Average Daily Rate is a common topic for this firm. We dish about it in our publications, in our presentations and in our day to day discussions with our clients. We are well aware that there may be some of you that are at the “enough already” point. But the truth is - until we see a reverse in the trend towards discounting in this country - we just can’t stop talking about it.
Regardless of the audience – owner, management company, or operator, we hear the phrase “well that’s easy for you to say…” more times that we can count. We recognize that as consultants looking at the big picture we are not faced with the same day to day challenges of running a hotel business, getting heads in beds, and most importantly, ensuring there is enough money on the bottom line to cover the bills. We also know the story of the one big player on the block that leads the pack by making the first move to discount. We can’t dispute the fact that when this happens, it’s hard for the rest of the industry not to follow suite. Nor can we argue the fact that in some cases, rate discounting can be an effective tool for managing demand levels, so long as this tactic is employed in a strategic manner that does not result in large decreases to a property’s overall ADR. What we cando however, is present the facts that clearly illustrate the incredibly negative impact that overt rate discounting had on the accommodation industry in this Country in 2009, with the hope that moving forward, alternative strategies will be explored and pursued when the next challenging era is upon us.
So now for the facts: At a national level, bottom lines in the Canadian Accommodation Industry declined by $1.5 Billion in 2009 (a $4,000 per room decline in NOI). With a decline of 5 points in national occupancy, or a loss of 5 million occupied room nights, there is no question that a portion of the bottom line impact was the direct result of market driven factors resulting from the economic downturn (i.e. cancelled meetings/conventions, reduced corporate travel, a decline in tourism, etc). However, close to one third or $500 Million of the bottom line impact was the direct result of the overt rate discounting practices employed across the country. Our analysis suggests that if rates had been held at 2008 levels, demand could have fallen by a further 5% in 2009, or by an additional 3 to 4 million occupied room nights, and the industry would have been no worse off from a bottom line perspective. Furthermore, the industry would have been much better positioned for the recovery anticipated this year and going forward, with mainly the demand side of the equation to worry about.
This may not be the story you’re looking to hear, but it is certainly a story worth listening to and talking about. The facts can’t be disputed, and as they clearly show, overt rate discounting had serious negative impacts on hotel profitability in 2009. The fact is, maintaining and growing ADR is hard work - particularly when owners and asset managers may be pressing for short term results. In 2010, the time is ripe for all players to get on the same page and recognize that creating value without rate discounting through package development, differentiation and/or product improvement takes more work, more resources, more creativity and even more time to take effect than a rate discount tactic. In the long term, these are strategies that will work to not only maintain – but dare we say improve profitability? And who knows, maybe in time we’ll actually have to look for a new topic to write about.
Erin O’Brien, Senior Consultant
PKF Consulting Inc. Toronto
