Hotel Industry Blog

Hotels Must Act To Avoid Profit Erosion

By Des O'Mahony | On Mon, February 22, 2016

Ireland’s Hotels Are Doing Well, But Rate Recovery Isn’t Everything

The recovery in Irish tourism continues into 2016 on the back of record numbers of visitors in 2015. Most sectors are reporting a strong opening to the year.

At Bookassist, our hotel data for the first 6 weeks of 2016 shows online booking numbers up almost 14% year on year, with associated revenue up by more than double that figure. This indicates a welcome rise in direct online business coupled with a continued rise in average daily rate (ADR). Additionally, occupancy has reached strong levels in Ireland, with in excess of 82% being recorded in many Dublin hotels and healthy RevPAR.

Rate has largely recovered to 2006 levels, and caution is being urged to not let rate get out of control. But the reality is that hotel costs have risen significantly in the interim, so hotels are not nearly reaching 2006 margin levels despite the rate recovery. All the more reason that hotels need to be extremely careful to focus on where their room profit is really going and how they can take their fair share of it and put it to good use.

You Need That Profit

At the risk of stating the obvious, the hotel sector needs its profit. Working capital is the only way to prepare the sector for the future.

As a whole, the sector needs to deliver more capacity into the country, in Dublin in particular, to cope with and capitalise on the growing opportunity. To not accelerate development of new properties is to risk supply-demand problems that will ultimately make the market uncompetitive in the coming years and potentially reverse the recent recovery or drive more and more incoming guests from the hotel sector and into the sharing community exemplified by Airbnb.

However, property developers see much more profit per square foot from developing office space than low-margin accommodation right now. Unless the margin on hotel rooms can increase, this is likely to remain the case and constrain capacity. We all know this - but driving up rate is not the only solution to delivering that better margin.

On an individual hotel basis, stock needs to be continually improved. Maintaining rate requires renovation, modernisation of properties. Even more critically, maintaining your business for the long haul means continually improving service levels and holding reputation, a key driver of modern online business. This means real and ongoing investment in property quality, staff training and management. All of which are increasingly costly outlays today – but driving up rate is not the only solution to generating the required cash.

Your Fair Share

A buoyant market with higher occupancy should be generating greater margin. Yet what Bookassist has seen in other recovering markets in Europe in which we operate is that hotels themselves have been the slower ones to capitalise on the renewed buoyancy, with a disproportionate share being ceded too quickly to online travel agents (OTA).

The result of this is that while occupancy levels and ADR have risen, the associated profit generated is increasingly moving out of the hotels and into the pockets of distributors. In Ireland this is already happening and is in danger of accelerating as capacity is squeezed in 2016 and onwards.

This is particularly apparent in the “red herring” debate around rate parity, ostensibly one where OTAs do not want hotels to be selling lower on their own websites. In reality however, the OTAs are the ones merrily breaking parity by requiring discounted rates in their “private clubs”, clubs which are anything but, since anyone can sign up. These discounted rates are the fastest growing area of business for many OTAs, not surprisingly. Viewing OTA costs in commission rather than hard euro terms can often disguise what is really happening to your profit figure - remember that discounting €10 on a €100 room rate in order to make a private club sale means -€10 straight to your bottom line but a reduction of just €2 or less in the commission paid to the OTA on the €90 sale (assuming commission rates of 20% or less). That’s €10-€2=€8 more in cost of sale to you on a €100 room.

Put simply, getting your distribution strategy wrong can still fill your hotel at a reasonable room rate, but it will bleed your profit line in cost of sale terms. The same occupancy and rate skewed towards direct online business to your website will result in a significantly lower cost of sale and therefore real and substantial profit gains – profits needed to build your business for the future, profits generated without driving your rate to unsustainable levels.

Creating versus Servicing Demand

OTAs do an excellent job and are a critical part of your distribution mix. But as a hotel, you must realise that OTAs should be a secondary part of your strategy, not a primary one. OTAs are excellent at helping you to reach that customer that you could never reach on your own, and can justify high fees to do so. But OTAs should not be used to service existing demand, at least not at the rates they currently charge. In situations where occupancy is breaching 80% levels, it is an absolute no-brainer to be channelling that demand towards your lower cost direct-to-web channel online and adjusting distribution strategy generally to redistribute towards lower cost channels.

In the booming market that Irish hotels are experiencing, hotels would do well to note that OTAs do not create demand. The tourism influx is happening anyway, driven by the excellent strategies of Tourism Ireland, the value for money available in the tourism sector nationally and many other positive contributors to Ireland’s image abroad.

Hotels need to be tapping into that influx directly with proper online marketing strategies, quality websites, high conversion booking capability and strategic customer relationship management. These people are coming regardless, why aren’t you reaching out to them directly?

Long Term Strategy

Hotels need to act now to appreciate the danger of what this movement of profit out of the sector means for them long-term. Continuing to focus your hotel KPIs on occupancy and rate only and being oblivious to real cost of sale and profit blinds hotels to the reality of what is happening in a fast-moving marketplace and will result in hotels sleepwalking their way into a permanent low-margin business through OTA reliance.

It is a fact that some hotels are currently losing money on the channels they use, possibly without even knowing it. F&B may not be able to make up the difference, particularly in city hotels where guests want to be out and about and may spend little or nothing more in the property itself.

As we have long advocated at Bookassist, cost of sale needs to be looked at forensically by hotel FCs to see where real margin potential lies and where the bleed is really occurring. Investment in the direct channel is a clear win, but takes effort to kick-start.

Hotels of course “appreciate the ease” of doing business via OTAs and often view the effort in growing direct business as onerous. But OTA costs per booking do not fall with volume, while a successful direct strategy will result in an ongoing reduction in acquisition cost per direct booking and a consequent profit growth per room.

Remember, if Irish hotels get it right and improve their retention of profit, they can develop the sector for a sustainable future where rate can be justified and held. But if they allow the profit to bleed out disproportionately to distributors, then the inevitable rising rates to counter lower margins over the longer term will hit the sector hard while the distributors can just move on to other cities and countries.

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Dr Des O’Mahony is CEO and Founder at Bookassist (http://www.bookassist.com), the multi-award-winning technology and digital strategy partner for hotels worldwide, and is a HSMAI “Top 20 Extraordinary Minds” recipient.




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