Stating with certainty that a hotel’s profit margin should be X% would be ridiculous. It depends on various factors and it will vary accordingly. This said, there are the experts who can point to ballpark margins. As an example, PKF Consulting quotes a figure of thirty per cent. This is an average, recognising that the amount of revenue left over after accounting for expenses will fluctuate. So it could be 20% or it could be 40%. It all depends.
There is a view, one has the impression, that all Mallorca’s hotels are making vast profits and are handsomely filling the pockets of their hotelier owners. It is perhaps fair to say that hoteliers in penury will be few and far between, but not all of them are filthy rich. We are aware of those who fall into this latter category, if for no other reason than Forbes highlights them each year in its rich lists.
In addition to publicity given to their personal assets, representatives of the Big Four hotel groups - Barceló, Iberostar, Meliá and Riu - are not infrequently called upon to offer their views on the state of the tourism industry. Or they volunteer their views. The status of tourism and therefore hotels in Balearic society as well as economy makes them as quotable as any politician - more so usually.
The co-president of the Barceló Group, Simón Pedro Barceló, isn’t one to hog the limelight, but when he does speak, he can always be relied upon to make some pertinent points. Among other things in an interview earlier this week, he referred to the “obsession” of Balearic tourism minister Iago Negueruela with his “labour issues” and to hotel profit margins. The two do coincide.
Barceló quoted research by the Fundación Impulsa, the private-public collaboration for economic competitiveness. The foundation, he noted, had discovered that a significant number of hotel businesses are operating with profit margins below ten per cent. Because of this, he explained, they will be at a great disadvantage if they were to lose five per cent of their room capacities in order to undertake expansion that is at least in part driven by the government’s circularity requirements. This expansion, set to be 15% of a hotel’s current built area, would be offset by a five per cent loss of beds.
Without wishing to go into the minutiae of the government’s tourism decree, let’s stick with Barceló’s observation about profit margins and consider these in the context of their costs. If the Fundación Impulsa has come up with its less than ten per cent based on historical results, the situation for these hotels isn’t terribly promising.
Ignoring investment that will be needed down the line for circularity, elevatable beds, etc. (notwithstanding government assistance), there are the immediate costs. We all know about electricity and fuel because we can’t avoid knowing this, but there is something else - and that is the latest increase in salaries under the collective bargaining agreement for the hospitality sector.
Delayed because of Covid, hotels are now looking at a further 3.5% salary on their labour costs. Iago Negueruela will be pleased, employees will be pleased and the Mallorca Hoteliers Federation will be pleased (or should be) because it was the federation which actually tabled the pay rise package in 2017. But there were always the small hoteliers who weren’t that pleased - those which might be caught in the Fundación Impulsa’s less than ten per cent.
There are very great variations in the island’s hotel industry in terms of size and profitability. The Big Four are in a league of their own. Even if margins are affected, they have substantial liquidity. But this isn’t so the further you go down the hotel food chain. It was clearly exposed by the financial crisis, when, for example, small hotel businesses had to divest (if they could) because credit dried up. The pandemic, which came hard on the heels of the Thomas Cook collapse, created its own liquidity challenges, which have been assisted by government schemes, although these could involve loan repayments.
The government also established a means of reducing rents that hotels pay, but it was only for the period of the state of alarm. Large companies have resorted to the courts in pressing the principle of rebus sic stantibus - where there is a fundamental change of circumstances - for extracting rent discounts. But going to court isn’t necessarily an option for small companies.
One might say, well, they’re still making upwards of ten per cent. Perhaps so, but they’re not exactly rolling in it either and they have to contend with the constant pressure on costs. Against the background of a competitive holiday market, it is therefore rather too easy to assume that these small hotels can keep prices down. It is one thing for the Big Four and the groups immediately below them, but it is a different matter altogether for the smaller ones.