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Riding the wave of inflation in 2024: Navigating ADR growth in a changing economic landscape

commercial strategy fernando vives hospitality labs blog hospitality trends pricing revenue management Jan 15, 2024

Inflation Challenges in the Hospitality Sector for 2024

Since 2021 we have grappled with significant challenges. Inflationary pressures have notably escalated costs for raw materials, energy, and staff wages. For asset-heavy business models, the burden of increased rental costs is also evident. This environment necessitates a delicate balance in pricing management.

Sales and revenue management teams are under pressure not only to offset these rising costs through effective pricing strategies but also to ensure that operations continue to deliver quality and value for money to customers. This dynamic underscores the critical link between strategic pricing decisions and overall business sustainability in the hospitality sector.

Historical World Inflation : Source World Bank

Based on the World Bank data:

· World inflation rate for 2022 was 8.27%, a 4.8% increase from 2021.

· World inflation rate for 2021 was 3.48%, a 1.55% increase from 2020.

· World inflation rate for 2020 was 1.93%, a 0.28% decline from 2019.

· World inflation rate for 2019 was 2.21%, a 0.23% decline from 2018

According to current trends, there is an optimistic outlook that we may have passed the peak of inflationary pressures, and it appears that inflation is on a path to normalization in most developed countries. This shift is a positive sign for the hospitality industry, as it suggests a more stable economic environment moving forward, potentially leading to more predictable costs and consumer spending patterns. This normalization could provide a much-needed respite for the industry, allowing for more strategic planning and investment in the future.

Inflation forecast and focus on Euro Area. Source OCDE

Navigating ADR Growth in a Changing Economic Landscape

There's curiosity about whether we can anticipate real (inflation-adjusted) ADR growth in the next two years. If such growth is expected, would it be a universal trend across all market segments and countries, or would it be more pronounced in specific areas? This question addresses the complex interplay between economic trends and the hospitality industry's pricing strategies. As an Example, let´s take a look at the US main KPI Forecast:

Key Trends and Strategies to consider for 2024:

Strong Demand Continues: The ongoing strong demand in the hotel sector indicates a potential for ADR growth in the coming years. This is driven by the robust traction we're still seeing from some feeder markes, such us Spain, Brazil or the U.S.
Rising Influence of Asian Markets: The influx of tourists from Asia to Europe and America remains low, which is likely to increase pressure on inventory as it goes back to previews numbers. This trend should not be overlooked as airlines go back to 2019 capacity.
Significant Indian Market Potential: The Indian market, now the world's largest population, is rapidly emerging as a major player. With 50 million Indians moving from poverty to the middle class annually, travel is becoming a key aspiration. This shift is expected to significantly influence ADR growth.
MICE Segment Recovery: The MICE (Meetings, Incentives, Conferences, and Exhibitions) segment has fully recovered compared to 2019 levels, showing increases not just in volume but also in ADR. This trend is here to stay and if the macro is good, it will remain.
Optimism in the Corporate Segment: Although the corporate segment hasn't yet reached its 2019 levels in room nights, there has been a near-complete recovery in recent months, pointing towards a positive trend in ADR.
Revenue Management and Pricing Strategies: With the support of the right processes, teams, technology, and sophisticated revenue management and pricing strategies, there are many opportunities to optimize the increasing demand.
Market-Driven Pricing Dynamics: It's important to note that Hotel prices are determined by market dynamics of supply and demand. Therefore, we must also monitor the general market trends, particularly in certain destinations, to effectively adapt the strategies.
Overall Upward ADR Trend: Considering these factors, I do foresee an ascending trend in ADR, backed by each individual ability to optimize demand through strategic pricing, revenue management and by strong commercial strategies.

Adaptive Pricing Models

Adaptive pricing models, particularly dynamic pricing, are increasingly important in the hospitality industry. This approach allows hotels to adjust rates based on demand across all segments, including corporate tariffs. Effective management of Yieldable vs. Non-Yieldable segments is crucial. Dynamic pricing not only maximizes revenue but also ensures that rates are competitive and aligned with market trends. Additionally, this strategy enables hotels to respond quickly to changes in demand patterns, maintaining an edge in a highly competitive market. This adaptability is key to balancing occupancy and profitability.

Expanding on adaptive pricing models in the hospitality industry, it is imperative to conduct a detailed analysis of each hotel's segmentation. This surgical approach is crucial for understanding the contribution of each segment, evaluating the influence of different channels and accounts, and ensuring the capability for optimization. By analyzing these aspects, hotels can aim to achieve the highest NET TREVPAR (Total Revenue Per Available Room) possible. This detailed segmentation analysis enables hotels to fine-tune their dynamic pricing strategies, ensuring they not only meet market demands but also maximize revenue effectively from each segment and distribution channel. This strategic approach is vital in optimizing overall profitability in a highly competitive environment.

In enhancing adaptive pricing models, consider the following examples:

Dynamic Pricing in Corporate Segment: Implement dynamic rates for corporate guests, contrasting traditional fixed rates, to optimize revenue based on demand fluctuations.
MICE Segment's Contribution: Leverage dynamic pricing to capitalize on the high revenue potential of the MICE segment, including additional services like catering and AV equipment.
Distributor Impact on B2C: Assess the influence of B2C distributors in driving consumer bookings and adjust pricing strategies to maximize revenue from these channels.

Some additional strategies to counterfight inflation:

1. Product Optimization: Focus on high-performing hotel services and amenities. Discontinue low-margin offerings and promote higher-margin services like luxury spa treatments or premium room categories.

2. Discounting Rationalization and Promotional Management: Re-evaluate discount policies. Align them with market research rather than intuition, ensuring they don't erode margins unnecessarily.

3. Surgical Segmentation: As seen above, identify and address underperforming segments within the hotel.

4. Digital Go-to-Market and Channel Optimization: Enhance digital marketing and sales channels. Use e-commerce platforms effectively to maintain revenue streams and adapt to changing consumer behaviors.

Some of these strategies could help maintain profitability while adapting to current market conditions.

Balancing Costs and Quality

In response to rising costs, many hospitality businesses are shifting from traditional Revenue Management approaches, like selling every available room, to limiting sales to maintain quality standards. This strategy focuses on ensuring that service quality and value propositions remain consistent, even as operational costs rise. By prioritizing quality over quantity, these businesses aim to sustain high standards and customer satisfaction, recognizing that a positive guest experience is crucial for long-term success and reputation in the industry. Ideally we should be able to have both: the volumes and the quality.

Closing Thoughts

In conclusion, despite the ongoing challenges posed by inflation and rate increases, the VUCA environment and major global conflicts, such as the situation between Ukraine and Russia, and the conflict involving Israel, the hospitality industry demonstrates a remarkable resilience.

This resilience is underpinned by a strong and persistent demand, particularly from robust markets like the U.S, the recovery of Asia and specially China and rapidly emerging ones like India. Alongside the resilience shown by robust markets, the total recovery of corporate demand, the return of traditional trade fairs, and the consolidation of the MICE (Meetings, Incentives, Conferences, and Exhibitions) segment are also critical factors in the hospitality industry's growth.

The sector's ability to adapt and thrive, even in the face of these adversities, is a testament to its strength. Notably, there is a clear trend where travel is being prioritized over material possessions, reflecting a shift in consumer preferences. This trend, coupled with the right strategic approaches in revenue management and pricing, positions the industry for continued ADR growth.

Your Insights Are Valuable

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Until next time, keep exploring the endless possibilities of hospitality.

The views and opinions expressed in this newsletter are solely those of Fernando Vives and do not necessarily reflect those of any company or organization I work or I am affiliated with, nor those of their partners or suppliers. The data sources used are mostly public, and ChatGPT may have been utilized for research assistance and copywriting and editing. If you find any discrepancies or errors in the data or insights shared, please reach out to me via LinkedIn for necessary adjustments. Thank you for following and being a part of this community.