Is occupancy or rate more important to the bottom line?
Is occupancy or rate more important to the bottom line?
20 SEPTEMBER 2017 7:33 AM

This STR analysis examines how occupancy and rate affect gross-operating-profit margins of U.K.-based hotels.

LONDON—The age-old question for hotels is which performance metric ultimately has a greater impact on profitability: occupancy or rate?

For total transparency, I’ll answer this question up front—there is no right answer. There are too many variables in the industry to make a claim this bold, such as additional revenue streams and general cost control, which are two crucial elements, to say the least.

What we can do, however, is home in on a specific market at a specific point in time and explore the correlation between occupancy, average daily rates and gross-operating-profit percentage margins. This can tell us if hotel profitability for that market was more occupancy driven or rate driven.

Let’s look at STR's hotel profitability data for the United Kingdom in 2016, focusing on the luxury, upper-upscale and upscale classes. Then, let’s take all the properties within these classes that achieved a GOP percentage margin of 45% and above and compare this against the average performance figures of the full group. (STR is the parent company of Hotel News Now.)

The figures show that while occupancy levels were typically higher for hotels above the 45% mark, ADR was substantially higher for those hotels. We can interpret this to mean that for hotels included in this study, rate performance had a greater impact on overall profitability than occupancy performance. While the average occupancy was 7% higher when comparing the average versus top performers, the average ADR was 42% higher.

(Slide: STR)

Hotels above the 45% GOP percentage margin recorded occupancy levels well above the averages for each class, meaning higher occupancy still meant higher GOP. But ADR levels were substantially higher than average for the top performers in each class. It is also interesting to note that the departmental expense level was only 6.5% higher for top-performing hotels, while total revenues were 38% higher, which once again shows that maximizing your revenue from room sales truly pays off.

(Slide: STR)

Breaking down these results by class, we see that upper-upscale hotels above the 45% GOP percentage margin benefited from higher rates more so than luxury or upscale hotels, indicating that the upper-upscale class managed to control expenses more efficiently. This could be a takeaway for U.K. revenue managers working in upper-upscale hotels that fell below the 45% GOP percentage margin, especially in London, where there is a much higher rate spectrum and significantly stronger purchasing power than in other parts of the country. Nearly 75% of the top-performing U.K. hotels included in this study are based in London.

Of course, this is just one example of how hotels can analyze their KPIs and figure out where they should focus their efforts to drive greater results. To really make effective decisions, revenue and finance managers need to work together in studying the full picture.

When it comes to the bottom line, you need to take all revenue streams and expenses into account to evaluate where your biggest opportunities lie.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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