rely on them for more than half.

The recent takeover of Wotif by Expedia (for $703 million!) highlighted the digital reality for operators. Between them, the two global powerhouses, Expedia (Hotels.com, Trivago, Wotif) and Priceline (Booking.com, Agoda), now control about 85% of the online booking market in Australia.

In the wake of the takeover, both Wotif and Agoda raised the commissions they charge operators from 12% to 15%, squeezing margins for small operators who are unable to pass on the cost increase to consumers.

This added pressure comes at a time when some of the traditional costs of operation have also been increasing. The price of insurance has risen significantly in recent years, along with energy bills.

While electricity prices in some Australian states seem to have stablilised, they are certainly still rising in Queensland and the Northern Territory – locations where the air-conditioning expected by guests comes at an astronomical cost.

There is no getting away from these new realities. Motel operators now need to keep abreast of systems, strategies and software that help cut reservation costs and boost online revenue.

At the same time, motel landlords need to be aware of the impact of these increased operating costs when setting and reviewing rents. If their lessees’ profit margins are eroding, and rent increases are imposed, property maintenance can be the first to suffer – to the detriment of the business and, consequently their investment.