The hospitality industry’s topline revenue trends headed into 2023 are pretty straightforward. Steadily rising demand should continue to drive pricing power. Remarkably, ADR will end 2022 up 30% or higher in most markets as compared to 2019.
But unprecedented inflation and the overall rising cost of expenses – specifically labor, food, and amenities, among other things – continue to apply pressure to the bottom line and threaten to impact profitability in 2023.
U.S. hotel profitability continues to improve month over month, according to STR, but in September 2022 the cost of labor per available room came in higher than the pre-pandemic comparable for the first time. “Total labor costs were up 5% year to date, with all departments reporting higher expenses, except F&B, due to less group demand earlier this year,” said Raquel Ortiz, STR’s director of financial performance.
In the revenue department, Nicole Tomasso, Director of Revenue Strategy at Dragonfly Strategists, says too many leaders remain focused on topline performance. “There’s still a gap in the revenue discipline today. Many leaders are so focused on the top line and are way behind on their P&L analysis,” she says.
At Remington Hotels, Chief Commercial Officer Raul Moronto admits it was the dramatic spike in inflation that finally forced Remington to start making more strategy and business decisions based on bottom-line performance. “Necessity is the mother of innovation. Housekeeping and F&B expenses are up over 30% and that pressure can become crippling to the organization,” he says. “We’re doing a lot more benchmarking in bottom-line terms, factoring in average cost of goods and average wages.”
In some cases, the cost of labor and goods limited the ability to sell rooms, Moronta says. It made more sense to drive rate and sacrifice occupancy, which meant fewer staff and reduced amenity use. “You have heavy compression on demand and heavy compression on the cost of goods as well,” he says. “Now instead of just analyzing rate, we have to help somewhat control the costs.”
At Honolulu-based Outrigger Hospitality Group – a management company that operates luxury hotels and resorts in Hawaii, the Asia-Pacific region, and the islands of the Indian Ocean – leadership is shifting to a Total Revenue Management strategy where it makes sense.
“Because rising inflation has really impacted the costs of labor, goods and airfare, we analyze how to drive rate to offset those costs,” says Jenna Villalobos, Senior VP of Commercial Strategy at Outrigger. “We don’t limit occupancy, but we are focused on bringing in more quality business.”
That analysis includes noon-room revenue when applicable. At the properties in Hawaii, they’re ingesting and analyzing on-property Point-of-Sale spend, while in the APAC properties, where spa and F&B is managed in house, they’re able to build metrics like Total Revenue Per Occupied Room.
Another way revenue leaders are driving bottom-line performance is by driving more business direct, therefore skirting third-party commissions and some customer acquisition costs. Another is by managing and analyzing total revenue rather than just rooms revenue, including ancillary spend on F&B, parking, spa, etc.
But, for many hotels, accessing this important bottom-line data remains a challenge. And, without the proper resources, working countless hours to compile that data often doesn’t meet payoff requirements.
“If only 10% of my total revenue is from ancillary spend, without an automated tool providing me that insight, I can get a higher yield focused on other areas,” says Mike Medsker, Product Head at MDO.
For hoteliers with the right data at their fingertips, Medsker suggests a deep dive into assigning commissions to the various distribution channels, which will help you better analyze your current costs of acquisition.
Lastly, an increasingly important data set to consider is guest satisfaction, particularly longterm guest value. As hotels continue to drive rate and rely on fewer staff members to serve guests at the property level, naturally satisfaction scores are falling.
A July 2022 J.D. Power Hotel Guest Satisfaction study noted the surge in demand and steadily climbing prices have not been met with a corresponding improvement in amenities or services, and as a result, overall hotel guest satisfaction declined 8 points (on a 1,000-point scale) from 2021. “The single biggest factor driving this year’s 8-point decline in overall satisfaction is hotel cost and fees,” the survey noted.
With rates at peak level and without a resurgence in hiring at the property level, hotels risk leaving a bad impression on first-time customers or even displacing lifelong customers.
At Sea Island Resort on the coast in Georgia, leadership capped occupancy for a significant part of 2022, worried the thinned out team wouldn’t be able to accommodate high demand and deliver the service guests have come to expect. “Being five-star properties, we have a certain level of service that our guests expect and we expect to deliver,” says Billy Copelan, Director of Revenue Management.
Shifting your forecasting analysis to metrics that provide more insight on the bottom line is an important transition for hospitality leaders in 2023. Other steps involve analyzing how emerging segments of travelers will affect your forecast, as well as identifying new booking patterns to shape it. Here’s to more accurate profit-based forecasting in 2023!