What is one item or service that you absolutely must have, and would pay almost anything for, no matter what the cost?
For many of the world’s wealthiest individuals, it’s a vacation at a luxury resort. If you’ve recently shopped for that ultimate high-end getaway, you’ve likely experienced some sort of sticker shock and have been left with the impression that luxury resorts can seemingly charge whatever they want for a nightly rate.
In fact, since the last of the COVID pandemic dissipated around this time last year, luxury resorts have been shattering rate records. In March 2023, luxury resorts in the United States recorded an average occupancy of 72.2%, an Average Daily Rate (ADR) of $491.57, and Revenue Per Available Room (RevPAR) at $354.60, according to STR. Compared to the same pre-pandemic month of March 2019, occupancy was down nearly 8%, yet ADR was up 39.5%, leading to an average RevPAR increase of 29.5%.
“Once COVID-related travel restrictions lifted, Americans were eager to leave their homes to take advantage of the newfound ability to travel and work from almost anywhere,” wrote Jan Freitag, the National Director for Hospitality Market Analytics at CoStar, in a November 2022 article. “In addition, high levels of accumulated savings supported robust spending on experiences. This led to room rate increases well above the level of inflation as hotel operators took advantage of the strong demand.”
Skyrocketing rates are prevalent across the entire hotel industry, with the luxury segment leading the charge, but the resort space sits at the epicenter. While rates at U.S. luxury hotels averaged $377.98 throughout the entirety of 2022, rates at U.S. luxury hotels classified as “resorts” clocked in at $420.66 over the same time period.
A recent CNBC Travel report examined the effects of inflation on consumer spending and concluded that, of all household expenses, Americans weren’t skimping on vacations.
“The consumer is choosing to protect their travel spend,” said Karelle Lamouche, global chief commercial officer of Accor. “But because it’s more expensive, they want to make sure they make the most of it,” she said, noting that many guests are now opting for longer stays.
Developers Take Notice
When rates prove to be inelastic – meaning demand remains relatively steady despite price increases between 30-40% – hotel brand leaders see opportunity.
At Accor, focus has shifted to their high-end Fairmont Hotels and Resorts brand, where new CEO Mark Willis has been rethinking the brand’s strategy, according to a recent Skift report. In October, Accor’s management split the company into two groups: One unit focused on “luxury and lifestyle” and another on its “premium, midscale, and economy” brands. Fairmont has about 30 properties worldwide under development, with most expected to open in the next three years.
“In short, I would sit at a 10 o’clock meeting with an Ibis owner running a property with a $75-an-hour nightly rate, and then an hour later sit with a Fairmont owner with a typically $1,500-a-night rate in their market and a totally different set of needs,” Willis told Skift. “Now Fairmont is fully carved out with a full management team in place that thinks about Fairmont nonstop. We expect to unleash tremendous growth potential for the brand.”
During a panel at the recent SAHIC Latin America and The Caribbean Hotel & Tourism Investment Forum, leaders from several global brands said all-inclusive luxury resorts are the next big thing. “We have increasingly been tweaking the [all-inclusive] model to increase sophistication and elevate experience to cater to the luxury guest,” said Camilo Bolaños, a senior VP of development for Hyatt, according to a Hotel News Now report.
More Money, More Problems
Even when they’re able to charge top dollar, luxury hotel operators face their own sets of challenges.
First and foremost, the staffing issues felt across the entire hospitality industry – scarcity of workers and rising wages – are often exacerbated at the luxury level. This is because high-end guests expect high-end service, and when they don’t receive it, they’re quick to leave poor satisfaction scores or vow to never return.
Second, luxury hotel managers often face more pressure to implement sustainable operational practices. Wealthy travelers spending $1,000 per night or more often expect those hotels to put a bigger portion of that revenue back into environmentally friendly amenities. In fact, there is a growing movement toward an evolution of luxury from gaudy, ornamental design to ultra-low flow bathroom amenities and HVAC occupancy sensors, according to a recent Forbes article.
Ensuring Rates Drive Profits
Because both of those challenges lead directly to rising operating costs, luxury operators must ensure rate increases are strong enough to drive profitability. This is where profit-and-loss data becomes critical, affording business leaders the insights they need to see exactly how much of those room revenue increases are flowing through to the bottom line.
While top-line metrics like RevPAR remain widely used benchmarking measurements across the hotel industry, there has been a collective push from hoteliers over the past few years to standardize the use of bottom-line metrics that more accurately portray the health of a hospitality business.
Measuring profit – with new metrics like Gross Operating Profit Per Available Room (GOPPAR) – allows luxury resort operators to understand the true financial health of their business and make informed decisions about pricing, operations and investments. Profitability ratios such as gross profit margin, operating profit margin and net profit margin provide insights into the efficiency and profitability of a hotel’s operations.
In addition, improved access to ancillary profit data from other departments – food and beverage, spa, conference and event centers, etc., can be used to measure how pricing can offset costs to drive profitability. By taking a holistic approach to profit management, hoteliers can make informed decisions about pricing, marketing and distribution strategies that optimize revenue to drive profit.
While rising operating costs and sliding guest satisfaction scores continue to threaten profitability, right now it seems as if there’s no shortage of pricing power in the luxury resort segment. Catering to high-end clientele willing to pay a premium for exclusivity means these properties will continue to command market-leading rates, which should offset costs and ensure the longevity of their business.