Hotel brands and companies with a global growth strategy have been compelled during the COVID-19 pandemic to rein in that focus, and tend to their portfolios on a more local level.
During the 33rd Deloitte European Hotel Industry Conference, which was held virtually, two chief financial officers spoke about the trends and challenges their companies' portfolios have experienced since the start of the pandemic.
“The pandemic has made the hotel world much smaller," said Cameron Read, CFO of Europe, the Middle East and Africa at Marriott International. "A whole bundle of stuff around localization has come out of this, and I think that has to be a good thing. It will change things for the better."
He said Europe’s overreliance on inbound U.S. travelers might not be ideal in the long term.
“We have not tended to our own backyards, and we paid a pretty serious price for that,” Read said.
According to Marriott data, approximately 25% of business is coming from domestic markets, such as Germany, rather than the mid-90% domestic occupancy experienced in the U.S., Read said.
Kevin Jacobs, CFO and president of global development at Hilton, said approximately 20% of large companies will cut down on long-haul travel for low-impact meetings.
“That will take a hit. No one is going to get a [Washington], D.C.-Singapore flight for an internal meeting,” he said.
A concentration on local demand is going hand in hand with better-than-expected average daily rate.
Read said he expected rates to eventually rebound but not as quickly as they have.
“It is only a surprise in how fast [ADR] has returned,” he said.
Hoteliers spent a lot of time in the last cycle talking about what was wrong with rate, Read said. Now, the internet has increased transparency into rates, and guests have an increased notion of what constitutes value, which makes it more difficult for hoteliers to raise rates.
Breaking Even
Hoteliers are placing more emphasis on growing demand during shoulder periods — outside of traditionally high demand seasons — and perfecting more sophisticated revenue-management algorithms.
As a result, hotels are able to break even, or turn a profit, at a lower occupancy threshold, Jacobs said.
“For every point of occupancy after the break-even rate base has been secured, then that is 100% profit for the owner,” he said.
Moderator Simon Oaten, hospitality and leisure lead partner at Deloitte, said along with higher guest demand, supply shortages have contributed to a "steeper" trajectory for hotel rates.
Read said gross operating profit margins been surprising to watch each month.
“That is something we would never have predicted. [The numbers] have been remarkable — [for example] at 50% occupancy, a 40% GOP margin, numbers we never could have modeled. Part of that is rate, part of that is lower margins in [food and beverage], closing the spa and other loss leaders,” he said.
“The other part is staffing, a big issue, and while we think it will get better, we cannot [now] find people. [General managers] are cleaning rooms and changing beds,” he added.
Read said the strategy for hiring general managers has also become more localized.
“I have just got back from Saudi Arabia, where 20% of our general managers are local. That should be 100%. There is no reason why that cannot be,” he said.
He added hotel payments often are in U.S. dollars, too, and that incurs a cost that needs to change.
Improving profits, increased personal savings and a constrained supply chain are having a knock-on effect on inflation, Jacobs said.
“If you triple the money supply, there will be inflation. Who saw that coming?” he said.
Read said it is great to deliver profits to owners when demand is spottier but break-even points are lower.
“I wonder if [owners] will ask, ‘Well, what are you going to do for me at 75% occupancy, but we know this run rate is not sustainable. We have to double down on savings as we know costs will come back into the business,” he said.