Impact of diamond rating changes on hotel performance
 
Impact of diamond rating changes on hotel performance
20 NOVEMBER 2018 8:46 AM

Research shows what happens to hotels’ key performance indicators and indexes when they gain or lose a diamond rating.

Researchers from the University of Central Florida Rosen College of Hospitality Management, in collaboration with the American Automobile Association (AAA) and STR (parent company of HNN), recently conducted a study on the results from a change in a hotel’s AAA Diamond status.

The study focused on the effects of a Diamond change in North American hotels from 2006 to 2016. A hotel’s KPIs (average daily rate, occupancy and revenue per available room) and the KPI Index were analyzed over a short- and long-term period.

Results demonstrated that in the short-term (one year after the Diamond rating change), significant differences in KPIs and competitive set indexes were found between properties that saw an increase in Diamond rating versus those that had a drop in Diamond rating. More specifically, hotels that gained an additional Diamond benefited from a 9.23% increase in hotel occupancy, 6.07% increase in ADR and 16.57% increase in RevPAR. Hotels that lost a Diamond only benefited from a 2.83% increase in hotel occupancy, 2.44% increase in ADR and 5.24% increase in RevPAR.

In the short-term, properties that gained an additional Diamond were also compensated by much higher KPI indexes, such as increases of 6.56% in their occupancy rate index, 2.97% in ADR index and 10.11% in RevPAR index. Properties that suffered from a drop in Diamond rating experienced a small gain of 0.46% in their occupancy rate index, a loss of 0.80% in ADR index and a disappointing gain of 0.48% in RevPAR index.

In the long run (for example, between one and five years after the Diamond rating change), results demonstrated that hotels with a Diamond rating increase had significantly higher KPIs and competitive set indexes than hotels that had a Diamond rating decrease.

For hotels that gained a Diamond, their occupancy rate increases peaked at year four, and ADR and RevPAR peaked at year five. Similarly, hotels that gained an additional Diamond saw their occupancy rate index increases peak at year three, while their ADR index peaked at year four and RevPAR index peaked at year three.

This means that in the long run, hotels which gained an additional Diamond tended to have better KPIs than properties which lost a Diamond rating. Moreover, in comparison to their competitive sets, properties which gained an additional Diamond tended to perform much better over time than hotels that lost a Diamond rating, although most of these gains tended to decrease three to four years after the Diamond rating gain.

These results provide hoteliers a benchmark for changes in their Diamond ranking for their potential revenue performance and market share gains, not only for the short-term but also for a more sustained period.

Hoteliers can now use the results of this study to make decisions on their market placement strategy, whether that means investing funds in their facilities and services to maintain their current diamond status, increase their Diamond status to take advantage of increases in revenue or drop a diamond and save investment funds.

The results of the study provide a data resource for this strategic decision and could be used as an indicator to determine the potential return on investment and payback period for increasing a hotel Diamond rating. It also provides a revenue impact reference for those hoteliers who are interested in dropping down in the Diamond rating scale. Hence, hoteliers are now able to quantify the impacts of Diamond rating changes at both property and market levels.

Now that hoteliers know the performance outcomes of gaining and losing a Diamond rating, the remaining questions are: What decision will they make and what capital investments and service improvements will be needed?

Michael Nalley is a professional hospitality executive with more than 35 years of experience in education, training and operations management. He is a customer service expert experienced in global brand program development, launch, implementation and analysis. Mike is an Assistant Professor in Hospitality Management at the University of Central Florida Rosen College. His research areas include lodging operations, customer service, leadership, training and industry certification.

Dr. Diego Bufquin is an assistant professor at the Rosen College of Hospitality Management, University of Central Florida, where he teaches hotel and restaurant management courses for undergraduate and graduate students. Dr. Bufquin has degrees from the École Hôtelière de Lausanne (Switzerland), the Glion Institute of Higher Education (Switzerland), Skema Business School (France) and the University of South Carolina (USA). His research interests focus mostly on consumer and organizational behavior in the hotel and restaurant industries.

Dr. Jeong-Yeol Park is an Assistant Professor in the Rosen College of Hospitality Management, University of Central Florida, U.S.A. His research interests are potential travelers’ purchasing behavior in online travel agents, and restaurant customers’ behavior. His work was awarded the Martin Opperman Best Research Paper of the Year in 2015.

This article is based on academic research, submitted in partnership with STR’s SHARE Center, which provides support and data resources to professors and students in hotel and hospitality fields of study at colleges and universities worldwide. The assertions expressed in this article do not necessarily reflect the opinions of Hotel News Now or its parent company, STR, and its affiliated companies. Please feel free to comment or contact an editor with any questions or concerns.

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