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Cost Benefit Analysis of the Hotel Industry

Home Free essays Analysis Cost Benefit Analysis of the Hotel Industry

Tourism has been established as a major contributor to the global economy. The lodging and accommodation sector plays a vital role in this industry. Hotels offer accommodation and food services to visitors in hotels. Recent studies have shown that this industry heavily impacts the environment and the society. In the recent past, the hotel industry has begun focusing on sustainable hotel practices with an aim of reducing waste and effectively managing resources. These include; ecotourism, green building, Total Quality Management (TQM), Corporate Social Responsibility (CSR), and High Performance practices. High performance practices are becoming significant in the hotel industry in the United States. This practice involves the adoption of principles and strategies in design, construction, and operation of hotels. This system aims at efficiently using energy, water, materials, and land. This system has been ascribed to be advantageous to the economy, society, and the environment. This has made it increasingly attractive as an option to stakeholders in the hotel industry. This paper aims at evaluating the costs and benefits that come with the adoption of high-performance hotels. This study focuses on literary review to achieve this goal. The analysis will also involve a case study of Orchard Garden Hotel in San Francisco in order to justify the investment into sustainable hotel practices.

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Cost and Benefit Analysis of the Hotel Industry: Adoption of High Performance Practices

The tourism industry is a major contributor to the global economy. Statistics of this industry shows that it contributed $133 billion to the GDP of the United States of America in 2011 (The travel, tourism and hospitality industry in the United States, n.d.). The hotel industry plays a major role in the advantages drawn from the tourism industry. This hotel and lodging industry primarily offers accommodation and catering services. The sector of the economy offers significant socio-economic benefits for the stakeholders of the hospitality industry (Goeldner & Ritchie, 2009, p. 22). However, recent studies have shown that that the industry also has negative impacts on the environment. Operation of hotels requires inputs in the form of water, energy, chemicals, and other natural and artificial resources. As a result, there is enormous amount of waste generated in the form of energy, water, toxic chemical waste, sewerage, and solid waste (Green buildings and the bottom line, 2006, p. 23). This has led to awareness and proactive efforts in the industry to mitigate the effects of the hotel industry on the environment. This has led to adoption of green efforts in the industry. These efforts include ecotourism, green building, Total Quality Management (TQM), Corporate Social Responsibility (CSR), and High Performance practices (Aspinall, n.d., p. 7)

High performance hotels practice is an emerging trend in the tourism industry. It involves the adoption of efficient management practices of the hotel industry. The practice focuses on a shift towards adopting buildings that use less energy and less water and offer healthier environments for work, life, and rest. The adoption of this practice is becoming a market shift rather than an environmental issue.

The use of this practice is believed to offer social and economic advantages. These advantages include lower operating costs, less environmental impacts, social education on environmental matters, and increased productivity amongst the hotel employees. However, arguments against high performance practices in the hotel industry have also been propagated. Critics of this system believe that the trend is not feasible as it has no economic returns. There are also claims that this practice does not have demand amongst hotel operators and owners

The systems involve integration of environmentally conscious planning and design, construction, and operations of hotels. This system aims at achieving the most effective resource use with a view of conserving and protecting the environment. The influence on the adoption of sustainable practices is also driven by significant consumer demand of sustainable initiatives in the hotel industry. A survey of 12 business travelers reports by Deloitte in April 2008 reveal that 95% of respondents believe that the hotel industry should be undertaking green initiatives.

The rising demand for high performance hotels creates a need for the evaluation of its benefits and costs incurred by implementing the practice. This can be achieved by understanding appreciation of the history, stakeholders. and current practices in the hotel industry.


This cost and benefit analysis is aimed at justifying this practice. The results of the study will be extrapolated to demonstrate the benefits and costs that are associated with high performance practices. The paper will seek to answer questions about its feasibility as an effective future in the hotel industry. While this method of evaluation is admittedly not completely accurate, the associated percentages in savings and costs as compared to traditional practices will be used to evaluate the advantages and disadvantages that are associated with this practice. Finally, recommendations on how the costs may be minimized and benefits maximized is presented.


This study will focus on the hotel industry in the United States. The scope of the study will include the capital and social costs involving the implementation of high performance practices in hotels. The analysis will focus on the Orchard Gardens Hotel in San Francisco. However, data showing trends and practices from the industry in a global perspective will be used in the analysis.


This cost and benefit analysis will focus on the evaluation of secondary literary sources. This is justifiable as a source of information already acquired within a research area (Bryman & Bell, 2007, p. 45). This procedure follows the following general format to answer the research questions. According to Hanley and Spash(1993), these are: project definition, identifying project impacts, determining which impacts are economically relevant, quantification of impacts, and the monetary valuation of the effects.

The study will focus on a detailed and intensive analysis of a single case. Bryman and Bell (2007) observe that this case can be an organization, a location, a person or an event (Bryman & Bell, 2007, p. 52). They also point out that qualitative methods of research are helpful. These include participant observation and unstructured interviews. The information used in this analysis of high performance hotels is collected from print and web sources. The statistical data is presumed to be accurate as it is obtained from websites of relevant local governments and associations. These sources are also used by industry competitors as credible sources (Bryman & Bell, 2007, p. 53)

This cost and benefit analysis will review the history and common practices in the hotel industry. This will act as the alternative practice to the ones that high performance practices seek to replace. In order to establish a basis for measuring the costs and benefits of this trend, a case study of the Orchard Gardens Hotel in San Francisco will be featured. The data received from this case study will represent a general evaluation of adopting this practice. This study will make vast assumptions as to the difficulties that come with the accurate calculation of the multiplier effect in the hospitality and tourism industry. According to Cooper, Fletcher, Gilbert, and Wanhill (1993), this is due to the following reasons: data collection problems, data selection difficulties, and supply constraints.

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This is attributed to the fact that secondary data is rarely available in sufficient quantities to enable an accurate calculation to be made of what a particular area, or industry sectors, actual multiplier is (Cooper Fletcher, Gilbert, & Wanhill, 1993, p. 66). The absence of complete records even of primary data also limits its accuracy. Such inconsistency occurs in the hospitality sector in the form of tips, taxi fares, and other cash transactions that are not recorded. (Cooper, Fletcher, Gilbert, & Wanhill, 1993)

The evaluation of the projects environmental impacts also presents difficulty in economic evaluation. This is due to the fact that some benefits may be worth less than the ascribed value or even be priceless in terms of value for future generations and effect on the wildlife (Aspinall, n.d., p. 5).


Evaluation of the high performance practice will be based on savings achieved from the practice. These savings will be awarded liberal monetary values, on the basis of which comparison with the costs will be also made. Unquantifiable benefits and costs will also be compared in the form of percentages. This numerical analysis will use the Net Present Value (NPV) figures to derive the Benefit Cost Ratio and the Internal Rate of Return (IRR) (Levitan, 2010, p. 6)

Literature Review

Hospitality and Tourism Industry

Tourism has various definitions. According to Goeldner and Ritchie (2009), Tourism comprises the activities of persons traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes (Goeldner & Ritchie, 2009, p. 4). These have grown significantly as contributors to the global economy. Statistics from The travel, tourism and hospitality industry in the United States (n.d.) shows that the industry generated nearly $1.4 trillion as economic output in 2011. The industry was also responsible for 7.5 million jobs and accounted for approximately 7% of all the exports from the United States in the same year. Furthermore, 2.6% of the Gross Domestic Product of the country comes from this industry (The travel, tourism and hospitality industry in the United States, n.d.).

Tourism is mostly a service-oriented industry. The visitors enjoy facilities provided at a rate determined by the service provider. The stakeholders to the industry include local and central governments, the community, tourists (customers). The tourism and hospitality industry is divided into four main subsectors, which are:

Accommodation and lodging. This is the largest subsector of the tourism and hospitality sector. It comprises hotel and lodging services. It is responsible for 19% of the income, according to federal sources. Growth in the overseas travel has motivated growth in the industry (The travel, tourism and hospitality industry in the United States, n.d.).

Air travel. This subsector is the second largest in the US tourism and travel industry. It generates16% of the total tourism and travel income (The travel, tourism and hospitality industry in the United States, n.d.). The sector experiences continuous improvement with the encouraged efficiency increase and cost reduction measures taken by players of the industry. Trends in the incorporation of information technology have also increased the outreach and efficiencies in this sector of travelling.

Food and catering services. It comprises catering services that support the tourism industry. This sector has foreseen a considerable growth in the near future according to federal sources (The travel, tourism and hospitality industry in the United States, n.d.).

Recreation and attractions. This is the least active subsector. National parks and tourism sites are accounted for in this subsector of the industry. Recent studies have shown a drop in the income generated as tourism has been on the decline (The travel, tourism and hospitality industry in the United States, n.d.).

Practices in the tourism sector have costs and benefits to the local communities surrounding them. These may be social, economic, cultural, and political ones. According to Tourism costs and benefits (n.d.), these benefits and costs include the following: (see table 1)

Table 1.

Summarising the Costs and Benefits of the Tourism Industry





Tourism may lead to negative cultural influences. These may include prostitution, alcohol, and drug abuse.

Leads to changes in behavior and social responsibilities due to social influences of tourists.

Cultural diffusion may erode the existing cultures because of the daily interaction with tourists.

Leads to overcrowding in some areas.

Encourages crime in the local community.

Displacement of local communities from their land to facilitate tourism.


Encourages local development through foreign exchange.

Encourages national pride amongst the locals.

Encourages and capitalizes on local cultural activities.

General improvement of infrastructure benefits the local communities

Encourages cultural diversification by introducing new languages and cultures in the community.

Contribution to the education sector by building schools and colleges.




Threatens environments due to increased resource pressure.

May lead to an increase in pollution.

Increased competition for limited resources results in deterioration of scenery, land degradation, and loss of wildlife habitats.

Travelling causes emissions, which may be harmful for human beings and the global climate.


Encourages preservation of environmental resource. This could be done through community projects aimed at improving or maintaining the natural scenery.

Could encourage environmental conservation efforts.



Tourism requires a lot of capital to improve infrastructure.

Causes increase in inflation rates.

Leads to leakages in the economy if the development is owned by interests outside the country.

The seasonality of the industry destabilizes the local economy.

Poor paying jobs in the industry in cases where capacity development is not possible.

Affected by the economic climate of other industries and cannot be fully controlled.

Diminishing returns may be experienced once the tourism sites are visited as with any product life cycle.


It diversifies and stabilizes local economies.

Helps generate extra tax revenues from the industry supporting tourism.

Leads to the creation of local employment and entrepreneurial opportunities.

Leads to a multiplier effect in the incomes generated from tourism circulating in the local economy.

The industry is labor intensive, thus encouraging employment.

Foreign exchange brings international balance of trade.


(Tourism costs and benefits, n.d.)

Hotel Industry

Historically, hotels began operating to attend to sleeping accommodations of travelers. A typical hotel will offer sleeping accommodations and food and beverage for its visitors. The most distinct service offered is bedroom as this is the primary function of the accommodation industry. The bedroom itself is of course the most distinctive product of the accommodation industry. However, this industry is demand-driven and the service providers adapt their products to fulfill the needs of their customers. The hotels may therefore offer other services in the form of recreational activities and conference facilities. Other facilities may also be provided for non-residents of the hotel (Medlik & Ingram, 2000, p. 15).

Requirements that are customer-driven and are prevalent in the hotel industry include sleeping accommodation, restaurant services, and bars. These features are basic and function as principal hotel products.

However, the hotel industry has adapted to the needs of its customers and developed new products. Some of the products developed include valet services, room services, television in guest rooms, paid packages, and tour packages. All these are aimed at making the hotel competitive in the market and achieving higher level of customer loyalty (Medlik & Ingram, 2000, p. 19). Classification of hotels according to the classes also has a bearing on their pricing and occupancy. Some of these reward schemes include the star scheme with single star hotels offering a basic quality of service and five star hotels offering luxurious services (Goeldner & Ritchie, 2009, p. 6).

Trends in the Hotel Industry

The evolution of the hotel industry has seen new trends being adopted into the industry. These trends are aimed at achieving the hotel business visions and missions. They may be oriented towards customer satisfaction, economic prosperity, or even environmental sustenance (Meade, 2010, p. 56). Some of the trends are:

CRS and social networks use, These systems are used to increase customer satisfaction by adopting the use of information technologies. Computer Reservation Systems (CRS) are used to enable customers to book spaces in the hotel at their convenience. This system has eliminated the need for agents and allowed hotel bookings to be done globally. Social networks are also becoming a predominant marketing tool for hotel operations (Goeldner & Ritchie, 2009).

Eco tourism. This is the adoption of a form of tourism that is aimed at the conservation of the environment. This form of tourism involves visiting tourism sites and enjoying leisure activities, while leaving the least possible footprint. This is one of the green Trends in the hotel industry (Aspinall, n.d., p. 27).

Total quality management (TQM). This involves the practice of ensuring that all activities in an organization work towards a highest possible standard of quality. In the hotel industry, TQM is aimed at minimizing waste and optimizing the use of resources. This includes front office operations, as well as all other ones carried out in the hotel.

High performance practice. This trend is focused on going green; this means the design, construction, and operation of buildings that efficiently use water, energy, material, and land. This system aims at achieving environmental sustainability, but is also focused on daily practices that enable it to achieve economic and social goals.

High Performance Hotels

Green Building and High Performance Practices

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Green building refers to the construction and use of processes that are environmentally sustainable and resource-efficient throughout a building’s life-cycle, including its design, construction, operation, maintenance, renovation, and finally demolition (Green Hotels Association, n.d.). This practice is aimed at improving conventional building styles. It features the buildings economic value, utility factor durability, and the comfort of its occupants. There are new technologies constantly developed to achieve the least possible impact of built environment on human beings and the environment. This is achieved by efficiently using energy, water, and other resources. This practice also aims at protecting the occupants health and improving productivity of employees (Meade, 2010). This design utilizes locally available material or even recycled material to achieve its targets.

3.2 LEED Certifications

The Leadership in Energy and Environmental Design (LEED) is a rating system established to weigh the greenness of building systems. It includes a range of environmental and other measures of performance that can be implemented by hotels and other players in the accommodation industry. This rating system provides to be a plausible framework for hotel managers to implement sustainable practices in new and old buildings. Specifically, the LEED for Existing Buildings: Operations & Maintenance rating system addresses site maintenance programs, water and energy use, environmentally preferred products and practices for cleaning, sustainable purchasing policies, waste management, and ongoing indoor environmental quality (U.S Green Building Council, 2009).

The system, which has been established by the United States Green Building Council (USGBC), is aimed at reducing the negative impacts the hotel industry has on the environment. According to studies by USGBC, hotels in the United States alone occupy more than 5 billion square feet, on which they host nearly 5 million guest rooms and account for $4 billion in annual energy usage (U.S Green Building Council, 2009). This has brought about the need for hotels and other hospitality venues to develop measures to reduce the negative environmental impacts associated with the hotel industry. This is achieved through measures, including, but being not limited to rnergy and water efficiency, waste reduction and management, sustainable and local purchasing, and use of alternative transport systems.

These hotels may also positively contribute to human health by providing healthy and comfortable indoor environments. These indoor environments should provide occupants with improved indoor air quality, access to daylight and views, and control of the lighting and thermal environments.

The focus of the LEED certification is on the following categories:

Sustainable Sites

Water Efficiency

Energy and Atmosphere

Materials and Resources

Indoor Environmental Quality

Innovation in Operations (U.S Green Building Council, 2009)

Case Study

The San Francisco tourism and travel industry is significant. San Francisco visitor industry statistics (n.d.) shows that the city hosted 16.5 million visitors in 2012. These visitors included hotel guests, those staying with friends and relatives, those staying in accommodations outside the city but whose primary destination was San Francisco, and regional visitors driving in for the day (San Fransisco Travel, 2013). The report also reported that visitor spending reached the highest ever in the same year with an estimate of more than $8,93 billion spent in local businesses with this figure being an increase of 5.5% from 2011 (San Fransisco Travel, 2013).

This ready market for tourism is what prompted the construction of the Orchard Garden Hotel in the city. Another driving factor was that Mrs. Hueng was environmentally conscious and sought to develop a high performance hotel. The management and the owner thus engaged in a project that sought to give the mid-rate hotel credibility as a high performance hotel. Located near the Financial District, the Union Square, and the Chinatown Gate, it comprises a 56,000-square-feet building. The hotel hosts 86 guestrooms and a 56-seat restaurant. The hotel adopted the use of green buildings and high performance practices in all the stages of its construction and design. The use of these sustainable methods of operation also earned the hotel an LEED certification of 26 points out of possible 69. This made it the third hotel in the United States and the fourth in the world to be awarded this certification as of 2007 (U.S Green Building Council, 2007, p. 2).

The total project costs were estimated at $25 million dollars for the size of 56,000 square feet. This puts its cost per square foot at $44. In addition to this, the hotel adopted an energy saving system that was anticipated to save 20% in energy costs annually. This system initially cost the hotel $37,000 to install (U.S Green Building Council, 2007, p. 3).

Other features that characterize the project include:

A cardkey system that starts and stops power to a room whenever the guest leaves or enters. This system is aimed at reducing energy waste. This system is projected to decrease energy use by 20%. These energy savings are believed to attract more investments, as well as act as an attraction for environmentally aware customers.

The hotel has also adopted a water saving practice. The use of low-flow plumbing fixtures has reduced water use and water bills by 10%-20% (Orchard Garden Hotel, San Francisco, n.d.). Use of washable linen rather than dry Clean Only textiles has also led to low costs in the operation of the hotel.

The hotel used 100% local material from the local market. These were either recycled or from a nearby locality, which enabled the hotel to reduce its environmental footprint. This also meant the construction site produced considerably low waste levels (U.S Green Building Council, 2007, p. 6). The practice of supporting the local industry also still exists with the hotel purchasing grocery from the local suppliers.

The system has adopted lighting practices that allow its guests to use up to 82% of natural daylight and the occupancy of the hotel has a strict no smoking policy. The hotel also allows access of its roof garden to its occupants during the daytime (Orchard Garden Hotel, San Francisco, n.d.).

The hotel uses environmentally preferable cleaning products instead of chemical alternatives. These chemicals have no adverse health effects and have resulted in positive feedback from the workers.

The hotel also facilitates less use of motor vehicle, thereby reducing its carbon footprint and that of the local community.

These practices have made the Orchard Garden Hotel an adequate case study on the cost and benefits of adopting high performance practices in the hotel industry.


The evaluation of the costs incurred in the project will include development costs, operation costs, and hidden costs. Some costs are hidden because they cannot be evaluated in conventional monetary terms (Levitan, 2010, p. 6). These costs will then be evaluated over a period of 5 years of operation. The projects however are usually evaluated over a period of 20 years, which is the conventional lifespan of buildings in the US (Green buildings and the bottom line, 2006, p. 27).

Development Cost

Adoption of high performance practices is a capital intensive project. Development costs are the highest costs. They are divided into two levels: soft coats and hard costs. Soft costs refer to costs that are incurred during the development phase of the building, but do not constitute a part of the actual premises. These include architectural and design fees, inspection fees, legal and valuation fees, insurance taxes, and project management costs. Hard costs are comprised of the expenses on tangible items that need to be produced in order to complete the project (U.S Green Building Council, 2009, p. 23).

In this study, these costs will be compiled together to evaluate total costs incurred in the project. These costs will then be compared to those incurred in conventional building codes and practices. In the project, the costs assigned to the project of the Orchard Garden Hotel included the total cost of the project estimated at $25 million. The same project would have cost the firm 7% less based on the graph for the development cost, according to the World Green Building Council report (2013). This is shown in fig 1 below.

Operational Costs

The cost of installing water and energy systems will cost the initial system a given amount. The initial cost of these systems from the case study was valued at $42,000 for the water and energy systems with a premium of 0.17% of the operation. The water cost was repaid within 6 months, while the energy settings were repaid within two years.

Hidden Costs

Some of the costs that could not be evaluated in the system include daily wage and other operational costs such as laundry bill.


The benefits associated with high performance hotels are based on the shareholders of these buildings. These include owners, occupants, and sales persons. The Orchard Garden Hotel has experienced benefits in terms of development savings, operational savings in the water and energy systems installed, and free marketing from its systems. These benefits are quantifiable, while others are not quantified. The figure below summarizes the benefits that may attract various stakeholders towards high performance buildings.

Development Benefits

These benefits are experienced in the result of adopting high performance building costs. The building has had low design costs, which were absorbed by the architects as a part of their support of the high performance project (Diener, Parekh, & Pitera, 2008, p. 38).

According to the case study, the Orchard Garden Hotel has experienced up to 10% of material savings by recycling 100% of the site waste. Such recycling and use of material from nearby sources has had positive environmental impacts (U.S Green Building Council, 2007, p. 4).

Operational Benefits

Benefits to the operation and maintenance costs are reduced over a period of time. The building has installed water and energy saving systems, which has resulted in savings of 10%-20% and 20% respectively. The adoption of washable dry linen as part of the hotel system has resulted in about 18% decrease of the average laundry cost (Diener, Parekh, & Pitera, 2008, p. 36).

Total savings obtained from these efforts have been observed to achieve average savings of $11-$13 annually, according to the Business Case for Green Building Report of 2013. This is demonstrated in the figure below. This study will utilise the average of $12 per square foot per yea to evaluate the benefits obtained from this project.

Occupational Benefits

The occupants and employees working and living in high performance buildings have been observed to report improved health and wellness. Studies have shown a high productivity of 18% improvement amongst employees working in green environments as compared to those in conventional buildings (World Green Building Council, 2013). Employees at the Orchard Hotel have also reported positively on the use of citrus fruits-based cleaning agents as more effective, while posing no health hazards compared to chemical agents.

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Marketing Benefits

The adoption of high performance hotels is known to increase positive market awareness of the brand. Statistics shows that on average consumers are willing to pay 10% more to stay in a green hotel (Meade, 2010, p. 43). This not only significantly increases the occupancy of the hotel, hence generating more income, but also results in saving marketing costs. According to the World Green Building report (2013), this can be valued at $5,000 saved annually (World Green Building Council, 2013).

Environmental and Social Benefits

The projects adopting high performance benefits offer wide and sustainable environmental conservation efforts. The use of less water, energy, and toxic chemicals means that the ecological footprint is reduced. This has received positive affirmation from the authorities. The federal American Jobs Creation Act of 2004 authorized states and local governments to issue up to $2 billion in tax-free bonds to fund environmentally sustainable projects (Campanelli & Rizzo, 2009).


The figures generated from conventional and high performance buildings are summarized as follows;

Table 2

Conventional Option for the Orchard Hotel over a 3-year Period






Total initial cost










The building does not experience any additional costs or benefits and, assuming no inflation or interest rates, the cost of the building remains at the initial value of $23,250,000.

Table 3.

Table below shows costs and benefits from the adoption of the high performance project.






Total initial cost

Energy fittings

Water fittings










Total costs

($ 0)




Operational savings Benefits

Marketing benefits








Total benefits




Net value over 3 years is $ 23,011,059.5. This shows that the saving benefits of the hotel amount to $2,031,000.

The benefit/cost ratio of the building is 0.0811 at the end of three years after implementation (Levitan, 2010, p. 8).

These results clearly show that these hotels accrue high benefits over a shorter period of time as compared to conventional buildings.


It may be observed that high performance hotels will result in more benefits as compared to the conventional practice. This practice is aimed at achieving economic prosperity, environment quality, and social justice. Acquisition of the certified grades of high performance, for example LEED, has demonstrated positive returns in terms of savings for the business. The results from the cost benefit analysis show that the savings made in high performance hotels are higher over three years of operation as compared to an imaginary project of the conventional practice. These benefits show that the adoption of high performance hotels is not as expensive as perceived by the society. Furthermore, awareness of these practices has led to a decline in the cost premium of these projects.

While this analysis has picked only on the saving benefits and initial costs of the project, further study taking into account other factors such as the interest rates, inflation, sales revenues, and other discounted rates would yield a more accurate cost benefit analysis. The socio-economic benefits acquired by this practice are numerous and environmentally sustainable.

The hotel industry should therefore get involved in projects focusing on high performance practices on the basis of their benefits that outweigh the costs. This will result in the sustainability of tourism and the environment.

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