“In the digital market, what the hotel reports on their PNL doesn't necessarily tell the whole story,” Cindy Estis Green, CEO and co-founder of Kalibri Labs LLC, said in her opening remarks on The Numbers: What Are We Dealing With and Where Are We Headed panel at ALIS. In her opening presentation, Green illuminated the gap between guest-paid hotel rates and net hotel rates, the amount that the hotel actually gets after commission fees.
“In the old days, which I would call the analogue market, the hotel collected almost all of the revenue that they got directly. In the digital market, guests actually pay a lot of money to third-parties, and the hotel only gets a portion of that. The real rates that the guests are paying are not reflected in what is reported industry wide,” she said on the panel. This is called guest-paid revenue. “By guest-paid revenue, I mean the price that is recorded on the hotel's PNL plus the wholesale commissions that are paid to the third-parties,” adds Green
Currently, guest-paid revenue is on an upswing. Green predicts that guest-paid revenue in 2018 will reach $161.6 billion, which would be a 4% increase from 2017. That translates to significantly increased per-night room rates. “The good news is that guest-paid revenue has actually grown at a pretty strong pace,” says Green. “We can look at guest-paid revenue and see that it will grow about 4% from 2017 to what we predict in 2018, which is a pretty strong growth. When we look at all of the costs associated with that, it is about $4 billion in wholesale commissions. That $4 billion equates to about $3 per night on the average rate across the US. That means that the actual rate that the guest paid is actually $3 more than what the guest reported.” In certain metropolitans, the bump is even more dramatic. In New York City, the average room rate is $8 more per night that what is reported, and in San Diego, it is $5 more per night. “The average rates are not reflecting what is actually happening in the market,” said Green.
The differential becomes pretty important when you dig in deeper. A lot of hotel pricing is based on what the market can bear rather than the hotel's net revenue. “It becomes pretty important to track what is happening in the market because a lot of the pricing is based on what the guest is willing to pay,” explained Green. “If we don't know what that is, it creates downward pressure on rates.”
It isn't only hotel commissions that eat into these rates. The hotel industry pays another $10 billion in retail commissions, transactions costs and loyalty costs and another $12 billion in sales and marketing costs. “That brings us down to net revenue. We are predicting $135 billion in net revenue for 2018. That is a 3.8% increase,” said Green. “When the net revenue doesn't pace with the guest paid revenue, it means that the costs are higher.”
These numbers ultimately have an impact on asset valuations as well. Green calculates what she calls revenue capture, which is what the hotel keeps from what the guest pays. “In 2018, we predict that number to be 83.5% of what the hotels actually keep,” she said. “In terms of asset valuation, when you start to see the flow-through drop, the amount that you lose or that you are not capturing comes out of your flow through, which affects your asset valuation.”
For the last several years, there has been a three-tenths of a point decrease, and in 2018, Green predicts another three-tenths of a point drop. “That doesn't seem like a lot, but it is $420 million that would have been in the pockets of hotels,” said Green. If you apply an 8-cap to that, you will be at more than $5 billion in reduction in asset value. In the last few years, we have seen three-tenths of a drop each year, and it equates to $1.7 or $1.8 billion in asset valuation drop one year over the other.”
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Kelsi Maree Borland
