Industry: Overview

Industry Size

Although the US travel industry is in its maturity stage, it has been one of the fastest growing industry in the US, and has grown exponentially since 2006, contributing in excess of $2 trillion per annum in economic output (US Travel Association [USTA], 2014).  The lodging segment of the travel and tourism industry is considered as the sector’s nucleus and generates in excess of $150 billion annually (Statista, Revenue of the United States hotel industry, 2014).  The industry is projected to increase to over $200 billion annually by 2018 (Statista, 2015).   

Key Trends

There are several key trends that are driving lodging demand.  The most important ones that

pertain to the concept considered are discussed below.

1.       Residential Platforms

In recent years, there has been increase demand for lodging platforms or facilities that have a residential feel and component.  Increasingly, travelers are seeking overnight accommodations in facilities that provide the feel, ambiance and facilities of their home.  This trend has given rise to lodging platforms such as Airbnb and Home Away. These facilities range from individuals providing paid overnight accommodations in spare guestrooms to facilities catering to the affluent travel segment, where luxurious apartments, condominiums, or villas are provided.  Some hotels companies have attempted to respond to this desire of travelers to stay in more residential oriented quarters and have morphed or transformed existing facilities into more upscale, lifestyle properties with new design elements and services that address this need.

2.       Focus on Wellness

Another factor catalyzing change in the lodging industry is the growing trend of health and wellness. Increasingly, lodging travelers are making travel decisions based on whether or not lodging facilities provide facilities and services such as restaurants with “healthy menus”, spas and exercise facilities.  These services and facilities allow travelers to satisfy their desire to “live well and healthy” when they travel.  Lodging firms have started to capitalize on this trend.  For example, Starwood’s Element is a brand developed specifically as a wellness focused hotel. 

3.       Design as a significant component of guest experience

Hotel design elements have shifted toward providing a more authentic, “homely”, cultural travel experience for guests. This means moving the focus away from stiffer design elements such as marble staircases, centerpiece chandeliers, and brand-name beds and instead toward unique signature experiences.  For example, some hotels showcase local wine and beer tastings and the works of emerging local artists.  Examples of hotel concepts capitalizing on this trend include The Park Hyatt brand’s Masters of Food & Wine program which provides a signature experience to guests through hands-on, interactive culinary interactions with leading chefs and masters of a craft or trade. The overall gist of this trend is authenticity, adaptive design, driven largely by customer desire for new and creative travel experiences. 

4.       Technology as a component of the travel experience

Today’s guest expects more than simply free internet access from their hotel when it comes to tapping into technology. As such, hotels are investing in better customer driven technologies that improve processes, convenience for customers and customer experiences.  For example, guests are requesting mobile check-in via telephones, and seamless connectivity across platforms and devices when they travel.  In addition, mobile apps are being used to enhance services.  For example, some hotels provide digital concierges.  In the luxury segment some hotels are adopting more cutting-edge technologies, including tablet interfaces, mobile room check-in, computer kiosks, all in an effort to enhance the guest experience. Example of hotels capitalizing on the technological trend to enhance the guest experience includes the St. Regis, which launched their E-Butler. Hotels are also using technology to gather guest data during all stages of the guest cycle and guest interactions, which helps them to predict guest behavior and preferences, which allows properties to innovate toward a more authentic and anticipatory experience. 

Key success factors for the Industry

In most markets in the United States, especially in metropolitan areas such as Atlanta, the lodging industry is characterized by medium to high fixed costs, relative to total costs as well as high capital costs. Due to the high capital costs, to achieve success as indicated by profitability, hotel development projects should be managed to achieve the most cost effective use of resources.  This includes, construction, furnishings, fixtures and equipment, and pre-opening expenses.  Hotels should also be constructed at the optimal size in order to reduce daily excess capacity.  Operationally, success is contingent of maximizing yield or they should aim to fill each guestroom on a daily basis, maintaining a consistent level of service and providing impeccable facilities. It is also important to keep variable cost at a minimum. 

Since competition in the lodging industry is intense, success is also achieved through product differentiation and pricing strategies. Differentiation is achieved through variations in product-service offering, based on targeted market segments’ demand.  Although the supporting physical facilities play a role in differentiation, consistency of a high level of service is typically the key factor in achieving differentiation.  For example, leaders in the luxury segment such as Four Seasons Hotels are able to achieve the highest average daily rates because they are able to, and are known for providing a high level of consistent and anticipatory level of service to customers.  Thus, although their primary competitors often have better locations and facilities, Four Seasons Hotels typically lead the market in terms of achieving the highest average daily rates (ADR).  Pricing strategies involves employing revenue or yield management strategies to set prices based on daily demand. 

Standard Financial Ratios

The key performance indicators and terms used to describe performance in the lodging industry are listed below.  These performance indicators are in accordance with the Uniform Systems of Accounts for the Lodging Industry (American Hotel & Lodging Association Education Institute [AHLEI], 2015). 

General concepts

1.       Supply (Rooms Available) – the number of rooms in a hotel multiplied by the days in the month.

2.       Demand (Rooms Sold) – number of rooms sold by a hotel, does not include complimentary rooms or “no-shows” (reservations not cancelled).

Key Performance Indicators

Below are the key performance indicators for the lodging industry.  These are in addition to standard financial ratios.    

1.       Occupancy - %

Definition:  The percentage of available rooms that were sold during a specific time period.

Calculation: Occupancy is calculated by dividing the Demand (number of rooms sold) by the Supply (number of rooms available).  This is a percentage. 

Occupancy = Demand / Supply or Occupancy = Rooms Sold / Rooms Available

2.   Average Daily Rate (or ADR) - $

Definition: A measure of the average rate paid for rooms sold during a specific time period.

Calculation: ADR is calculated by dividing the Room Revenue by the Demand (Rooms Sold).  This is a dollar amount.

ADR = Revenue / Demand

3.  Revenue per Available Room (or RevPAR) - $
   Definition:  A measure of the revenue that is generated by a property in terms of each room available.  This differs from ADR because RevPAR is affected by the amount of unoccupied rooms, while ADR only shows the average rate of rooms actually sold.

Calculation: RevPAR is calculated by dividing the Room Revenue by the total number of Rooms Available, the Supply.  This is a dollar amount.

RevPAR = Revenue / Supply

Commonly Used Financial Ratios in the Lodging Industry

Liquidity ratios	Solvency Ratio	Operating Ratios	Activity Ratios	Profitability Ratios
Current Ratio	Debt to Equity Ratio	Cost of Food Sold (percent)	Fixed Asset Turnover	Earnings per Share
Quick (Acid-Test) Ratio	Debt to Assets Ratio	Cost of Beverage Sold (percent)	Asset Turnover Ratio	Profit Margin
Operating Cash Flows to Current Liabilities Ratio	Operating Cash Flows to Total Liabilities Ratio	Cost of Labor (percent)	Daily Occupancy (percent)	Operating Efficiency Ratio
Working Capital	Times Interest Earned Ratio	Average Daily Rate	Month to Date Occupancy (percent)	Return on Assets
Receivable Turnover (days)	Solvency Ratio	Average Food Check	Average Occupancy Per Room	Return on Stockholders' Equity
Accounts Receivable Turnover (times)		Average Beverage Check	Double Occupancy (percent)	Price Earnings Ratio
Operating Cash Flows to Current Liabilities Ratio		Cost of Supplies/Sales	Seat Turnover-Food Operation	Dividend Payout Ratio
		Food Sales/Total Sales	Food Inventory Turnover (days)
		Beverage Sales/Total Sales	Beverage Inventory Turnover (days)
		Room Sales/Total Sales	Beverage Inventory Turnover (times)
		Revenue per available room (RevPAR)	Food Inventory Turnover (times)
		Revenue per occupied room
		Cost per occupied room