As a hotel development company that’s more than forty years old, we’ve seen our share of market changes that impact growth in Average Daily Rate (ADR).
Today we’re providing our take on ADR growth during an interesting time in the hospitality space. The world has emerged from the depths of the pandemic and is continuously redefining life, work, and travel amid COVID-19 variants. What does this mean for ADR growth and the hospitality industry?
Business travelers who stay with us for 300 or more days are not consistently around right now; however, when stimulus checks were issued throughout the pandemic, we saw a decent increase in destination and weekend guests. Even if people were local, they wanted to get out and visit somewhere else in town. Transient travel has artificially increased ADR because of the reduction of corporate rate stays and the nature of opportunistic travel driven by pent up demand.
Specifically, we saw a significant ADR increase in destination locations such as Orlando and southeast beaches, particularly in Summer 2021. In Atlanta, we saw a 20-30% ADR growth, which lasted through October 2021 and only began to decrease once the Omicron variant emerged.
During a down cycle, hotels tend to react the same way historically—by cutting rates. The perception of creating demand through a lower rate is completely unjustified. You cannot create demand with rate. People either have the funding to travel, or they don’t. Offering $99/night v. $139/night won’t make a difference in who is traveling and where they are traveling to. However, lowering rates can give consumers a choice of where they want to stay based on savings or a value-add. But when a large majority of hotels drop their rates, the whole industry suffers. Those who charge a higher rate have to lower it because of market behaviors in the competitive space. Customers then become conditioned to paying a lower rate. When rates increase, consumers have an adverse reaction.
During the pandemic, loyalty programs can also inadvertently impact ADR. During this most recent pandemic driven downturn, rewards members stopped traveling, to potentially stimulate travel, loyalty programs gave discounts as an incentive. However, our industry had already reacted to the pandemic by lowering room rates. Essentially, loyalty programs took our best, most loyal customers and gave them another discount on top of already discounted rates. In some cases, business travelers stopped booking their pre-negotiated rates because the loyalty rate was a savings comparatively, which ultimately impacted profitability.
In the midst of the Great Resignation, the food & beverage and hospitality industries have seen the most quits across the U.S. Because of the lack of ADR growth, hotel businesses can’t afford to pay their staff competitive wages. In January 2022, we were down another 4 million small and midsize business (SMB) workers.
ADR is theoretically one of the most compelling data driven reasons why our workforce is leaving. Largely because the industry can’t keep up with compensation other industries are offering. In an effort to stop the exodus of great team members, we consciously took a hit to profitability to pay a starting wage of $15/hour. And for every year an associate was with us, we provide them an additional 3%. While this has led to increased retention, it has also proven to be challenging in the absence of ADR growth.
Narsi has stayed profitable largely because we work with an exceptional Regional Director of Sales and Marketing, Tammie Piacenti. Her expertise combined with a strategic approach to revenue management using our triad approach—revenue management, operational excellence, and sales expertise—with all representatives having a seat at the revenue optimization table.
For example, if a company starts using one of our hotels in Research Triangle Park, Tammie and her team will make sure we get our fair share of their business. The path to that is to work in harmony with brand sales and make sure we are available to those companies. We make a case to those stakeholders at a global level that we should get their business because we meet the audience’s needs. We do not get anywhere from an ADR standpoint without a high level of collaboration with our sales team.
When we don’t hold rate integrity, it has an almost irreversible trickle-down effect on other hotels. We need to encourage other operators to not cave on rate. Our revenue, sales, and operations teams collaborate on the right price to charge guests in the current market conditions. In theory, we do our best to ensure we are the rate leader among our competitors so that they follow us, and not the other way around. Our philosophy is that if a customer is prioritizing rate first, then Narsi isn’t necessarily the right fit for their needs.
We study TSA travel stats meticulously as they are a reliable indication of whether people are getting on planes. If our occupancy starts to rise or fall, we study TSA numbers to determine whether it’s because of travel due to leisure, work, holidays, and/or other factors. From there, we can create a data-driven strategy to capture the business of those travelers.
We also study our STR report data strategically, focusing on one metric in particular: Revenue Generating Index (RGI), RGI indicates whether we are getting our fair share of all revenues coming into the market—and if we are doing it at the right price. It gives us great insight as to how are competitors are doing in the occupancy and ADR space.
Narsi Properties is a private family-owned Hotel Development & Management company based in North Carolina. Founded in 1978 on principles of trust, authenticity, and family, we take pride in our community, guests, and team members as the cornerstones of our company values. Our philosophy of positive reinforcement ensures a comfortable and unique experience for hotel guests, in turn reassuring our investors and stakeholders of our consistent reliability and superior performance.