The hotel industry is considered one of the most lucrative businesses. It offers a vast opportunity to earn sizeable revenue via various streams. The pertinent question is do 5-star hotels make profit?
Yes, they do! While the profit margin can be highly subjective, there are various sources from which a hotel makes its money.
If you are wondering how do 5-star hotels make money, their income depends on several factors such as the location of the hotel, size of the property, occupancy rates, and revenue model to name a few. The profit can vary from thousands to millions annually.
5-star hotels primarily make money from room revenue. Other revenue streams comprise food and beverage, rental from event spaces, and parking fee.
Outdoor catering and loyalty programs are also a part of the hotel’s income. Essentially, a significant cost is spent towards maintenance and employee service. There are costs, but there is revenue as well!
Also Read:- What Is The Average Hotel Business Profit Margin In 2024?
How Do 5-Star Hotels Typically Measure Their Profitability?
Profitability is the revenue that a hotel generates from its operations for a given period. A hotel can gauge the profitability of their hotel with the Profitability ratios. For any business, it is crucial to have an insight on its performance and there are various tools for analysis of the financial statements.
Four main profitability ratios are as follows:
ROI enables a business to measure its profitability on the capital invested. Capital investment includes net working capital and fixed assets.
ROI = [Operating Income/ Invested Capital] X 100
Return on equity is the third ratio which is used for measuring the overall profitability of the investment made by the shareholder/ owner in the form of risk capital or equity. The ROE must be equal to or higher than the return on Government bonds.
ROE = [Annual Net Income/ Net Equity] X 100
Return on sales is the third ratio. It measures the profitability of the business as compared to the sales revenue. This metric offers insight into how the hotel business is performing in comparison to its competitors within the same segment.
ROS = [Operating Profit/ Net Sales] X 100
It is a ratio that reflects the amount of money a hotel business has for covering the costs which are not related to the business operations like taxes and interests. A higher EBITDA is a sign of a healthy business.
- EBITDA = Revenue- Expenses [excluding taxes, interests, depreciation, and amortization]
The 5-star hotel profit margin is calculated considering EBITDA and not just profit as it offers a clear picture of whether the hotel business will generate profit.
How Much Does a 5-Star Hotel Make Yearly?
According to an estimate, the approximate 5-star hotel revenue in India varies from INR 25 Cr to 95 Cr, depending on the number of rooms. However, a reputed 5-star hotel that enjoys excellent occupancy and has a magnificent banquet space might earn INR 150 Cr as well! The industry is very dynamic!
So how much do 5 start hotel owners make yearly is a subjective question. It greatly varies on how much they charge for offering an exceptional experience to the guests for top-notch services, activities for entertaining the guests, and luxurious amenities. Restaurants, banquets, and spas are an additional source of income.
What are the Main Expenses that 5-Star Hotels Incur to Operate?
A hotel struggles with several operational costs for staying profitable. The operating cost of a 5-star hotel can be categorized into fixed and variable costs.
Fixed Costs
Regardless of the occupancy that a hotel witnesses these costs remain the same. The hospitality business focuses on services and hence employee compensation makes for a significant amount of the fixed costs. There is a lot of staff in a 5-star hotel such as housekeeping, concierge, reception desk, and managers to name a few. They are on payroll throughout the year. Labour cost usually occupies the largest space in any hotel’s operating cost.
Other costs that identify as fixed costs are as follows:
- Property tax
- Rent
- Human resources
- Healthcare premiums for employees
- Contracted services such as security
- Hotel management software
- Phone, television, and internet
Fixed cost is not directly proportional to the occupancy of a hotel. Over time, fixed costs can shift, but mostly they remain predictable and stable. They are much easy to manage as compared to the variable costs.
Variable Costs
Variable costs are the ones that fluctuate basis the number of guests staying in a hotel at a given point. Variable cost is directly proportional to the occupancy rate. Lower occupancy lowers the variable cost and vice versa.
Variable cost consists of:
- Utilities such as electricity, water, etc.
- Housekeeping supplies
- Food and beverage
- Hourly wages
- Marketing
- Décor and floral arrangements
- Third-party travel site commission
- Linen and laundry operations
It can be challenging to predict the exact variable costs, using a tracking system can offer insight onto the variable expenses.
A hotel always strives to control its operational costs. They examine and evaluate the property management system to identify the inefficiencies in the form of operating costs.
The profit and loss statement offers a view of the revenue and expenses for each department line by line. It becomes easy to see what is impacting the bottom line. Maintaining a detailed profit & Loss sheet enables a hotel business to pinpoint the areas with scope for improvement.
Are there Specific Regions or Cities Where 5- Star Hotels tend to be More Profitable?
The city or region doesn’t directly impact the profitability of a business. Luxury hotels can be profitable in smaller cities as well considering their location and the occupancy they witness. There are a few factors that play a key role in the profitability of a 5-star hotel regardless of the city or region.
The location of a 5-star hotel is the key to its success. Prime location has a great impact on the financial performance and success of a hotel.
The right location will always attract a steady inflow of guests, thereby increasing occupancy rates and higher profits. The prime location attracts an elite clientele that is ready to pay a premium for convenience, prestige, and luxuries. It results in higher room tariffs and increased revenue.
Proximity to business centres and tourist attractions also plays a crucial role in the performance of a business. Tourists often pay more for hotels that offer easy access to sightseeing locations.
It helps in saving their time and overall expenses. Business travellers prefer hotels located near offices and meeting places as it improves productivity. Apart from the prime location, the level of demand and competition should also be considered.
- Amenities for Attracting Elite Customers
When we talk about 5-star hotels, magnificence and opulence are what attract guests. Rooms equipped with amenities, spectacular view, and elegant furniture is what fascinates the guests.
Hotels that create an indulgent experience for the guests always experience great inflow. Swimming pools, fitness centres, landscaped gardens, and sumptuous dining are yet other attractions.
The idea is to offer a world-class experience with incredible luxury and sophistication.
- Target Market and Demographics
When it comes to the success of 5-star hotels, the focus is to cater the VIP and affluent guests. The high-end facilities are designed for guests that are willing to pay a premium for outstanding services and amenities.
Clientele that values personalized attention, exclusivity, and unique experience happily looks forward to their stay in 5-star hotels.
For 5-star luxury hotels, branding plays a major role in profitability. Strong branding can create a sense of desirability and exclusivity. Creating a unique identity helps in commanding higher prices and creates a loyal customer base.
A robust branding strategy of creating an image of trust, prestige, and quality can be a game-changer for a 5-star hotel in any location.
What strategies do 5 Star Hotels Use to Increase Revenue and Maximize Profits?
Revenue management for 5-star hotels consists of predicting the demand and streamlining the prices for maximizing profits. Here’s a look at a few strategies for how hotels increase their revenue.
- An incentive for direct booking
It is important to optimize the prices on all the listing channels but the idea is to make the guests book directly from the website. Direct booking eliminates the need for commission to third-party OTAs, thereby increasing revenue and profit.
If the in-house hotel restaurants serve what’s available elsewhere, there is no unique appeal. For maximizing the in-hotel food spends, 5-star hotels offer a culinary treat that is a blend of seasonal and local delight.
- Right property management software
Modern PMS have several features like optimizing the room tariff, automating room availability, offering bulk booking discounts, event booking, and more. Cloud-based PMS saves from spending extra on IT infrastructure.
Hotels have a clear understanding of their customer base which helps them sell the right room to the right guest. They segment the customers based on budget, business, leisure, vacationers, etc to identify the pattern of booking and willingness to pay.
Room tariffs make for a major part of the profits. Boutique hotels generally optimize their profits from speciality rooms. Having a clear understanding of room availability and guest needs enables the hotel to optimize the room rates.
- SEO and social media marketing
Ranking high on search engines offers an excellent opportunity to improve occupancy rates and increase sales and profit. 5-star hotels invest in robust SEO strategies and optimize their website.
How do 5 Star Hotels Manage Operating Costs without Compromising on the Quality and Luxury?
Rising operating costs can significantly affect the bottom line. Keeping the operational costs in check is quintessential to maintaining profitability.
- Hotels focus on reducing utility expenses by tracking energy consumption. It helps them cut the cost in creative ways. Using solar heaters and keeping up with maintenance helps.
- On-site software and staff to manage it increase the overhead cost. Hotels are now switching to cloud-based solutions for reducing the cost and centralise services.
- Automation in the future of the hospitality industry. Hotels switching to automation reduce the administrative task so that staff can focus on serving the guests. Automated data collection helps with informed decision-making.
- Hoteliers try to keep their marketing costs in check by fetching commission-free bookings. Investing in digital marketing increases direct bookings which bring more revenue and profits.
What are the Challenges faced by 5 Star Hotels in Maintaining Consistent Profitability?
- Hiring, training, and retaining the new staff can lead to a significant expense thereby putting a dent in the profit margins.
- Changing market dynamics and the inability to keep pace with them can affect revenue.
- Inflation and the rising cost of consumables are also a threat to profits.
- Operational and housekeeping issues.
- Irregular cash inflow and cost-income ratio can negatively impact profitability.
What Percentage of Revenue do 5 Star Hotels Typically Invest into Improving their Facilities and Amenities?
Like any business, 5-star hotels invest 10 to 30% of their revenue in improving their business. However, it can vary depending on the circumstances of a business and specific goals. Some 5-star hotels might choose to reinvest a higher percentage of the profit for growth and expansion while others might retain a significant percentage of profit for financial security and business stability. Unique goals and requirements decide the suitable percentage of profit for reinvestment.
Are there Seasonal Trends that Affect the Profitability of 5 Star Hotels?
Yes, seasonal trends do affect the profitability of luxury hotels. Every hotel witnesses an inflow of guests and high occupancy during peak seasons. Climatic factors, environment, and nature are all responsible for the attendance of tourists in certain destinations.
People might visit mountainous regions during summer for relaxation while seaside destinations witness peaks during winters. Holidays and the school calendar also have a role to play. 5-star hotels witness varied occupancy rates throughout the year due to seasonality factors.
Conclusion
Revenue and profit is the lifeline of any business. Profitability is a subjective factor for any luxury hotel business. Several factors contribute to the revenue and profit of a hotel. There are times when 5-star hotels might make lesser or no profits. The idea is to create robust strategies for price optimization and adopt ways for reducing the operational costs.
