HOTEL REVENUE MANAGERS face a changing mandate, moving their focus from just maximizing revenue to maximizing profit as well, according to an article from CBRE Hotels Research Director of Research Information Services Robert Mandelbaum. The article examines how this new focus affects rate setting decisions.
The article, co-authored by CBRE’s Economist and Senior Research Analyst Bram Gallagher using data from CBRE’s June 2019 Hotel Horizon report, analyzed the impact of RevPAR, occupancy and ADR on changes in profits. It included 2,799 properties, which participated in the CBRE survey each year from 2011.
The researchers examined the differences in optimal ADR setting for the revenue-maximizing versus GOP-maximizing revenue manager. For example, in cases where adding a new guest will cost more than the non-rooms revenue generated by the guest, such as using F&B services, a revenue manager who wants to maximize revenue will disregard the extra costs and set a lower ADR than a revenue manager who wants to maximize GOP.
The difference recorded from the sample was $6.04, which amounts to nearly 4 percent of the nominal average ADR achieved by a sample over the eight years. The study finds that this increase may discourage some guests, but the higher rate paid by the remaining guests could result in higher GOP.
“While we find there is an optimal ADR that maximizes growth in GOP, we also know that the greater the gain in RevPAR, the greater the gain in profits,” the report states. “Accommodating more guests (occupancy) and raising prices (ADR) are the two factors that serve to increase RevPAR. The challenge for revenue managers is to find the proper balance of occupancy and ADR change to maximize GOP”.
Annual charges in RevPAR have been closely correlated to changes in GOP over the years and it is more evident from the 2018 study sample.
It is believed that RevPAR growth driven by ADR is more ‘profitable’ than RevPAR growth driven by gains in occupancy. However, the study found a diversion from this long-standing belief.
“In summary, hotels cannot live by ADR growth alone,” Mandelbaum and Gallagher said. “There needs to be a proper balance between gains in both occupancy and ADR.”
ADR is forecast to increase by 2.6 percent in 2020 and 1.2 percent in next year, according to report. Occupancy levels are projected to decline in both years.
“With fewer guests staying at their hotels, revenue managers are left with ADR as the predominant implement at their toolbelt to increase revenue in a profitable fashion,” the authors of the report said. “More than ever it will be incumbent upon revenue managers to find the optimal room rates for their property that provide the proper balance between occupancy and ADR and maximizes GOP growth.”
In August, Mandelbaum predicted that, even in an extreme economic slowdown in the next two or three years, U.S. hotels should still make enough money to cover the interest payments on their debts.