As highlighted at our September 2007 PKF Outlook Forum and in our June copy of Monthly Trends, from a performance perspective the Canadian accommodation industry is experiencing a continental divide between Western Canada and the rest of Canada. From 2005 to 2006, Western Canada realized a 6.2% increase in average daily rate (ADR), while Central and Atlantic Canada realized 2.3% and 3.6% increases in ADR respectively. There is some industry opinion that suggests Western Canada’s strong ADR growth is the result of healthy occupancy levels (70% or higher) in Vancouver, Calgary and Edmonton.
After considering the relationship between occupancy and rate growth in Canada, we thought it would be interesting to see if there was a similar correlation in the United States. Does the US rely on strong occupancy to achieve ADR growth?
In order to create a fair comparison, we used a sample of 10-major Canadian markets that ranged in occupancy from 59% to 74% with an average of 67.6% in 2006. These markets included Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Niagara Falls, Ottawa, Montreal, Quebec City and Halifax. We compared the composite performance of these markets against a sample of 20 US markets that were segmented using the following criteria:
- US 1 Sample: Markets that operated at approximately 65% occupancy in 2006. These markets included: San Francisco, Seattle, Houston, Minneapolis, Atlanta, Miami, Chicago, Philadelphia, Washington DC, and Boston, with occupancies ranging from 65% to 74%, for an average of 68.4% in 2006.
- US 2 Sample: Markets that operated at a maximum of 62% occupancy in 2006. These markets included: Detroit, Indianapolis, Cincinnati, Cleveland, Kansas City, Pittsburgh, Hartford, St. Louis, Dallas and Richmond (Virginia), with occupancies ranging from 57% to 62%, for an average of 60.3% in 2006.
It should be noted that 2006 was a banner year for both the Canadian and US accommodation industries. However, there are other important factors beyond the scope of this article that one could consider in assessing the performance of the industry, including: Relative depth of supply, national/provincial/state economy performance, local operating costs, one-time citywide events and unforeseen occurrences.
* Canadian sample represented 154,869 guestrooms (2006) ** US 1 sample represented 589,229 guestrooms (2006)
Note: Figure 1 measures the percentage point difference between the US 1 sample relative to the Canadian sample. For example, in 2006 the US 1 sample was 0.8 percentage points higher than the Canadian sample in Occupancy and 6.5 percentage points higher in ADR.
Source: PKF Consulting, PKF Hospitality Research
Figure 1 shows the relative percentage point differences in occupancy and ADR growth between the US 1 and Canadian samples over the 2004 to forecasted 2007 period. Looking at 2004 as the final normalization year of recovery for both the Canadian (SARS) and US (Iraq War and 9/11) accommodation industries, the US 1 sample has outperformed the Canadian sample in terms of ADR growth by a wide margin, ranging from 2.8 to 6.5 percentage points while operating at comparable occupancy levels. This was the case over the entire 2005 to forecasted 2007 period.
* Canadian sample represented 154,869 guestrooms (2006) ** US 2 sample represented 298,997 guestrooms (2006)
Note: Figure 2 measures the percentage point difference between the US 2 sample relative to the Canadian sample. For example, in 2005 the US 2 sample was 6.5 percentage points lower than the Canadian sample in Occupancy but 1.8% percentage points higher in ADR.
Source: PKF Consulting, PKF Hospitality Research
From the outset it should be noted that the US 2 sample has historically under performed compared to the Canadian sample – 4 of the 10 markets have operated at 60% occupancy or below for at least 2 of the last 4 years, while all 10 markets operated below 63.5%.
Figure 2 shows the relative percentage point differences in occupancy and ADR growth between the US 2 and Canadian samples over the 2004 to forecasted 2007 period. Once again considering 2004 as the final normalization year of recovery for both the Canadian and US accommodation industries, the Canadian sample achieved higher occupancy and ADR levels than the US 2 sample for that year. From 2005 to forecasted 2007, the US 2 sample performed far below the Canadian sample in terms of occupancy however, managed higher ADR growth.
To put this in perspective, in 2006 the US 2 sample operated at 60% occupancy - 7.3 percentage points less than the Canadian sample while at the same time the US 2 sample achieved 7.6% in ADR growth - 4.1 percentage points more than the Canadian sample. While operating near or above 70% occupancy certainly supports strong rate growth, it does not seem to be absolutely necessary.
Based on the preceding analysis, we have made the following observation: There is a divide in the philosophy behind ADR growth between Canada and the United States. The Canadian sample shows a more conservative approach to ADR growth, increasing room rates only when the markets achieved strong occupancy levels, while the US samples appear to have a more aggressive ADR growth strategy – independent of occupancy performance.
This observation may spur additional questions to consider: Could rate growth in Western Canada while exemplary, be higher than what it has been? If the US Leisure Tourist market has evaporated, and Canadian convention business has declined in some markets, “does this mean that those who are traveling need to do so or are strongly motivated to do so regardless of rate”? In regard to ADR growth, could we be asking for more rate to better reflect the quality of product and hopefully service that we are providing?
We do not believe the guest knows how empty or full your hotel is, unless you tell them – Either verbally or through pricing actions at the hotel or on the Internet.
Christopher J. Pinto, Consultant Malcolm Jastrebski, Research Consultant
PKF Consulting, Toronto PKF Consulting, Toronto
