A Hotel’s Room Rates Rise 12%. Is It Outperforming — or Is the Market Doing the Heavy Lifting? 

By Pierre Marechal, Vice President, Strategic Advisory & Asset Management at JLL

For much of the past few years, the hotel industry’s attention has understandably focused on recovery. Owners wanted to know when occupancy would return, how quickly room rates could be rebuilt and when RevPAR would finally move beyond its pre-pandemic level.

In many markets, those conversations have now changed. Rates have recovered strongly and, in some cases, moved well beyond 2019 levels.

That should be good news for owners, but it also creates a risk: when room revenue is growing quickly, it becomes relatively easy to mistake a strong market for a strong operation.

I was reminded of this during a recent discussion about Indonesian hospitality. Hotel rates in the market are materially higher than they were in 2019, and travellers have demonstrated that they are willing to pay substantially more for the right product, particularly at the luxury and experiential end of the market.

That tells us something important about pricing power, but it does not tell us how efficiently individual hotels are converting that pricing power into profit.

For an owner, that distinction matters.

When Revenue Growth Conceals Operational Inefficiencies

Imagine a hotel where its average daily rate (ADR) increases by 12% over the course of a year. Occupancy remains relatively stable, and revenue per available room (RevPAR) consequently posts another strong increase.

At first glance, there is little reason to be dissatisfied.

Now move further down the profit and loss statement (P&L).

Payroll has increased more quickly than revenue. The hotel has become more dependent on high-cost distribution channels. Procurement hasn’t been properly revisited for several years. One restaurant is busy but produces little meaningful profit once labour and food costs are considered. Maintenance expenditure has been delayed and will eventually need to be caught up.

The hotel is still performing better than it did the previous year, but how much of that improvement has actually been created by management?

This is one of the difficulties of managing hotels during a strongly rising market. Revenue growth can compensate for decisions and inefficiencies that would be much more obvious in a flat market.

It is also why a period of strong ADR growth is arguably the right time for owners to examine operations more closely, rather than pay less attention to them.

RevPAR Matters, but It Isn’t the Owner’s Return

I spent a significant part of my career in revenue management, so I have no difficulty arguing for the importance of ADR, occupancy, and RevPAR. They tell us a great deal about how effectively a hotel captures demand and positions itself against its competitive set.

The problem arises when the analysis stops there.

An owner ultimately receives the economics produced by the hotel, not its RevPAR index.

If additional room revenue requires disproportionately higher payroll, expensive third-party distribution or increased operating expenditure, the benefit to the owner can be considerably smaller than topline performance suggests.

This is where flow-through – the proportion of incremental revenue converted into incremental operating profit – becomes particularly useful.

If a hotel produces an additional dollar of revenue, how much of that dollar becomes incremental operating profit? More importantly, why?

There is no universal percentage that answers the question.

A resort with significant food and beverage (F&B) operations behaves differently from a limited-service hotel, while an increase driven primarily by ADR will have different economics from one driven by occupancy.

The value lies in understanding these differences rather than applying a single benchmark.

If RevPAR rises strongly but earnings before interest, taxes, depreciation and amortisation (EBITDA) barely moves, an owner should want to understand what happened in between.

Where Is Hotel Profitability Being Lost?

Distribution is one obvious place to start. A hotel can increase occupancy and room revenue while becoming more reliant on channels with higher acquisition costs. The topline looks stronger, but the quality of that revenue may have deteriorated.

Labour deserves the same attention. The question is not simply whether payroll increased, because in an inflationary environment it almost certainly did. The more useful question is whether productivity improved or deteriorated relative to the business being generated.

F&B can be particularly deceptive because revenue alone tells us relatively little about whether a concept creates value.

A busy outlet can appear successful while producing an inadequate return after food costs, staffing and other operating expenses are considered.

Conversely, an outlet that does not maximise standalone profit may still make sense if it materially supports the hotel’s positioning or room-rate premium. The point is to understand why it exists and what return the owner expects from it.

The same thinking applies to sales productivity, procurement, utilities, maintenance and capital expenditure.

Individually, each may look relatively small next to rooms revenue. Together, they determine how much of a hotel’s commercial success reaches the owner.

Is Your Hotel Outperforming, or Is the Market Doing the Heavy Lifting?

There is another question I find useful when reviewing a strongly performing hotel:

How much of this result would we have achieved by doing nothing?

It is deliberately difficult to answer, but it forces a useful discussion.

If every comparable hotel in a destination has benefited from substantial ADR growth, part of your hotel’s improvement is clearly market-driven.

Management should not be criticised for benefiting from favourable conditions, but neither should market growth automatically be treated as evidence of superior execution.

The more interesting analysis is relative.

Did the hotel gain or lose market share, increase rates more effectively than competitors, or improve its channel mix? Was the additional revenue converted into profit more efficiently? Did guest satisfaction hold while prices increased?

And were there deliberate decisions behind the result that can be repeated?

These questions become especially important when preparing the following year’s budget. One of the easiest mistakes after several strong years is to assume that the market will continue doing the heavy lifting.

It may not.

The Next Stage of Hotel Performance Is About Profit Conversion

Indonesia provides a good illustration of this shift because parts of its hotel market have enjoyed very strong pricing growth.

I would be cautious, however, about underwriting another equivalent increase simply because the previous one occurred.

As rate growth becomes more normal, the source of future improvement is likely to become increasingly asset-specific.

Better segmentation, more disciplined distribution, improved labour productivity, stronger F&B concepts, intelligent capital expenditure and more effective commercial execution may matter more than another large market-wide increase in ADR.

For owners, this is not necessarily a less attractive environment. In some respects, it creates more opportunity because these are areas over which ownership and management can exert influence.

A rising market can make a large number of hotels look successful at the same time. A more normal market tends to reveal which ones are actually being operated well.

So when reviewing a hotel’s performance, I would certainly continue to ask what happened to ADR, occupancy and RevPAR.

I would simply keep going down the page.

The more important question for the owner is what happened to EBITDA, and why.

Read the Chinese article here.