This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies.  Find out more here  Close
Unlocking hotel operating profitability
February 7 2014

What do the most profitable hotels have in common? Lower ADRs and higher year-end occupancies, for starters. 

Highlights
  • Chain-affiliated hotels comprised a larger percentage of the top performers.
  • Room revenue as a percentage of total revenue was 20 points higher for top performers than average properties.
  • The U.S. Pacific region has the highest concentration of top performers.
By Caitlyn Milton
STR Analytics

BROOMFIELD, Colorado—In the past, STR Analytics has analyzed the top revenue-per-available-room performers across the United States in an effort to distill any commonalities among them. While analyzing RevPAR is an effective tool, it only tells half the story. Using HOST data, we are again looking at top-performing hotels in the U.S.; however, this time we are looking at revenues and expenses in an attempt to unlock the mystery behind hotel operating profitability.
 
STR Analytics’ annual HOST Program collects detailed profit and loss data from more than 6,000 hotels across North America. Statistics for this article have been extracted from the 2013 HOST Almanac as well as custom analysis using the historic HOST database.
 
What the most profitable hotels have in common
Based on year-end 2012 HOST statistics, we analyzed the highest-performing hotels in the full-service and limited-service categories. The highest-performing groups include those in the top 10% of hotels in the U.S. in terms of gross operating profit as a percentage of total revenue. In analyzing these two groups of hotels, we noted physical and operational characteristics to illustrate what, on average, the most profitable hotels look like.
 
Click to enlarge.
 
While the room count difference between the top 10% of limited-service hotels and the average for the total U.S. is not significant, the difference between the top 10% and total U.S. for full-service hotels is nearly 100 rooms. This might be attributable to smaller full-service hotels typically having leaner food-and-beverage operations, which lend toward greater profitability. Because limited-service hotels are defined as those with less than 5% of revenue coming from F&B (as compared with room revenue), there is less variation of the percentage of revenue deriving from the rooms department. Therefore, room count does not play as large of a role when analyzing limited-service top performers. Although total RevPAR is less for the top 10% of full-service hotels than other full-service hotels across the U.S., the average gross operating profit per available room is higher, by more than $2,500. 
 
Click to enlarge.
 
The most profitable limited- and full-service hotels averaged lower average daily rates but higher year-end occupancies. During the past few years, demand has recovered from the previous peak of 2007 at a faster rate than ADR. As demand continues to break records and ADR plays catch-up in the markets where it has yet to reach previous peak levels, we expect this to have a positive impact on overall U.S. hotel industry profitability. 
 
Based on more than 3,000 limited-service hotel profit and loss statements for year-end 2012, chain-affiliated hotels made up a larger share of the top 10% of performers. Chains made up nearly 10% more of the top 10% of full-service hotels. 
 
With demand expected to continue growing, albeit at a decelerated rate, and ADR to continue catching up to previous peaks, we expect to see departmental and overall profitability increase during the coming years. Especially as occupancy rates rise and economy of scale sets in, we should also see some departmental expense ratios decrease, helping the bottom line.
 
Click to enlarge.
 
Room revenue as a percentage of total revenue for the top 10% of full-service hotels averaged 87.9%, more than 20 points more than the average for the U.S. Because F&B departments are historically less profitable than the rooms department, having a higher share of revenue derive from the rooms department will likely help the hotel’s bottom line.
 
Potential impact of top performers
To illustrate the impact the top 10% of full- and limited-service hotels have on the rest of the industry, we looked at their reverse competitive set, which comprises the hotels that name the subject property as a competitor in their own comp sets. 
 
We expected to find hotels within the top 10% would have larger reverse comp sets. But what we found was that the most profitable limited-service hotels were actually named as competitors fewer times than the average for limited-service hotels. This might be due to limited-service comp sets not being updated appropriately. Full-service hotels within the top 10% have about the same impact on the rest of the hotel industry as other full-service hotels. The more a hotel’s data is used, even in aggregate, in other hotels’ STAR reports, etc., the greater impact that subject hotel’s positive performance will have on other hotels when they are making strategic plans.
 
The top 10% of full-service hotels has a significantly higher average RevPAR Index, coming in at 115.7%. This aligns with the logic that better performing hotels have more than their fair share, or 100% index. However, the top 10% of limited-service hotels actually has a lower average RevPAR Index than the average of all limited-service hotels. Because limited-service hotels tend to be lower-tier hotels, the likelihood they include hotels that are higher in class than themselves is greater. The top 10% of limited-service hotels might be benchmarking themselves against a comp set with a higher average class than their own. 
 
The top performers 
Click to enlarge.
 
The Pacific Region, which consists of Alaska, California, Hawaii, Oregon, and Washington, boasted the most profitable of full- and limited-service hotels. Location types brought more diversity, with airport locations holding most profitable of the top 10% of limited-service hotels, and resort locations having the most profitable of the top 10% of full-service hotels.
 
COMMENTS   Show All
Login or enter a name   Post Your Comment  Check to follow this thread via email alerts (must be logged in)
(4000 characters max)

Comments that include links or URLs will be removed to avoid instances of spam. Also, comments that include profanity, lewdness, personal attacks, solicitations or advertising, or other similarly inappropriate or offensive comments or material will be removed from the site. You are fully responsible for the content you post. The opinions expressed in comments do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please report any violations to our editorial staff

TRENDING
Exclusive: Hilton adds Canopy lifestyle brand
A hotelman gives Airbnb a try
Canopy by Hilton: ‘It’s all about mindset’
When bad online reviews are good for you
The brilliance of Blackstone
Data analysis: Ebola impact on hotel industry
VIDEO
The Lodging Conference in review: Day Two
The Lodging Conference in review: Day One
US supply growth not a problem
Low supply, group biz boost hotel sector
HDC attendees discuss revenue strategies
Contact Us
Hotel News Now
18500 Lake Rd.
Suite 310
Rocky River, Ohio 44116
        
Copyright © 2004 - 2014 Hotel News Now, a division of STR, Inc. All Rights Reserved.   Privacy