3 Ways to Fight Flat RevPAR Growth
The Problem: Lodging Spending Is Up, but RevPAR Growth is Slowing
Consumer spending contracted in the years after the 2008 recession, but they also saved more and paid off consumer debt. Now that debt levels are lower, consumers are shifting their disposable income towards travel and hotel stays. Lodging spending has grown faster than spending on food and consumer goods combined.
Above: Consumer spending trends since 2011, using December 2011 as an index. Lodging was the fastest-growing spending category measured.
While this appears to be good news for hotel owners, many submarkets are reporting negative RevPAR (revenue per available room) growth. Nearly 40% of hotels made less money per room this year than they did last year, compared to 3% of hotels in 2014.
Part of the reason for this is that customer demand has grown significantly, but room supply has also drastically increased, especially in the top 26 markets, which account for about half of all new construction.Above: the inverse relationship of Airbnb vs. hotel occupancy.
What are the top strategies for staying competitive in a tough industry?
Strategy #1: Leverage Local Patronage
Think about a hotel as a stock portfolio. A diverse portfolio is more resistant to market contractions. Hotels that offer a range of amenities for non-guests—for instance, pay-to-play golf courses, gyms, and spas—can use local patronage to offset amenity construction costs. Many upscale hotels have introduced luxury memberships to non-guests as a way to improve revenue flow during periods of low RevPAR. Building a local audience takes time, but in the end is a steady source of revenue. Not only will the locals pay to use these amenities, they will recommend them to their friends when they come to town.
Strategy #2: Recapture Millennials through Community
Bringing in locals plays into a second long-term strategy: recapturing the millennial market. AirBnB plays heavily to millennials, which make up 50% of their customer base. Their smartphone-friendly interface, intuitive search filters, and flexible pricing have consistently outcompeted hotel booking sites. However, there are downsides to the gig economy: AirBnB has come under fire from regulators worried about gentrification and illegal subletting, and guests take a gamble on whether the room will be what was advertised.
Hotel managers can leverage these weaknesses more publicly to appeal to millennials in the short term, but a longer-term strategy is to appeal to millennials’ community-oriented mindset. AirBnB realized early on that millennials are more strongly community-oriented than previous generations, and they pitched their marketing strategy to appeal to this mindset and use their peer-to-peer model to paint a picture of a supportive, shared world.
How can hotel owners compete? In the short term, continue to relentlessly improve the mobile user experience for seamless, easy booking. In the long term, focus on capturing millennial business through quality amenities. High-quality food options, pools, gyms, spas, and other pay-to-play options build local brand awareness, which is critical for the millennial generation, which relies almost as heavily on word-of-mouth referrals as it does on online searches.
Strategy #3 – Make Smart Cost Improvements
One way to fight falling revenue is to lower operating costs. But operational cost reductions can only improve profitability when it does not negatively impact customer perception of value. If a room feels cheap and dirty, the hotel may permanently lose that customer.
When looking at operational costs, it is important to include GOPPAR (gross operating profitability per available room), which is a better key performance indicator than RevPAR alone. While operational costs involve many more variables than revenue, it is critical to know these numbers when margins are tight.
Technology and efficiency help to reduce costs without making a room feel “budget.” Penny-pinching staff wages, food costs, linens, and cleaning costs are short-term fixes that end up lowering a hotel’s brand value. By contrast, hotels that make smart technology capex decisions in the next few years are likely to outcompete those who rely on budget cuts alone. Fortunately, many other customer-facing industries (like retail) have pioneered how to evolve their customer experience, and the hospitality industry can take their cues from their successes and mistakes.
Investing in a sleek online customer interface is a good investment that prevents fall-off at the booking stage of the pipeline. Fast, free Wi-Fi is also a good investment – it tops the list as the #1 amenity guests want during their stay. Connectivity will only grow more important in the years to come. It is a fact that analytical software makes better decisions than human instinct, so investing in good analytical software to manage pricing decisions and find operational pain points.
Even budget cuts can be marketed as features. Some hotels give guests the option of skipping housecleaning services, and they receive an “eco-friendly credit” for each day skipped. This improves customer experience by putting more control in their hands, and it benefits the hotel by cutting down on unnecessary cleaning costs.
Perhaps most of all, hotels should focus on having the right people in the driver’s seat. The pace of technology continues to increase, and that means more market disruptions, even in age-old industries like hospitality. Hotels should fight hard for employees who are plugged into the march of technology and can look forward into the future to anticipate market trends.