During the past year and particularly during the last 5 months we have seen energy costs increase heavily.
There are many reasons for that, lack of supply, the Ukraine invasion, etc. It is clear that this scenario is a reality that both hoteliers and restaurants will need to learn how to live with, at least in the short term.
In order to navigate through it many hoteliers and restaurants are implementing the following strategies:
- Get together and lobby to push governments to do something about it: The issue with this approach is that it will not solve the problem in the short term (since lobbying take time) and in the mid term it will create a tax increase (to pay for the public grants) that would eventually impact hoteliers and restaurants.
- Change the way in which they are operating to lower costs and improve efficiency: This would help in the short term but of course, it is very difficult to generate efficiencies in the way a restaurant is operating without negatively impacting customer service.
- Improve our energy infrastructure to be less dependant on external suppliers: For example installing solar panels would be a good idea and a good help in the mid run, but you will need to do an investment in the short term in order to do so and the impact is not huge.
So, is there any other way to solve this issue? We have focused so far on trying to mitigate the energy cost increase by lowering costs, but maybe a different approach can be brought.
In the end, the problem is not the increase in energy cost per se, but rather, the decrease in EBITDA that it is bringing. Once we understand that, we can try to solve it either by lowering cost or by increasing our revenue or contribution margin.
So, how can we increase our contribution margin?
During the past year, many restaurants have been adopting Revenue Management strategies (Dynamic Pricing and Smart Menus mostly). This kind of techniques have proven succesfull, being capable to increase their contribution margin by 10%-15% in a very short time.
But the question remains. Will applying Revenue Management strategies mitigate the impact of energy cost increase?
Lets look at some numbers. First, lets see what is the energy cost increase that the average 4 star hotel has had to face since 2019:
Energy costs used to represent between 2,5% to 3,5% of the annual revenue of a hotel
Now, lets see what would be the increase in contribution margin that this same hotel would have gotten if it had implemented Revenue Management strategies for its restaurant.
The expected increase in contribution margin thanks to using Revenue Management strategies is between 10%-15%
We can see how, by implementing Revenue Management strategies in its F&B outlets, a hotel is expected to clearly mitigate the impact of the increase in energy cost.
Of course, the ideal strategy is to aim for both; cost driven strategies that will mostly impact the mid term as described but at the same time, top line strategies that will impact heavily our results in the short term.
