Is 60% occupancy with ADR $125 better than 80% occupancy ADR $100?
The President of Sri Lanka Inbound Tour Operators (SLAITO) recently stated that Colombo City hotels ended 2023 with an average occupancy of around 60%. He claimed that, were it not for the existing minimum room rate (MRR) policy, which has also driven away the MICE market, Colombo City hotels could have achieved an average occupancy of more than 75% last year.
Furthermore, he stressed that a MRR was not needed and market sources should determine room rates. On the contrary, the Hoteliers Association of Sri Lanka wants the MRR to continue, arguing that this measure prevents under-pricing by higher-tier hotels. Thus conveying the message to hotels that want to belong to the higher-tier, to play by the association’s government imposed rules.
Occupancy
If a hotel with 100 available rooms has an average monthly occupancy rate of 60%, it means that on average, 60 rooms are occupied each night. If the average daily rate (ADR) is $125, the revenue per night is $ 7500.If that same hotel is able to push up its occupancy to 80% by dropping its ADR to $100, the nightly revenue it makes is $ 8000.
In the case of the second scenario, the hotel increases its revenue by 6.7% over that where it sells 60 rooms at $125. While the drop in ADR was indeed offset by the increased number of rented rooms – the overall profitability of the hotel, i.e. the net operating income (NOI) is likely to be harmed, owing to the increased operational expenses associated with renting those additional 20 rooms.
Occupancy or more ‘heads in beds’, should be pursued as one of several goals for maximization, however, it should not be viewed as an indicator of hotel profitability. A hotel with high occupancy and low ADR may generate revenue but could miss out on potential opportunities for increased profitability.
Occupancy and ADR
The answer to the hotel industry’s age old question, Occupancy and ADR: which has the biggest influence on a hotel’s bottom line…can be frustrating, because there simply is no right answer. There are far too many variables in how a hotel performs, such as control of costs and additional revenue streams, which are too many… to claim that either is the principle profit driver.
One thing though is for sure - driving occupancy with fixed expenses that do not cover that strategy is a trip to nowhere. Unfortunately, during slackening business periods, most hotels cast a wide net with unacceptable ADR to push up occupancy, in the hope of reaching the ‘make or break’ operational threshold.
Minimum Room Rate
The minimum room rate tied to the star classification is an imperfection of great proportion. Hotels that have rooms un-refurbished in the last decade or two have to compete at the identical price-point with newly opened hotels offering superior accommodations. This is a ‘no contest’ for the older hotels with their tired-looking rooms. Furthermore, this ‘one-price-fits-all approach, disregards the crucial factor of consumer choice, where when prices fail to accurately represent the product and services provided, customer dissatisfaction can ensue. A glimmer of hope though is that the battle to own the guest can be won on exceptional service and acceptable qualitative aspects.
Chasing MICE
An average 60% occupancy in 2023 for Colombo’s city hotels means 40% of its total room inventory remained unsold, and, makes for a strong case to offer a special MICE market rate -with applicable terms and conditions to ensure compliance.
In 2017, the President of the Hotels Association of Sri Lanka asked the question “Why are we looking at cheap MICE tourism to drive our business?” Maybe the hoteliers were justified in asking such questions since MICE organisers usually look for the lowest possible room rate.
However, a re-think is perhaps now necessary, given that the country’s leading tourism provider John Keells is constructing a 4,000-delegate capacity conference centre within a upscale mixed-development project.
Shafeek Wahab – Editor, Hospitality Sri Lanka, Consultant, Trainer, Ex-Hotelier
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