As I write this column, many of you are deeply entrenched in budget season. Some view it as a necessary evil, while others see it as a time to reflect and take a detailed look at what is on the horizon.
Budget season is also a time to get everyone back on the same page. Your success in 2012 is entirely dependent on how you build and execute your strategy. It’s crucial to involve both owners and managers in a thoughtful discussion on how best to navigate the coming year.
What is on the horizon?
Since last spring, a lot has changed—and, in many respects, a lot has stayed the same.
After reading the news and watching the stock market, you might think the world is falling apart and we are headed back into a deep recession. This is certainly something we cannot ignore and need to keep a close eye on.
However, when you look at industry performance, you see a different story. The hotel industry as a whole is experiencing continued growth in demand and a nice recovery on the rate side. At the same time, very little new supply is hitting the market. This is good news for owners and operators alike.
More good news is coming from various research companies. PKF recently came out with their 2012 forecast for U.S. hotels. It expects slow supply growth of 0.7%, demand to grow by 3.1%, and revenue per available room to grow by 7.3%. It also predicts net operating income to grow by 15.2%, driven by continued strength in average daily rate (up 4.8%). STR (the parent company of HotelNewsNow.com) expects most of the growth in 2012 to be in rate.
The hoteliers who will be successful are the ones who understand these dynamics in their specific markets and how best to manage their rates and mix of business to capitalize on their given situation.
Why rate growth in 2012 is so important
I continue to be surprised by the lack of awareness and discipline when it comes to rate and mix management. We have a tendency to talk about it at a macro level, but when it comes to managing the day-to-day, there is plenty of room for improvement.
I challenge you as owners and operators to pay close attention to your mix of business in 2012 as this is the single greatest opportunity for you to drive NOI. Decide now what your optimal mix of business will look like, and then build strategy around that mix. Once you build that strategy, ensure proper execution by continuously monitoring success.
Do not be afraid of taking risks. Supply growth is slow and is expected to stay that way for some time. Now is the time to focus on innovative strategies to grow rate. Experiment with changes in pricing and mix strategy, and set goals for yourself. Continually challenge that goal and improve on it.
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In doing so, operators, you must listen closely to your owners’ and asset managers’ objectives. Many hotels were financed based on pro formas that anticipated much higher ADR. You must be honest with owners and asset managers about how far they can push occupancies and ADR.
I once had an owner tell me during the height of the recession that the expectation was to bring portfolio ADR back pre-recessionary levels. Knowing this was not possible meant I had to have a very frank conversation with this person. Yet having that conversation made me think about ways I could grow ADR index without losing too much occupancy.
In a previous article I mentioned an example of how we managed to do just that: I worked with a property that was doing well on market share by commanding a significant premium in occupancy in relation to its competitors. After sitting down with the team and analyzing the type of business they were accepting and the amount of profit this business was generating, we decided to change strategy significantly and shift our mix. The end result was some lost occupancy share, a significant gain in rate share, maintained revenue-per-available-room share and overall profitability, with flow-through up significantly.
Before considering an occupancy-focused market share formula, consider the consequences on the profit side of the equation. Striking the right balance is very important.
Finally, you need to be very careful with last-minute sale channels. We have recently been inundated with offers to participate in last-minute deal platforms such as Groupon, Hoteltonight.com, Priceline and Hotwire, to name a few. The promise from them comes in the form of filling last-minute rooms that would otherwise go empty. Recent studies suggest sites like these are changing consumer behavior, erode hotel ADR and, in the long term, do not increase occupancies.
Continued growth ahead
Baring any major events, 2012 looks like a year where we will see continued growth. We might not see as much occupancy growth as we saw this year, but clearly more and more emphasis is on the rate side of the growth spectrum.
By ensuring your organization has clear, thoughtful strategies that reflect current trends, checks and balances that focus on a mix of business that favors premium rated categories, and an environment of open communication and accountability, you will ensure your hotel is on track for a successful 2012.
I wish you a prosperous year ahead.
With more than two decades of experience in the hospitality industry, Tim Wiersma is recognized as a leader in revenue management. Specializing in property and portfolio revenue management, sales, marketing, distressed-asset turnaround, and asset assessment, he consistently delivers results for properties around the world. He is the founder of Revenue Generation LLC, and can be reached at firstname.lastname@example.org.
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