HENDERSONVILLE, Tennessee—In a previous article, “Pricing case study: Deep vs. moderate discounting (part 1),” two competing hotels’ performances were compared to determine whose pricing strategy appeared to drive the least amount of room revenue declines in 2009. This article will focus on the profitability of those hotels during the same period.
Assumptions:
- The hotels are located in a downtown area in a major U.S. market.
- Each hotel has been selected in the other’s Smith Travel Research competitive set.
- The hotels are located within walking distance of each other.
- The hotels are branded, upper-upscale, full-service properties, each with 400 to 450 rooms.
- Each hotel has at least 20,000 square feet of meeting space.
As a reminder from the previous article, Hotel A had higher declines in room revenue than Hotel B from July 2008 to June 2009. In June, Hotel B’s strategy of having more moderate room-rate declines appeared to have paid off with a significantly lower decline in room revenue than Hotel A.
Percent change comparisons
| |
Occupancy % Change1 |
ADR % Change1 |
Rm Revenue % Change1 |
| |
Hotel A |
Hotel B |
Hotel A |
Hotel B |
Hotel A |
Hotel B |
| Jul 08 |
-15.0% |
-27.2% |
8.0% |
6.4% |
-8.2% |
-22.5% |
| Aug 08 |
-15.6 |
-0.6 |
-1.3 |
-2.6 |
-16.7 |
-3.2 |
| Sep 08 |
-0.5 |
-2.5 |
-3.7 |
3.9 |
-4.2 |
1.3 |
| Oct 08 |
-9.2 |
-5.4 |
-7.8 |
-8.3 |
-16.3 |
-13.2 |
| Nov 08 |
-17.0 |
-16.5 |
-8.8 |
-3.1 |
-24.2 |
-19.0 |
| Dec 08 |
-2.0 |
12.2 |
-7.2 |
-0.9 |
-9.1 |
11.2 |
| Jan 09 |
-8.2 |
4.1 |
-14.4 |
-6.3 |
-21.4 |
-2.5 |
| Feb 09 |
-21.0 |
-6.7 |
-8.9 |
-7.7 |
-28.0 |
-13.9 |
| Mar 09 |
-12.2 |
7.2 |
-25.6 |
-11.4 |
-34.7 |
-5.0 |
| Apr 09 |
-18.2 |
-12.9 |
-20.5 |
-19.9 |
-35.0 |
-30.2 |
| May 09 |
-12.7 |
-8.1 |
-18.0 |
-17.2 |
-28.4 |
-23.9 |
| Jun 09 |
7.7 |
-4.2 |
-21.7 |
-3.8 |
-15.7 |
-7.9 |
1 Percent change versus prior year.
Source: STR
Based on June year-to-date activity, Hotel B has had a lower percent decline in room revenue (14.6 percent) versus Hotel A (27.7 percent). So what does that mean for profitability for the two hotels?
Using the 2008 HOST (STR Hotel Operating Statistics Study) data, we extrapolated the two hotels’ likely operating revenues and expenses. We assumed in 2009:
- Operating revenues were generated at the same per occupied room levels as in 2008.
- Operating expenses were at the same cost per occupied room as in 2008.
- Undistributed expenses remained the same per available room costs as in 2008.
- It’s likely both hotels reduced costs at their properties in 2009 because of current market conditions. However, for the sake of this case study, it’s assumed both hotels reduced costs at the same type of ratio as their 2008 expenses.
Hotel A had higher room revenues and other operating revenues (e.g., food and beverage revenue) than Hotel B as of June 2009 year to date. However, their distributed department expenses (e.g., rooms expense, food-and-beverage expense) and undistributed expenses (e.g., administrative and general, marketing expense, utilities) were much higher than Hotel B’s. As a result, Hotel B was able to capture more gross operating profit (4 percent). Hotel B’s gross operating profit percentage was 36 percent versus Hotel A’s percentage of 30 percent.
| |
Variance
|
% Variance
|
Hotel with highest revenue/expense
|
| Room revenue |
$221,000 |
3% |
Hotel A |
| Other operating revenue |
$1,159,000 |
40% |
Hotel A |
| Total operating revenue |
$1,381,000 |
14% |
Hotel A |
| |
|
|
|
| Distributed operating expense |
$1,061,000 |
29% |
Hotel A |
| Undistributed operating expense |
$471,000 |
18% |
Hotel A |
| |
|
|
|
| Gross operating profit |
$151,000 |
4% |
Hotel B |
Capturing more revenue is only half the equation of a profitable hotel. Although Hotel A reported a comfortably higher ADR than Hotel B from 2004 through most of 2008, it started deep discounting in January 2009. This rapid loss of revenue from a reduction in rate was a more immediate impact on gross operating profit, and likely, the hotel’s cash flow.
