Value Investing – Hospitality Industry Characterized by High Fixed Costs
There is one unique financial characteristic that is synonymous with the hospitality industry; that is high fixed costs. Or another way of stating the same financial attribute is to simply state that the hospitality industry has low variable costs. There are several different cost drivers that force this industry to incur high fixed costs. These include location, initial cost of construction, costs of capital and an economy of scale. Each of these business attributes contribute to the high fixed costs of operations.
In general the hospitality industry takes care of guests for an extended period of time (at least several hours). Some writers indicate that your fancier sit down restaurants are in this industry and they are not. All restaurants are in the food service industry. Hospitality involves longer periods of contact or utility time with the guest than simply the time it takes to consume a meal.
The hospitality industry is comprised of the following lines of business:
- Hotel/Motel Operations
- Event Planning and Coordination
- Theme Parks
- Golf Courses
- Tourism including Cruise Lines
As the following sections explain the cost drivers for high fixed costs, think of the different lines of business as identified above when evaluating theses costs. The first contributing cost driver that forces a high fixed cost is location.
Hospitality Industry – Location, Location, Location
If you haven’t quite figured it out yet, most of the hospitality based operations have to operate in more expensive geographical
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