Hotel prices in Sri Lanka and in New York City
Posted on August 19th, 2018

By A Traveller

Our son, his wife and two children (14 and 10) spent a week, including July 4th, Independence Day, on holiday in Manhattan. July 4th week is when most tourists come to Manhattan, mainly to see spectacular fireworks on the East River, to see the Statue of Liberty and to visit museums and galleries and to go to the theatre. Consequently, that is the week when hotel rooms in Manhattan are most expensive. They stayed in a spacious family room in a hotel on Wall Street and Water Street in lower Manhattan. This is in the thick of the financial district where commercial real estate is highly expensive. This is in lower Manhattan, away from the entertainment district. Yet train D, F, 2 or 9 on the Subway will carry one to Times Square in 15 minutes. That room for four in the most expensive part of Manhattan during the busiest tourist week in the year cost them $150 a night, for a week. Sure, this is not Waldorf Astoria or Helmsley Palace, neither do I need one such as a comparator.

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His sister, was here and wanted to spend a few days in a seaside resort. To reduce travel, we booked a hotel about 35km south from Colombo. It is on a spectacular site and the layout and the buildings have been marvellously designed. The room was spacious. However, the thermostat did not work and had to be attended to after we complained about it. The toilet smelled foul incessantly, due, I suspect, to a design flaw in plumbing. A candle was lit 24 hours a day after we complained. There were roaches in the room. Meals offered little choice, except at breakfast. The view of the Indian Ocean from the balcony was breathtaking. Thick clouds in the evenings spoiled probable colourful sunsets. Service was exceptionally good. There was a small gymnasium into the bargain. The hotel told us that they could not offer a lower price for half-board. There was little choice as reasonable restaurants were quite a way off. Even at that price there was a measly limited choice menu for lunch and dinner. The price for a three person room on the second floor was Rs.60,000 per night, full board for three nights, including service charges and taxes, roughly $400, a night. And this was in July, off season for hotels on the Western seaboard in contrast to Manhattan in July. Indeed, we did not see more than a score or so of guests at meals. As taxes and other charges normally add up to about 15 (another 10 percent in service charges) percent of the total bill, revenue to the hotel was probably $340 per night. This price was described as a ‘discounted price for locals’!

Colombo hotel

At Sinhala New Year when all our staff took a week off, we decided to check into a hotel in Colombo city. I checked on the internet and there was an attractive offer in one of the older hotels and before booking in, we decided to get a better idea of the room and that ‘check in’ paid off handsomely. Yes, it had a small balcony facing the Indian Ocean, the view of the ocean now irretrievably spoilt by the breakwaters of the Colombo Port City. But the room was crowded with a large tub in the middle of the room. It was no place where we could stay a week. Anyway, the price half board was $ 300 a night. It made no sense and we decided to make do with whatever provisions we could find at home.

Back to the comparison. The minimum wage in Manhattan is $9 per hour. Eight hours of work would earn $72 per day. Most hotel employees including plumbers, electricians, cooks, waiters and managers are skilled workers and would earn much higher wages, when the unemployment rate nationally is less than 4 percent. I would guess that the average monthly cost, including insurance costs, of a regular employee to a hotel in Manhattan is about $ 4,000, about Rs. 600,000.

I have no information on wages paid to employees in large hotels in Sri Lanka. (However, the quality of food served in hotels outside Colombo does not tell me that they secure the services of skilled cooks. In consequence, I rarely order a meal other than curry and rice, of even which, they at times, make a mellum. ) In The Island, a few weeks ago, a sous-chef with 18 years of experience complained that his monthly wage was Rs. 18,000. In addition to their regular wages, hotel workers share in the service charges collected (mercifully) for them by the hotel. With those additions he may receive Rs.80,000 per month, not the Rs.275,00 that a railway engine driver earns nor the Rs. 40,000 that a school teacher earns.. The average employee may earn perhaps Rs. 40,000 a month. (The complaint by owners and managers of hotels that they cannot get employees is simply another way of saying that they pay low wages. When you say that goods produced in China are cheap, you are in fact saying that, given the same technology, wages in China are lower than in another place. When you drive down the price of a handicraft you are driving down the craftsman’s wages. Those workers hoteliers miss in Sri Lanka, one meets in any good hotel in West Asia.) Let us assume that hotels in Sri Lanka employ two for each in Manhattan. Then the equivalent cost of a worker in Sri Lanka is about Rs.80,000 a month (2 x 40,000).

I argued earlier that the cost of real estate in Manhattan must be several times that in the area of the hotel, even in Colombo. I have argued that wage costs in Manhattan must be 7-8 times that in Sri Lanka. Food in these hotels in Sri Lanka, has a larger component of imported items than in the average home in Sri Lanka. Yet, the fish is from the ocean below, the chicken is local, and so are greens and the fruits. Having lived long in New York City I know prices for fish, meat and produce there. They are much cheaper in Colombo here than in Manhattan.

Beach hotels in SL

Still hotel prices are three times as high in towns by the sea side in Sri Lanka as in the financial district of Manhattan! Little wonder that accommodation in ‘informal hotels’ gives good competition to these large hotels. The wonder is that small hotels and home accommodation have not competed away more business from large hotels. I suggest that government encourage banks to lend funds for home owners to add two rooms and two good bath rooms in their present homes to compete away the huge profit margins that these hotels now collect. These ‘profits’ are in reality rent collected for the exceptionally beautiful locations that hotels rest in. Go back to the first principle that prices are not high because rents are high but that rents are high because prices are high. Then if competition drives down prices, so will rent collected by large hotels. These locations belong to the public commons, believers might say, ‘gifts of God’ and the rent on them must go to Caesar, the government.

Because of these rents earned by nature but now collected by large hotels owners, these hotels must be profitable even at 35-40 percent occupancy. Consequently, in large hotels, all that capital in unoccupied rooms lies idle, a heavy cost in a capital scarce economy. (Today 4 August, one hotel in Colombo announced that they had closed for guests one whole wing of the hotel: so much idle capital.)

There is another source of income to these hotels. Rich Indians, long have had a habit of celebrating weddings expensively (recall Monsoon Wedding), the more expensively the higher the prestige of the families. One part of this extravagance now is to hold the parties overseas. In this instance 300 guests (full capacity) were to stay in the hotel for five days to celebrate a wedding. Let us assume that the parties bargained for a tariff of $300 per night full board. That would bring in $ 210,000 (300x5x140). Six of these in a year $ 1,260,000.That bashes of this nature are not uncommon, I reckon from experience in another similar hotel in the South, where such celebrations took place the week after we had left it, last year.

Does this price and what subsequent occupancy rates give a reasonable rate of return on capital? Would a substantially lower price raise occupancy rates to ensure better use of capital, whilst making the hotel affordable to more people and earning the hotel higher profits? If they receive USD 1.26 million a year from that source, what is the occupancy rate, assuming a flexible pricing policy, that will give the hotel a reasonable rate of return on the capital?

Another business model

Let us imagine another business model, because the model that this hotel seems to follow results in a huge outlay of capital lying idle for a good part of the year. Government at the local level or a firm that can raise the capital builds infrastructure in suitable sites along the coast. The infrastructure includes roads, water supplies, sewage disposal, electricity supplies and so forth. Sites so supplied will be rented out long term to small scale entrepreneurs to build and operate chalets on demarcated sites. These chalets could operate the same way as ‘boutique villas’ along the road from Galle to Matara, whose owners mostly live overseas. Owners can organize themselves to provide common services such as security, lifeguards, gardening and so on. We spent happy three days in such a villa in spring in another country and the price was quite reasonable and a fraction of the $400 a night. Chalets of this nature can compete away some of the abnormal profits now earned by large hotels and avoid the waste of capital, I have pointed to earlier. They can be flexible with prices. Then rent paid to government would catch some good part of the ‘rent’, generated by nature and which now accrues to hotel owners. I can see an objection that this would provide opportunities for crooks and cronies to collect large bribes etc. That is a common affliction, like filariasis infection in some parts of our country, that disfigures the entire body politic of this country and this is not where we can discuss it.

There is a still more capital saving business model at work: Airbnb. This is where a household may rent out a bed with breakfast and nothing else. The booking and paying is all on line. The word ‘air’ in Airbnb, legend has it, stands for an airbed which was all that was offered in the first instance. It has spread in many countries from US and there has been no hue and cry against it on account of vulgarity or criminal behaviour of guests. Well, our country is unique: Loken utum rata lankavai, siri lankavai!

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