Stonebridge Companies VP of Hotel Performance and Analytics Christopher Cheney

Is the industry heading toward a profit recession?

Dave Farmer Uncategorized

Originally appeared in Hotel News Now in July, 2019

By: Danielle Hess

Executives at the recent HSMAI Chief Revenue Officer Executive Roundtable in Minneapolis discussed how they’re thinking about rates at a late point in the hotel industry cycle and the possibility of a profit recession. They also talk on video about the transition from revenue management to revenue strategy.

As the hotel industry cycle continues to show signs of age, raising rates has been more of a challenge for hoteliers, but revenue experts said they’re not ready to throw in the towel just yet.

During an HSMAI Chief Revenue Officer Executive Roundtable in Minneapolis, Raul Moronta, SVP of revenue strategy at Crescent Hotels & Resorts, said the industry is close to a “profit recession.”

“We’re probably about a month away from having a profit recession, meaning there’s a number of hotels that would actually have two consecutive quarters of negative growth on the GOP line,” he said. “So when you’re sitting at a 2% growth in the revenue mark, no average rate growth and every other expense is growing faster, you’re going to have a hard time making your profit grow on a year-over-year basis.”

To overcome rate struggles, hoteliers should focus on total profitability and find ways to grow ancillary revenue, said Priya Chandnani, VP of revenue management at Benchmark.

“We still have a hotel and we still have a space that we can (use) to generate revenue,” she said. “Now (we can) push our boundaries and say, ‘How do we leverage function space? How do we leverage food and beverage? How do we invest in spa?’ to be able to bring up that ancillary revenue that we would have otherwise liked to get from robust rates.”

Planning for a downturn
The Great Recession took many by surprise, but revenue experts said their teams are more prepared for a downturn this time around.

“We are a lot smarter than we were 11 years ago when things went south,” said Kerry Mack, EVP of revenue and distribution at Highgate Hotels. “There are a lot more revenue executives and professionals and staff and analysts, so I think we’re in a better foundation to deal with that and to not panic.”

Chandnani added that her company has its “fences in place” to get through a recession.

“We know that we’re not going to drive demand through some of the high-cost distribution channels,” she said. “We put fences in place to be able to drive demand through some of those low-cost channels, and we’re starting to think about that already and we’re implementing strategies now, which will help us in the future, so I think we’re definitely better prepared at this point.”

While many revenue managers experienced the last recession and know what they would do differently the next time around, Chris Cheney, VP of hotel performance and analytics at Stonebridge Companies, said he’s not sure how revenue technology will react.

“We don’t know what the AI is going to do differently … and a major concern I have is what’s going to happen with pricing strategy when a system is geared toward driving every dollar of (revenue per available room) it can realizes the fastest way to get RevPAR is to sell another room, even if it’s at a garbage rate,” he said. “That’s not the approach we would take, but currently, that’s the approach the system would take. I don’t know how fast they can get it to evolve before it starts spiraling out of control.”