Although the covid-19 pandemic has caused untold disruption to hospitality, it has also underscored the sector’s durability. For the hotels that have weathered the storm, creative thinking has proven valuable. Those that have realigned services to meet shifts in demand and identified new sources of revenue have generally performed best.
“Given the uncertain trajectory of covid-19, it has been a testing time for hotel owners and operators, as the pathway out of the pandemic has taken many unpredictable turns,” says Philippa Goldstein, senior analyst at real estate consultancy Knight Frank. “For many investors, the pandemic provided incredible insight into how individual assets have performed, as well as which sectors of the hotels market are the most defensive, versatile or resilient.”
Some uncertainty still surrounds the sector. Labor shortages, for example, have proven difficult to shake off, with the US Bureau of Labor Statistics reporting that the quit rate in leisure and hospitality jumped a full percentage point in November, to 6.4 percent.
Nevertheless, if the previous two years have taught the hospitality sector anything, it is to expect the unexpected. As institutions look to create the right environment for enduring profitability, it may mean a rethink regarding the assets that have long made up their core offering.
Looking long term
The volatility created by covid initiated a moment of reflection for many hotel operators. “The reality is that some of the pre-existing revenue patterns have changed as a result of the pandemic,” says Javier Arús, senior partner at the Azora Group. “Hotels need to adjust to this new scenario. They can play an important role, for example, in creating unique experiences.”
The new focus on experiences has been partly driven by a shift in traveler profile, with business travel expenditure falling by 61 percent, compared with 49 percent for the leisure category. More than a fifth of leisure travelers are looking for once-in-a-lifetime experiences, leading hotels to increasingly repurpose public areas as all-encompassing hospitality offerings.
“Pre-existing revenue patterns have changed as a result of the pandemic”
“An experiential offer provides hotels with an opportunity to upsell, ultimately driving costs down through greater utilization of these spaces,” says Julian Kemp, senior director, advisory services, hotels at CBRE. “Not only are you creating greater revenue, you are also getting greater engagement from guests as well as attracting external visitors by creating a more welcoming environment.”
UK-based Selina, a company describing itself as both a “lifestyle brand and hotel operator,” has flourished during the pandemic by offering everything from wellness experiences to jungle adventures. It expects to generate approximately $1.2 billion in revenue by 2025.
More traditional operators have also embraced the experiential craze. Earlier this year, for example, Scotland’s Green Hotel used a £100,000 ($132,000; €121,000) refurbishment program as part of its bid to enter a three-day golf tourism event.
But increased revenue only affects one side of the profitability problem. “The focus on ‘maximizing’ revenues is always in the mind of the hotel operator, but, in the current environment, the challenge centers on achieving this by controlling costs,” Arús acknowledges. Rising inflation, increases in energy prices and surging staff overheads are making the challenge more difficult.
A change in approach
An experiential approach is not the only way to boost revenue, of course. “For many branded operators, the focus is now on leveraging technology to drive profits and performance,” says Goldstein. Technology company Oracle’s Nor1 Hotel Upsell Solution, for example, uses machine learning to drive a 34 percent increase in the number of guests that commit to an upgrade. Greater implementation of more advanced IT solutions could strengthen bottom lines further.
Some industry players are using technology by creating co-working environments within hotels. While business travel remains below pre-covid levels, many hoteliers are optimistic that the widespread adoption of flexible working could help replace some of their lost revenue. In their most recent quarterly earnings call, both Intercontinental Hotels Group and Marriott International showed signs of improved earnings, with both organizations referring to recent changes in the way people work.
Commercial real estate firm Colliers International predicts that hotel turnover could be increased by as much as 20 percent by providing office spaces for co-working and greater guest interaction. Many hotels are already acting on this emerging market trend, from independent venues like hybrid hospitality brand Zoku, to larger chains like Moxy by Marriott offering ‘Living Room’ spaces to meet modern workplace needs. Hospitality group Accor has launched its own co-working brand, Wojo, with plans for more than 1,000 networking spots by the end of the year.
Where there is room for reinvention across the industry, hoteliers appear keen to pursue it. The move toward using total revenue per available room (TRevPAR) to calculate hotel profitability, rather than the traditional measure of revenue per room, comes as the industry adapts to the growing importance of ancillary revenues. CBRE found growth in these revenue streams helped mitigate overall revenue decline during a period where total operating revenues decreased by 63.3 percent.
“Regardless of cost, smarter use of existing space should be front of mind, making operational functions more dynamic,” Kemp acknowledges. “As an asset manager, this means identifying redundant space that could be made into revenue-generating space. How can existing facilities be better utilized?”
As the post-pandemic recovery gathers pace, a new challenge is emerging. “There cannot be a mismatch between guest expectations and the reality when they are in the hotel,” Arús says. “Any investment in hospitality assets must be timed and scaled properly.”
In Goldstein’s words, a vital task facing hotel owners and operators is “effectively asset management, working the assets to perform 24/7.” Asset optimization – striking a balance between reducing costs and investing enough in amenities and services to meet guest expectations – will be key to capitalizing on the sector’s nascent recovery.
Maximizing hotel revenue
Maximizing revenue-generating opportunities can take many forms at an operational level, explains Philippa Goldstein, senior analyst at Knight Frank
“Rebranding and repositioning plays have and will continue to become increasingly common, as investors seek to take advantage of a new investment cycle. Global brand operators will seek to capitalize on those hotels coming to market and which offer opportunities for new franchise or lease agreements,” she says.
“Undertaking easy-win, cost-effective sustainable practices, such as monitoring and controlling food wastage, offering incentives to guests to encourage them not to have their bedroom cleaned for short stays, building green walls to lower energy costs, informing guests on how best to reduce water consumption and diverting waste from landfill can all improve a hotel’s green credentials, while ultimately having a positive impact on the bottom line,” she adds.
“Throughout 2022, rateable values for all hospitality businesses are expected to be reassessed, with the rateable value based on turnover. Instructing a specialist business rates adviser to ensure a hotel business is not excessively overcharged may lead to extensive rebates and reduction in charges going forward, with these savings used to fund more revenue-generating initiatives.”