Hotel Occupancy and Demand are Soaring. Why Can’t You Drive ADR?

By Jason Q. Freed - Managing Editor at Duetto

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28 August 2018
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Despite industrywide record demand and occupancy levels, historical data shows that hoteliers — specifically general managers and revenue teams — are struggling to drive rate at paces they've seen during past peaks.

To illustrate, STR data shows the industry sold 117 million room nights in June, the most ever recorded in that month. June marked 100 consecutive months of RevPAR growth (since March 2010), with average monthly RevPAR growth at 5.8%.

"This clearly points at very healthy group, business transient and leisure demand, supported by still undeterred GDP growth and low unemployment numbers," said Jan Freitag, Senior VP of Lodging Insights at STR.

"We're in the best demand environment we've ever seen as an industry," added Isaac Collazo, VP of Competitive Intelligence at IHG, during the Hotel Data Conference last week.

Yet, June data also showed year-over-year rate increases of only 2.7%, which is right around the historical average. In fact, for the first four months of 2018, ADR growth climbed higher each month, exceeding 3% in both March and April, which seemed to point to an increase in pricing power. But in May ADR growth fell to only 2.2%.

Ask why, and you'll get blame pointed in several directions, from online price transparency, increased hotel supply and new competition from home-sharing services like Airbnb. During a panel titled "What Happened to ADR Growth?" at HDC in Nashville last week, hotel owners, operators and asset managers mentioned each of these factors, in addition to shedding light on new issues leading to rate suppression.

Are We Focusing on the Wrong Metrics?

The panel agreed that hotel managers and franchisors are often incorrectly incentivized to focus on occupancy instead of rate and profitability.

"We do sellout incentives," admitted Michael Heaton, President of Waterford Hotel Group. "I actually think we've gotten to that point because of how we do displacement analysis, and we're asking operators how often they're selling out."

Esther Gayfield, VP of Asset Management for Colony NorthStar, said the practice is not uncommon and often hoteliers will take low-rated business to get to break-even.

"When we're measuring, we don't always fully understand how this price of business is going to affect things like year-over-year margins," she said. "We're often taking occupancy at the expense of profitability."

Gayfield also said asset managers tend to put pressure on operators to maintain their share in the market, and it's easy for them to shoot for occupancy increases to hit those numbers.

"If we don't sell out and we had a perfect fill last year, then they're afraid to slip in index," she said.

To fix this, ensure management is focusing on top and bottom line, said Leticia Proctor, Senior VP of Sales, Revenue Management and Digital Strategies for PM Hotel Group. "You have to be fluid and flexible every day, and maybe at times you need to drive occupancy," she said.

Gayfield added that displacement can be brought down to the gross operating profit level, and that sometimes those numbers dispel anecdotal evidence on whether a piece of business is profitable.

"Management companies are incentivized at the top and bottom lines. Below that, GOP is what the ownership has to focus on, which includes insurance and payments," said Ash Kapur, Senior VP of Hotel Asset Management and Chief Revenue Officer at Starwood Capital Group. "Expenses continue to rise, and we need to focus on a higher rate that will flow through better."

The panelists all agreed that a new rate transparency created by an influx of e-commerce hotel booking sites is undermining hoteliers' pricing power. In fact, new data shows the average traveler visits anywhere from four to 18 unique sites before booking.

"Millennials love to shop and visit multiple sites, and now they're the ones booking lots of hotel rooms," Kapur said. "Years back they did not have TripAdvisor, all they had was directories. Today that transparency shows them how we perform, how we treat our guests, and actually has a greater impact on how we price."

Heaton of Waterford Hotel Group said this transparency compels hotel revenue teams to look at paid placement to level the playing field.

"Why should I book direct if I see rates $150 less on a wholesale channel?" Proctor of PM Hotel Management asked. "We own the rooms, and we own the rate. Now my hotels are having a hard time filling up on weekends and compression nights because of Airbnb."

How Hoteliers Can Gain the Confidence to Push Price

While the revenue management role looks much different than it used to, Gayfield of Colony NorthStar said she's worried that revenue employees aren't learning as fast as they need to keep up with technology innovations.

"We put too much pressure on RMs to make the decisions when the GM should also be the Revenue Strategy leaders," she said. "I think it's important to focus on education, from GMs to sales to revenue."

Kapur said a core issue is that hoteliers are looking at market trends and competitor rates before simply evaluating how many rooms they have left to sell.

"People are starting to price based on these rate shopping tools. No!" he said. "We set the rate. Then we will push it to all channels: hotel website, call center, OTAs."

Kapur said Starwood Capital has successfully achieved higher ADR from OTAs by understanding where the demand is coming from and by building room type and channel pricing strategies.

"If managed correctly, if you understand the demand channels, then you are able to push higher rates even through the OTAs," he said.

"OTAs have forced us get really analytical about this because there's always an expense," Heaton added. "A great way to challenge your GM is to disrupt a revenue management meeting and ensure the discussion ends with net rate."

Kapur said that often brand-developed revenue systems aren't syncing up with that strategy.

"Larger brands have RMSs or platforms where you are not able to maximize ADR potentials," he said. "If we have a team of smart revenue people and can't maximize ADR by room type, why can't we do that?"

"Brand systems are looking too much at historical data before, say, a bunch of new supply came in the market," Gayfield added. "Everyone says, 'Trust the system. Trust the system.' Well, I have to question the system. You have to understand the data."

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Jason Q. Freed

Jason Freed has been Managing Editor of Content for Cleveland at Duetto Research, Inc. since June 2015.