Location-Based Costs and Profits (% of Revenue)

The same applies to all hotel locations. The reality is that city hotels tend to have higher labor costs due to higher occupancy levels than other hotel groups, assuming that taxes remain unchanged.

Research shows that, in addition to factors such as size and accommodation class, the location of the hotel is also a factor that creates different levels of profit. Therefore, city hotels are the most profitable, with profits before tax, interest and financial costs accounting for more than 30% of revenue, while coastal resort hotels are the least profitable, at only about 17%. The difference is partly due to accommodation services, with estimates showing that accommodation services account for up to 80% of profits in city hotels compared to only 60% in coastal resorts. This makes material costs (food and beverage) account for a much smaller proportion of the total cost structure in city hotels than in hotels in other areas. Moreover, some city hotels (London, Tokyo, ...) provide accommodation services only without breakfast included. Analysis of Table 7.9 shows the difference in profit on the basis of cost of accommodation and catering business.

Hotels with a high revenue reliance on beverage sales, particularly those in less populated urban areas and coastal resorts, have the lowest profits. However, hotels in urban areas may face higher financing and other similar costs. These hotels must meet different demand patterns depending on their location. Meanwhile, motels have a relatively high reliance on food and beverage sales, which shows a clearer distinction between hotels and motels. This also provides a basis for hotels with low occupancy rates to shift to other products that generate higher revenues. Rural hotels with low occupancy rates should have profits that depend mainly on food sales.

Table 7.9. Costs and profits based on location (% of revenue)

London	Urban with over 100,000 People	Urban with less than 100,000 People	Countryside Resort	Beach Resort	Motel
Business
Room	54.2	34.7	18	25.7	27.3	34.2
Food	23.4	31.3	32.7	35.8	31.3	32.5
Bar	10.9	24.1	43.8	30.6	35	26
Other	11.5	9.9	5.5	7.9	6.4	7.3
Expense
Raw materials	13	25.6	41.4	33.4	34.8	29.2
Labor	28.1	28.5	26.4	27.8	25.5	28.8
Other	25.6	21.9	13.5	17.9	22.7	20
Earnings before taxes, fees and interest	33.3	24	18.7	20.9	17	23

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Source: NEDC

When it comes to taxes, many businesses can make or lose money due to the difference in tax rates between corporate income tax and business tax. Hotels that are not run by companies but by individual tenants are usually subject to personal income tax in assessing income, however, the Internal Revenue Service does not differentiate between personal and business income. Typically, personal income tax is lower than corporate income tax (for example, personal income tax is 10% (progressive) while corporate income tax is 20%). This means that self-employment is more profitable, but it depends on the size of the profit. Therefore,

Hotel owners must decide which is more profitable, to be taxed as personal income tax or corporate income tax, to include the manager's taxable income and leave the remaining revenue in the business, or to be subject to corporate income tax. For service businesses, including hotels and restaurants, while the average 80% of property owners pay about 30% of their total revenue in taxes. In general, hotels and catering have historically paid much less tax than other industries due to lower profits and low levels of corporate consolidation, and service industries do not have the same subsidies and tax benefits as manufacturing industries.

In terms of international profitability, comparisons can be made between hotels in European countries (Table 7.10).

Table 7.10. Profits of European countries (Profits as % of sales)

Total average	Belgium	Older brother	France	Virtue	IDEA	Netherlands	Other
Average number of rooms	352	292	376	417	352	358	259	310
Income
Room	52.6	48.0	54.5	57.3	48.6	55.5	48.4	50.7
Food	27.0	30.6	26.9	26.8	26.0	25.1	31.6	26.7
Total income	46.7	40.6	51.4	43.7	46.3	33.8	41.9	46.2
Total profit	20.7	9.3	28.3	16.4	19.2	7.1	16.1	19.1

Source: Trends in the Food and Beverage Industry, Pannell, Kerr, Forster et al.

In the past decade, hotels in the Middle East and South Asia have had high occupancy rates of 78.2% and 74.7%, respectively, and high profitability of 37.1% and 50.6% of total revenue, respectively. European hotels have average occupancy rates of around 64.3% and profitability of 20.7% of total revenue.

income. In fact, in Europe, according to management consultants Pannell, Kerr, Forster and Company Ltd., hotels in the UK are the most profitable with the fastest growth when occupancy is high and some costs such as food and labor are quite low. However, a survey of hotels in major cities shows that the average number of rooms brings a high rate of profit. In European countries, costs for administration, advertising and repairs are quite low, about 23.5% in the UK and 34.2% in Belgium, averaging about 26.8%. In Italy, labor costs are very high, about 49.8%, while administrative costs in Belgium are the highest. Profitability in the UK is due to lower food and labor costs, in addition, tariffs in this country are also lower, about $3 below the European average at $25.98 per room used. International comparisons also show differences between hotels. German hotel guests are twice as likely to buy drinks in their hotel as French guests. The Dutch spend the most on meals in their hotels, and the French the least. English-speaking hotels spend less on bed linen than their European counterparts, but spend the most on crockery and glassware.

European hotels also face a large cost in interest on loans. In the 1980s, 5% of hotel revenues went to repay the original loan principal that was due. Falling interest rates later eased this burden, but those who missed their loan payments were hit with rising interest rates, highlighting the importance of timing.

Another expense that hotels can save is laundry costs. It is estimated that on-site laundry services can save 30% compared to the cost of hiring an outside laundry service and contribute to the hotel's profits, in addition to increasing the amount of linen available for use in the hotel and avoiding loss. On the other hand, the 30% savings is also a figure for hotels to consider whether to add room service and staff costs. However, there are very few hotels that can reduce costs without reducing the quality of the service provided. Food and beverage services are probably the

Savings can be made in the sector, but these changes often involve switching to fresh food, which is difficult to achieve with high-quality customers. The best way to make the most of the costs is to allocate them more to the accommodation sector; this is something that hotels are less able to influence and is more dependent on customer demand. However, this also means that larger hotels will benefit more. This is the basis for larger hotels to increase their occupancy levels. Large hotels can be highly profitable with the most professional management in hotel groups. However, it cannot be concluded that large size corresponds to large profits for hotels in different locations. Hotels with less than 50 rooms have a profit proportional to capital. 30-room hotels can achieve a higher return on capital or revenue, but larger hotels can still make more profit. For example, a small hotel might achieve a 15% return on $200,000 in revenue, or $30,000, but a larger hotel might achieve a 10% return on $500,000 in revenue, or $50,000, which is a higher profit while achieving a lower return on capital or revenue.

In fact, with the impact of the business environment, many hotels continue to operate at low profit levels. In addition, to cope with inflation, many investors have decided to focus on property and land values, increasing revenue and profits, leading to an increase in investment in the industry, to renovate and build hotel rooms. Of which, large companies, led by Trusthouse Forte, invested about 20%. However, as the demand for amenities increases, small hotels will face more difficulties in maintaining profits due to their limited business conditions.

In addition to the costs listed above, there are additional costs such as “downsizing” costs and theft-related costs. These costs can be as high as 10% of total revenue, and employees are responsible for nearly a third of all costs in a hotel. Many hotels around the world are now using this system.

computerized keyless bedroom door locking system and it has brought double advantages. First, it means less theft; and second, it is suitable for foreign customers. Another advantage is reduced insurance premiums.

7.3.2.2. Cost of food service business operations

The main component costs of a restaurant food service business include materials and labor, which are similar to those of a hotel. However, restaurants differ from hotels in that labor costs in a food service business account for only a small percentage of total revenue, averaging 25% of revenue. However, labor costs can vary as a percentage of revenue from restaurant to restaurant (Table 7.11).

Table 7.11. Labor costs as a percentage of sales (%)

Highest	Medium	Lowest
Restaurants	36.0	24.7	14.6
Specialty restaurants	30.1	23.7	15.6
National Restaurant	45.0	26.8	16.0
The bars	23.0	22.5	22.0
Other dining establishments	32.0	25.2	16.2

Source: Restaurant Labor Costs, R.Kotas

Part of the deciding factor is the impact of labor costs on the restaurant's operating efficiency and the audience it serves. Two restaurants may be equally efficient in many ways, but one will have a higher labor cost as a percentage of total revenue due to operating 24 hours a day.

Estimates show that 24-hour business operations make labor costs about 45% of total costs, while other operations

The business of providing one meal a day costs only about 28% (Table 7.12).

Table 7.12. Food costs (%)

Direct				Indirect
Food	Chef	Serve	Clean up	Labor	Other
Profit 1 meal/day	43.6	5.3	9.6	7.1	6.3	28.1
Cost of 1 meal/day	49.9	8.6	7.0	10.2	2.2	22.1
Profit 2 meals/day	47.2	17.3	8.5	4.9	3.3	18.8
Cost of 2 meals/day	52.4	5.8	2.7	5.0	10.8	23.3
24h service profit	47.6	16.1	16.6	8.7	6.4	4.6
24 hour service cost	52.0	18.8	15.3	6.5	3.9	3.5

Source: Convenience foods in the food industry, NEDC

Cooking and meal preparation do not consume the majority of labor costs, the costs associated with serving are the same, so the main reason is thought to be the salaries of the chef and cooks. Serving costs can account for up to 16% of total costs and therefore savings can be made by combining serving with self-service. Self-service in restaurants has become more common and restaurants will save on overtime pay for staff, etc. Food accounts for the majority of total costs, often accounting for about half of a restaurant's costs.

This means that the cost structure of restaurants is oriented towards variable costs rather than fixed costs and profits are derived from seating capacity and the defined number of meals served.

For example, in Figure 7.11, variable costs (total costs minus fixed costs) remain the same and change with the number of meals served.

fixed costs increase. The score at OQ 2 rather than OQ 1 assumes that revenue remains the same and also corresponds to the number of meals served. As mentioned above, restaurants typically lease equipment rather than purchase new investments, so depreciation on equipment is typically less than 3% of total costs. Thus, equipment rental costs, along with rent and insurance, may account for only about 1/5 of total restaurant costs.

Figure 7.11. The importance of the ratio of fixed costs to variable costs

There is a difference in the allocation of costs between the commercial and non-commercial sectors of the industry, as the latter are very expensive due to their usual focus on providing low-cost meals to customers and consequently have rigid pricing policies. In practice, non-commercial providers may be completely free and subsidised units may have very loose criteria. While 90% of catering companies provide criteria and guidelines for non-commercial restaurant managers, many do not bother to do so. Very few consider budget issues. This does not reflect inefficiency on the part of non-commercial caterers but rather reflects a desire to provide more low-cost meals to employees. The aim is to create better relationships with employees and for some employers in

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