21Oct

Adapting to the Changing Landscape of Hotel Group Demand Measurement

Author: Erik Browning

We had a record setting year for the hotel industry: It was the year of most rooms sold, highest rooms revenue, highest ADR, and highest RevPAR. 2014 is shaping up to be even better: Occupancy is projected to grow between 2.1% to 2.6%, and ADR is forecasted to grow between 4.2% and 4.5%. In fact, in the US, May 2014 RevPAR growth was a new record breaking 10%.

It has been well-documented that the stellar US performance has been driven by the increase in the transient segment, but we are also finally seeing growth in hotel group demand. For example, the number of group rooms sold in June 2014 was 1.5 million more rooms than what was sold last June of 2013. Exemplified in the table below, group occupancy growth is finally outpacing the growth of transient occupancy. However, group ADR growth is only at 1.5% compared to the 4.2 % growth of transient ADR.

Chart showing YOY growth for group and transient ADR

With all of these positive indicators (record breaking performance, consistent demand increases, moderate supply growth and 4 years of positive RevPAR lift), why aren't we seeing better growth in group ADR? Certainly some of this lack of growth can be attributed to group business booked between 2008 and 2010, the Great Recession. However, the Recession cannot explain it all. Let's examine a bit more closely some contributing factors.

Old Way and New Way arrows on a chalkboard

The most obvious reason for the lack of growth is the change in group dynamics: Meetings are getting smaller and shorter. Back in 2005, group business represented about 39% of occupancy, and currently in 2014, it represents only 33% of the occupancy. Another issue is the 12-month moving average of group demand change was in negative territory during the second half of 2013 through early 2014. This may have led some hotels to reduce group prices to be lower than what the market could probably have held. These factors, and more, have made the group landscape more competitive.

While there are various reasons for group ADR underperformance, let's focus on how individual properties currently measure their group demand, the changes to group distribution, and then ultimately, the downstream impact on how they price group.

As I noted earlier, until recently, group occupancy and group pace have been lackluster in the US. I can certainly empathize with the revenue management team during the group rate quotation process when the group pace has not been as strong as needed. At the same time, we have to recognize that most markets have already reached or surpassed previous peak occupancies. Many markets have likely already hit their functional capacity with little to no space for additional occupancy growth. For RevPAR growth to remain positive in the future, growth has to come in the form of ADR lift. The prognosticators in our industry are all projecting 2015 RevPAR increases between 5.2 and 6.7%, with occupancy only contributing about 1% growth.

Assuming that the transient ADR lift continues at the current pace of about 4.2%, transient rate growth will have to be even higher in 2015. More importantly, however, group ADR has to rise dramatically compared to the current growth rate of 1.5% to hit the overall RevPAR projections.

So how do we make this ADR lift happen? In my next blog post, we are going to examine what is going on with measuring group demand and how you might be looking at it incorrectly. All of which could be leading to pricing decisions resulting in money left on the table.

Want to learn more about group demand? Read Part 2 and part 3 of the series. 

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