How Hotel Managers Can Generate Profits Above and Beyond Owner’s Expectations

By Max Starkov

 The hospitality industry is enjoying its longest expansion and healthiest growth in decades, yet, are the owners happy?

The hospitality industry is enjoying its longest expansion and healthiest growth in decades, yet, are the owners happy?

Background:

The economic collapse of nearly ten years ago brought not only havoc to the hospitality industry, but also created a new type of hotel owner: the activist owner. These owners are knowledgeable, curious, involved, and demanding.

There is a lot happening in 2018 that hotel owners should be happy about. After the best Q1 on record earlier this year, it is shaping up to be another stellar year in hospitality with demand (2.4%) outweighing supply (2%); occupancy increasing by 0.4%; ADRs growing by 2.6%; and RevPAR increasing by 3% (STR, PWC).

The hospitality industry is enjoying its longest expansion and healthiest growth in decades, yet, are the owners happy?

For one, in spite of record-breaking industry benchmarks, profitability is falling and net room revenue—i.e., revenue that remains with the hotel after accounting for distribution costs (OTA commissions, traditional agency commissions, and other distribution expenses)—has been declining steadily over the past several years. In 2017 U.S. hotels earned roughly $155.2 billion in guest-paid revenue but paid an estimated $25.2 billion to acquire guests in the form of OTA commissions and other distribution costs, retaining significantly lower net room revenue of $130 billion (Kalibri Labs). Revenue capture—i.e., net room revenue that remained with the hotels—declined from 84.9% in 2015 to an estimated 83.5% in 2018 (Kalibri Labs).

As far as falling profitability is concerned, 2018 is shaping up to be a repetition of 2017. The overall growth in room revenue, occupancy, and RevPAR that many hoteliers have been enjoying in recent years cannot possibly compensate for “the loss of wealth” in the form of steadily increasing distribution costs via the OTA.

So what should hotel management companies (HMC) do to increase profitability for owners and fulfill their fiduciary obligations as responsible managers? Naturally, any good and responsible HMC can do a lot to improve the bottom line for their hotel owners. However, here we will focus only on increased profitability as a result of smarter distribution and digital marketing strategy.

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