From HOTEL BUSINESS

ATLANTA—While the fallout for hotels from the recent hurricanes that swept across the Caribbean is far from calculated, the results are expected to only compound existing troubles the industry in the region has been suffering.

In newly released data from CBRE Hotels’ Americas Research the average Caribbean hotel experienced a 4.7% decrease in gross operating profit (GOP) during 2016. This decline in profitability follows four consecutive years of double-digit increases in GOP according to CBRE’s report, “Caribbean Trends in the Hotel Industry.”

For its survey sample, CBRE indicated the decline in the bottom line started with the fall-off in top-line revenue. Last year, occupancy for the sample declined by 2.8%, along with a 0.2% decrease in ADR. The net result was a 3% decline in RevPAR. All other revenue-generating departments (F&B, other operated departments and miscellaneous income) also saw a loss in sales during the year, resulting in a 2.2% drop in total hotel operating revenue, the data shows.

“A multitude of factors caused the decline in revenue for Caribbean hotels in 2016,” said Scott Smith, managing director, CBRE Hotels Consulting. “These include new supply, currency exchange rates and the Zika virus.”

(It was noted the impact of the hurricanes would be assessed when 2017 annual operating data is reviewed.)

New Supply

The strong performance of Caribbean hotels from 2012 through 2015 attracted the attention of developers from around the world, the report observed. “New hotels have opened up on most all islands in the region. We have seen urban select-service properties, along with five-star, all-inclusive resorts enter the market in recent years,” Smith said.

Compounding the impact of traditional hotel openings in historical destinations is the entry of alternative forms of lodging, plus the emergence of new venues, according to CBRE. “Like elsewhere in the world, Airbnb is becoming a popular form of lodging in the Caribbean region. In fact, Airbnb has served as the entrée form of lodging for people wishing to visit Cuba, a new and emerging destination attracting visitors from other islands in the region. Plus, parts of the long-delayed Baha Mar development opened in early 2017,” Smith noted.

Other Negative Factors

The Zika virus was officially eradicated in 2017, the CBRE data indicated, but the negative publicity from the virus impacted both the transient and group segments. CBRE’s conversations with regional hoteliers indicate the stigma of Zika has dissipated somewhat this year.

Travel to the region also is sensitive to fluctuations in currencies. In June 2016, British voters opted to leave the European Union. The so-called Brexit vote caused the British pound to fall to its lowest level against the dollar in 30 years.

“The decline in the value of the pound limited the purchasing power of U.K. travelers, dampening their spending habits on discretionary spending, including vacations. Popular British destinations such as Barbados and St. Lucia were the most vulnerable,” Smith added. “In response, I expect Caribbean hoteliers to shift their marketing focus to the U.S., where the dollar is relatively strong and purchasing power is high.”

Cost Controls

With revenues declining in 2016, Caribbean hotel operators had to focus on cost controls to limit decreases in profits, with regional managers cutting their operating expenses by 1.2% during the year, noted CBRE.

Despite the 2.8% decline in occupancy, rooms-department expenses remained flat from 2015 to 2016, the data shows. “The stagnation in rooms-department expenses is surprising given the high degree of variable expenses within this department,” Smith said. “On the other hand, the decreases in the food and beverage and other operated department expenses make sense and were commensurate with their respective declines in revenue.”

Undistributed department expenses, usually more fixed, declined by 1.6% during 2016. “The 7.9% decline in utility expenses is noteworthy given the relatively high cost of energy in the Caribbean region. This could be reflective of a payoff in the green and sustainable practices that have been prevalent in the Caribbean for several years,” Smith noted.

“The 3.5% rise in management fees, on the other hand, is counter-intuitive given the declines in revenue and profits experienced in 2016. Caribbean hotel owners would be advised to check the incentive clauses in their management contracts,” Smith suggested.

Profits

By cutting expenses 1.2%, Caribbean hotel operators limited the 2.2% decline in revenue to just a 4.7% decrease in GOP. Of all the categories analyzed by CBRE, only those Caribbean properties in the upscale and upper-midscale categories achieved an increase in GOP in 2016. During the year, these hotels in aggregate converted a 4.1% increase in revenue to a 1.9% rise in GOP.

“Several of the properties in these chain scales are select-service hotels in urban locations that accommodate business travelers. Therefore, they were somewhat insulated from the factors that negatively impacted leisure travel and resorts,” Smith said.

For more on this story go to: https://www.hotelbusiness.com/caribbean-hotel-profits-were-suffering-pre-hurricanes-cbre-report/