NASHVILLE, Tennessee — The most notable and profound metrics shift in the global hotel industry since the end of the pandemic has been the widening between occupancy and average daily rate, but with pricing power showing signs of weakening in the U.S., hoteliers must define long-term strategies to compete in an unprecedented hotel landscape.
For the past few years, ADR has more or less constantly outgrown occupancy, with rates in the upper-upscale and luxury markets pulling the average up, often by a significant margin.
Audrey Kallman, operations analyst at STR, CoStar’s hotel analytics division, said during a presentation at Hotel Data Conference that for some hoteliers, the revenue-generating index might not have changed, but increased emphasis on driving rate has shifted the balance of the market penetration index and average rate index.
For hoteliers and owners, high revenues can translate into high profits, but margins have been hampered recently by the inflationary costs of labor and supply-chain goods and services.
Also, in the past year or so, ADR growth has fueled gross operating profit per room, Kallman said. The focus now for hoteliers is on how to maintain that ADR.
Getting the right commercial strategy in such a frothy landscape requires focus, said Chris Cheney, vice president of hotel performance and analytics at Stonebridge Companies.
“It is more efficient to raise ADR than to add rooms or to increase length of stay,” he said.
“Inflation has entered the revenue-management strategy discussion. The questions we are asking are, do we just rely on demand, and what that will do to rate, or do we increase guest experiences and work with that so as to meet our commercial strategies to grow GOPPAR?” he said.
Cheney added for hoteliers, resort fees have been a godsend.
He listed a few long-term initiatives for hotel revenue management:
- Define and communicate the value proposition of hotels and room nights to capture higher ADR.
- Diversify room revenues with a strategy around suites and premium rooms, allowing guests to trade up and training front-desk staff to upsell.
- Drive a greater contribution from ADR during high compression nights, or when hotel occupancy exceeds 90%.
- Yield day-of-week demand and ADR.
- Develop more experiences and programming, and market those initiatives to guests as things that further the value proposition and encourage return guests.
“An example is to offer 50% off second rooms, which reduced acquisition costs and increases on-property spend. Give third or fourth nights for free, provide breakfast packages or award extra loyalty points,” he said. “Provide housekeeping services only by request.”
Experiences are key to securing occupancy and higher ADR.
Cheney said one unique hotel experience — not at one of his company's hotels — that caught his eye was for a five-day teaching program for triathletes led by six-time Ironman world champion Dave Scott.
“The Ironman course is $3,500 for five nights, which does not include accommodation costs. It is a once-in-a-lifetime experience and comes with excellent wallet spend,” he said.
Kallman said hoteliers never take their revenue-generating index, or RevPAR index, performance to the bank.
“The RevPAR mix is critical to driving profitability,” she said, adding hoteliers are not finding it easy to shave a dollar off their operating costs.
“Not every dollar of revenue per available room is equal,” she added. “Profit margins continue to decrease. Between June 2022 and June 2023, the percentage of gross operating profit in relation to revenue has fallen from 41% to 38.5%, mostly due to growth in labor costs.”
Service Standards
Stonebridge’s Cheney said higher costs and reduced staffing has meant service offerings have had to be adjusted, but there are solutions.
“It can be very reactionary and has become more strategic over time. What has emerged are core strategies as to what we can do going forwards. Contract labor had been reduced but is back in full swing. We’re also leveraging technology and providing efficient offerings such as grab-and-go.
“As hoteliers, we’re looking at eliminating some of those costs while maintaining guest experiences,” he said.
Cheney and Kallman said currently labor constitutes approximately one-third of operating costs, so the trick is how to leverage experiences with a smaller pool of employees.
Kallman said labor costs constitute 25% of food-and-beverage revenue.
Cheney said a labor crunch will continue in the industry for a little while longer.
“Labor costs are more fixed than you think,” Kallman said.
Across the U.S. top 25 markets, conditions are different in demand, ADR and total spend, which affects RevPAR and GOPPAR.
In rolling 12-month numbers to June 2023, Miami has seen a 2.3% increase in ADR but a 3.4% decrease in GOPPAR. At the far end of the scale, Oahu has seen approximately the same increase in ADR but a 131.6% increase in GOPPAR.
“Consistency in strategy will help your ultimate revenue strategy and GOPPAR to the bottom line, to avoid the peaks and troughs. Consistency also helps tremendously in getting return loyalty,” Cheney added.