Caribbean Hotel Profits Retreated in 2009 – Cost Controls Mitigate Decline Relative To U.S. Properties
The Caribbean lodging industry felt the full negative impact of the recent global recession in 2009, but to a lesser degree than the U.S. hotel industry. During the year, Caribbean hotel revenues and profits experienced double-digit declines. While the results may be disappointing for Caribbean hotel owners and operators, the fall off in net operating income was much less severe than what was experienced by U.S. properties. These findings are reported by Colliers PKF Consulting USA (PKFC) in the recently released 2010 edition of Caribbean Trends® in the Hotel Industry, the only published research available that focuses exclusively on Caribbean hotel profits, revenues, and expenses.
“It is evident that Caribbean hotels and resorts suffered one of the worst declines in profitability during 2009,” said Scott Smith, MAI, senior vice president in the Atlanta office of Colliers PKF Consulting USA. “Being a global destination for leisure and incentive group travelers, as well as intra-regional commercial demand, the worldwide recession resulted in significant declines in hotel performance. It may still be hurricane season in the Caribbean, but fortunately we are starting to see the stormy economic seas begin to calm in 2010.”
Fewer Guests, Less Revenue
In aggregate, the hotels in the Caribbean Trends® survey sample reported an 11.9 percent decline in total revenue from 2008 to 2009. Leading the dollar decline in revenue was the 13.6 percent fall off in rooms revenue, the result of a 3.7 percent drop in occupancy and a 10.1 percent decline in ADR.
“With fewer guests staying at the Caribbean properties, all other sources of revenue posted declines as well,” Smith noted. “Food and beverage revenue fell 13.7 percent from 2008 to 2009, while the revenue from other operated departments (golf, spa, retail, casinos) declined a relatively modest 5.3 percent.”
Facing declines in revenue, Caribbean hotel managers responded by cutting costs an impressive 10.5 percent. Unfortunately, this was not enough to overcome the 11.9 percent fall off in revenues.
“Due to climate, population, natural resources, and government involvement, Caribbean hotel managers have some unique operational advantages, and disadvantages, compared to their U.S. counterparts,” Smith said. “In general, labor costs and property taxes tend to be less in the Caribbean. However, the cost of supplies, insurance, and utilities are frequently higher than in the U.S.”
Despite relatively low wage rates, labor costs are the single biggest item of Caribbean hotels’ expenses. Therefore, operators had to implement staffing cuts and salary/wage reductions in order to keep departmental expense ratios in line. In total, labor related expenditures were reduced by approximately 11.0 percent from 2008 to 2009.
The largest expense reduction was achieved in the utility department. “In past issues of Trends® we reported that many hotels in the Caribbean were implementing ‘green‘ sustainable energy practices in an effort to control utility costs. By using energy-efficient light bulbs, toilets, sinks, and showers, Caribbean hotel managers were able to cut their utility costs by 21.2 percent in 2009,” Smith observed.
The only expense item to rise in 2009 was insurance costs. During the year, insurance premium payments increased 5.3 percent. “Despite a relatively calm hurricane season in 2009, insurers still fear the threat of hurricanes,” he added.
With Caribbean hotel revenues declining at a greater pace than expense cuts, net operating income in the Trends® sample declined 18.2 percent in 2009. While this is a significant decline, it is considerably less than the 35.4 percent drop in profitability reported in the 2010 edition of U.S. Trends® in the Hotel Industry.
Fortunately, things are beginning to pick up in 2010. The peak season results as reported by Smith Travel Research indicated a comeback in the demand for lodging accommodations in the region. “As with the United States, we are clearly in the beginning stage of what should be a period of improving operating performance for the Caribbean lodging industry. Our estimates of demand and ADR growth are strong through 2013. However, one cannot ignore the depth of the 2009 recession and what was occurring in the real estate and financial markets. This is going to be a protracted revival for hotel operators and an even longer recovery for property owners,” Smith concluded.