“The 3.9 percent growth in revenues reflects the moderate performance levels currently being achieved in the U.S. lodging industry,” says R. Mark Woodworth, Executive Managing Director of Atlanta-based HRG.  “The run-up in new supply during the past few years has not only resulted in declining occupancies, but moderation in the growth of average daily rates (ADR).  The slowdown in ADR, combined with yet another drop on occupancy are the main causes for this relatively listless top-line performance.”

While the 3.9 percent growth in revenues was relatively low when compared to the 4.6 percent annual average growth rate for the decade, it was greater than earlier projections for the year.  “Halfway through 1999, we were estimating the average hotel would gross roughly the same revenue they did in 1998.  However, ADR growth rebounded somewhat during the second half of last year and helped most properties realize an increase in revenue,” notes Woodworth.

This improved performance appears to have carried over into 2000.  Starwood Hotels & Resorts, with properties mostly in the full-service and convention segments, was able to post a 9.5 percent increase in revenue per available room (RevPAR) for its North American properties during the first quarter.  Hilton Hotels Corp., with a portfolio distributed from economy through luxury, announced an increase in their RevPAR of 4.7 percent during the same period.

Performance Varies by Property Type

While all segments of the industry have experienced moderation in the growth of revenues, certain types of hotels continue to outperform others.  Resort and convention hotels led all property categories in 1999 with 4.4 percent growth rates in total revenues.  On the other end of the spectrum, limited-service and all-suite hotels struggled to improve their income and grew revenues at annual rates of 0.5 percent and 1.1 percent respectively.

“Limited-service and all-suite properties have dominated recent development activity; however, the effects of new competition on revenue growth for the existing inventory has apparently differed for each segment,” says Robert Mandelbaum, HRG’s Director of Research Services.

“The low growth in revenue for the limited-service hotels in our survey sample was attributable to a 2.4 percent decline in occupancy that negated a 3.3 percent increase in average room rates.  All-suite hotels, on the other hand, lost just 0.1 percent in occupancy, but were only able to increase their ADR by 1.0 percent,” Mandelbaum adds.

Holding true to recent form, full-service and convention hotels achieved the highest ADR growth in the sample.  For full-service hotels, however, a 0.8 percent decline in occupancy limited their total revenue growth to 2.9 percent.  Resort hotels benefited from lesser declines in occupancy, plus gains in revenue from other operated departments (golf, ski, retail outlets, etc.)

Alternative Revenues

“With increasingly competitive market conditions inhibiting the growth in the revenue derived from the rental of guest rooms, hotel managers have enhanced their focus on income from other sources,” says Mandelbaum.  “In fact, the growth in rooms revenue was less than the growth in total revenue across all property types, thus indicating hoteliers’ increased reliance on income from sources other than the rental of guest rooms.” 

Examples of increased revenue from other sources include the fact that food revenue grew faster than rooms revenue for the second consecutive year.  In addition, the greatest percentage revenue increases were earned from other-operated departments, store rentals, and other income sources.

Contrary to this trend are the incomes derived from the sale of alcoholic beverages and guest telephone use.  “The meager 0.1 percent increase in telephone revenue is consistent with the increased use of cellular phones,” says Mandelbaum.  “Also, the relatively low 2.6 percent growth in beverage sales is a continuation of the impact of social trends that we have seen the past few years.”
 

Cost Controls

With revenue growth slightly above inflation, hotel managers will need to concentrate more on cost controls to increase profits.  The HRG has already seen managers take advantage of certain technological advances in an effort to cut costs and control expenses, especially in the following areas:

• Procurement is one area where the Internet is sure to benefit the hotel industry.  With products, suppliers, and chain-wide standards changing constantly, the Internet is an efficient tool for keeping up with the changes and one-stop shopping.  A recent study by HRG measuring the potential hotel procurement market at $16 billion.

• The Internet also allows for direct contact between hotels and the consumer.  This not only gives the consumer a positive feeling of empowerment, but allows hotels to avoid the reservation commissions and fees paid to agencies in the middle of historical distribution channels.

• Several companies are now offering products that not only reduce traditional telecommunication costs, but create new income generating services for this shrinking source of revenue (see above).

The Hospitality Research Group (HRG), headquartered in Atlanta, is the research affiliate of PKF Consulting, the international consulting and real estate firm specializing in the hospitality industry.  HRG, along with PKF Consulting and hotel brokerage affiliate Hospitality Asset Advisors Incorporated, are wholly owned subsidiaries of Hospitality Asset Advisors International, a U.S. Corporation.  HAA International has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, San Francisco, and Singapore.