Slowing growth forces hotel industry to be inventive

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Face it, folks: The days of +5-percent annual RevPAR growth are over. To paraphrase the basketball coach Rick Pitino: 2014 is not walking through the door. But take heart, there are still ways to profit during these tighter times.

If we look at Europe, the numbers portend contraction in the continent's hospitality industry. For the week ending Feb. 18, European RevPAR was +1.6 percent, according to STR, with occupancy rate up +1.2 percent and ADR +0.4%. The 28-day moving average RevPAR growth for Europe was +1.8 percent.  

Segment specific, midscale and economy underperformed in Europe and the UK. For Europe, midscale and economy RevPAR was +0.4 percent in reported currency (previous week +5.1 percent) with occupancy +0.8 percent and ADR -0.4 percent versus 28-day moving average RevPAR of +0.6 percent. For the UK midscale and economy segments, RevPAR was +0.9 percent (+5.2 percent previous week) with occupancy -2.5 percent and ADR +3.5 percent. 
Worries remain over Paris and it is bringing down France as an aggregate. STR data showed RevPAR of -6.9 percent for the week ending Feb. 18 for France, with occupancy -2.1 percent and ADR -5.0 percent versus the 28-day moving average RevPAR growth of +5.8 percent.

While these numbers are weekly and fluid, expectations on a global scale are that RevPAR, ADR and occupancy rates are drying up. 

Asia-Pacific's numbers for January 2017 weren't better. Hotels in the region reported a moderate occupancy decline though stronger strong rate growth in the month, according to STR. Year-over-year occupancy was -0.8 percent to 64.8 percent YOY; ADR was +4.6 percent to US$108.10; and RevPAR was +3.7 percent to US$70.07. 

In the U.S., 2014 was a watershed year, with RevPAR of 8.2 percent for the full year, according to STR. The following year saw RevPAR decline to a still heady 6.2 percent. But from there, it's been a rather precipitous decline. RevPAR in 2016 was down to 3.2 percent and the prediction by CBRE and STR is that RevPAR will come in at 3 percent for 2017. 

How to Proceed

The halcyon days of 2013-2015 were marked by a large imbalance between demand and supply, in favor of the former. For example, in 2014, demand clocked in at 4.1 percent compared to supply growth of 0.7 percent. In 2017, those numbers are predicted to flip with demand at 1.5 percent and supply at 1.8 percent. Historically, demand growth has always outpaced supply growth, so we are headed into new waters. 

How, then, does the hotel industry continue to make money amid slowing KPIs?

As John Keeling, EVP of Valencia Group, pointed out, "Slowing RevPAR growth is a result of occupancies topping out and only rate increases contributing to RevPAR growth, where in the past it was both increased rates and increased occupancies.  

"It must be recognized that when you are running high occupancies you tend to be profitable because once you reach break even and have covered your fixed costs, the incremental net revenue after that point is very profitable. Further, having RevPAR increases as the result of only rate increases is not a bad thing as long as rates are going up at least as fast as your costs, which is primarily personnel and property taxes."

A strong, focused revenue strategy, then, as Duetto's Patrick Bosworth points out, is vital. As he writes, "Get your team aligned behind a revenue strategy that can adapt to changes in consumer demand and maximize your results once things come into focus.

"Take a fresh look at your segmentation and distribution channel strategies. If some segments are showing a fall-off in demand, consider other feeder markets or customer groups that might respond to new offers or marketing messages. If uncertainty remains the new normal for a while, the objective for many hotels will switch from driving RevPAR gains to taking more share of bookings from competitors and growing RevPAR Index."

Controlling costs is yet another way to weather any upcoming downturn. These include such large operating costs as labor, maintenance, FF&E and OS&E and utilities.

Here are some ways to monitor and reduce your hotel’s largest operating costs, as outlined by Hotel Effectiveness and Unifocus

1. Labor Costs (your largest cost): Make sure your schedules reflect the day-to-day variations in business volume and; for cleaning, never set one minutes-per-room standard for all room types; cross-train your staff; implement a labor management system.

2. Utilities: Consider things like a switch to LED lighting or swapping out old thermometers for new ones with sensors—any new technology that will help reduce your utility costs. 

3. Property Operation and Maintenance: Don't skimp on preventative maintenance as it can end up costing you more down the road and keep a reserve for FF&E. As Hotel Effectiveness points out: an air filter that has not been replaced in over four months can reduce HVAC efficiency by 10 percent.  

4. Real Estate Taxes: They are a large recurring expense, so establishing the valuation of a property is critical. To ensure that an assessment is appropriate for tax reduction purposes, consider factors in the valuation process such as economic conditions, declining property values and/or significant new supply.

5. Brand Considerations: If you are an independent hotel, is a brand fee worth the cost if it can deliver you more business? Vice-versa, if your hotel is branded, does 

6. F&B: A comprehensive review can highlight whether your food-and-beverage outlets are productive during operating hours and whether those operating hours can be reduced. 

7. Mortgage Payments and Other Debts: As Unifocus points out, be transparent about your financial obligations. "If a property is falling behind in payments, it is wise to let your lender or creditor know in advance so that they can help you with a strategic plan. Lenders do not want to foreclose on hotels. They would rather work out a program that will keep the property alive until the economic outlook improves."

Minimizing costs will be a topic of discussion at Hotel ROI, a series of regional one-day conferences focused on how to leverage a hotel asset for maximum returns.