| In a recent survey of 411 hotel managers across the United States,
PKF Consulting has found that hotel managers are forecasting a 1999 increase
in occupancy of more than two percentage points. At the same time,
they plan to raise their room rates by only a moderate 4.5 percent.
This pattern is contrary to recent industry trends that have seen declining
occupancies paired with strong growth in average daily rates.
Prior to the 1990s, most hotel managers have responded to declines in occupancy by cutting their rates. The accepted theory was to preserve your market share through discounting. However, with the advent of automated yield management systems and continued growth in demand, recent industry data has shown that hotels have sacrificed occupancy in an effort to continue to increase room rates two to four times the pace of inflation. With revenue growth driven mainly by increases in pricing, a greater percentage of the growing revenue has dropped to the bottom line, resulting in all-time record levels of profitability. PKF Consulting estimates of performance for year-end 1998 illustrate this recent trend. The 1998 average occupancy for major US cities is estimated to be down 1.6 percent from 1997. However, average room rates have risen 6.9 percent during the year, thus resulting in a 5.1 percent improvement in REVPAR. The growth in ADR and REVPAR are both greater than three times the estimated rate of inflation for the year. We continue to see that, when revenue growth is driven by growth in room rates, rather than occupancy, the net result is usually an improvement profits. Looking at the downward movement in occupancy for 1998, and seeing it paired with a growing ADR, we estimate that unit level profits for the year will have risen approximately 7 to 8 percent. While this growth in profits is above the pace of inflation, it is less than the 13 to 16 percent growth rates seen from 1994 to 1997. Revenues And Profits Anticipated To Rise In 1999 Consistent with their forecasts of increased occupancy and ADR, US hotel managers are also anticipating increases in their total revenues and operating profits. In addition to increasing room revenues, management at hotels with restaurants is forecasting food revenues to increase a rather healthy 5.6 percent in 1999. For those hotels still offering restaurant, room service, and banquet services, enhanced marketing and creative concepts have resulted in a resurgence of food sales during the past few years. On the other hand, beverage revenue is forecasted to grow at the slower pace of 2.9 percent. This is a continuation of recent trends in the food and beverage department where the growth alcoholic beverage sales has been diminishing. For hotels, payroll and related costs comprise nearly half of all operating expenses. Anticipating another year of low unemployment and the struggle to find a sufficient number of qualified employees, hotel managers are forecasting their personnel costs to rise 4.2 percent in 1999. It should be noted that this is approximately twice the national average for wage growth for all industries in the United States. With total revenue forecasted to rise at 5.7 percent, and operating expenses estimated to grow approximately 4.0 percent, the net result is a hopeful 8.4 percent boost in operating profits for 1999. Beware The Magical Spinning Budget It is important to note that the forecasted information provided by the hotel managers came from their 1999 budgets. And, as we all know, no one ever budgets to do worse than they did the prior year. Therefore, the forecast of the two point increase in occupancy or 8.4 percent increase in profits may be the result of management bravado, or fear of retribution from a corporate officer for submitting a decline. In addition, an analysis of budgeting accuracy conducted by PKF Consulting in 1998 found that, historically, management tends to underestimate its forecasts of occupancy growth, while overestimating its ability to raise room rates and profits. While the actual numbers that management is forecasting to achieve in 1999 may or may not be credible, the survey does shed light into management’s strategies for the relative movement of occupancy and ADR, as well as revenues and expenses. The Discerning Detail When analyzing the forecasts by type of property, the numbers begin to tell a story that is pretty consistent with the market conditions observed by PKF Consulting. Resorts
Interestingly, resort managers appear to have been least spooked by the depressing economic news that surfaced in the third quarter of 1998. Given the discretionary nature of leisure travel, one would think the potential of a recession would have scared these managers. However, 86.7 percent of resort managers stated that the poor economic news had no effect on their 1999 budget. This may be because resort managers forecasted their greatest increase in occupied rooms in 1999 to come from the meetings demand segment, as opposed to the leisure traveler segment. Limited-Service
Due to all the new construction in this segment in recent years, this has become a very competitive segment, probably the primary reason for low ADR increases as these properties scramble to maintain market share. However, it should be noted that limited-service properties have a relatively limited amount of variable costs associated with their operations. Unlike full-service hotels, limited-service properties with their few variable expenses, allow managers to increase their profits through revenue growth driven by occupancy or ADR. Full-Service
Unlike resort operators, full-service managers appear to be concerned with the prospects of a potential recession in 1999. Approximately 46 percent of all the full-service managers surveyed altered their budgets downward upon hearing the poor economic news during the fall of 1998. This is the highest percentage among all property type management groups. All-Suite
Upon further examination, a significant portion of the all-suite respondents were operators of new mid-priced, extended-stay hotels. The fact that most of these properties are still establishing themselves in the marketplace could be the primary reason for the strong occupancy growth. Despite the optimism for occupancy, all-suite hotel managers are forecasting the relatively low growth rates for revenue (3.9%) and profits (5.4%). Again, the new all-suite properties appear to be striving for improved market penetration before concentrating on revenue and profit improvement. About The Survey PKF Consulting’s survey of hotel managers was performed in the fall of 1998. The survey sample consisted of 411 properties with an average room count of 268 rooms. The majority of properties were full-service (62.1%), followed by limited-service (22.6%), all-suite (10.9%), and resorts (4.4%). Approximately 70 percent of the hotels are affiliated with a national chain. Slightly more than half the properties (51.3%) identified themselves as residing in the middle of their respective markets, while 7.6 percent of the respondents were upscale properties and 41.1 percent considered themselves to be in the economy segment. For a summary of the full results of the survey, please contact the Research Department of PKF Consulting at (404) 842-1150. |
|
|