Due to a weak local economy, business is slow at the Hyatt, a 300-room property

Question

Due to a weak local economy, business is slow at the Hyatt, a 300-room property owned by the Hyatt. Last month’s ADR (Average Daily Rate) was $159.00. Occupancy was 58.5 percent—down from the prior year’s same month occupancy of 65 percent. Bob, RM for the Hyatt, and Rachel, the hotel’s GM, forecast that this month’s occupancy will also be approximately 58.5 percent and at the same ADR. (Average Daily Rate = Room Revenue / Room Sold)

“We’re down six and half occupancy points from last year! That’s a 10 percent decline. We need to cut prices so we can ?ll these rooms,” says Hyatt CEO. “If we increase our discounts, I think we can shoot for a $139.00 ADR, sell more rooms, and get our revenue back up to where it needs to be.”

Assume Hyatt CEO mandates a new rate strategy and that is correct in his prediction that the next month’s overall ADR is $139.00.

For percentage questions below, round to one decimal point and answer in the format where 15.5% would be entered as 15.5, or 16.84% would be 16.8

a) What would be the percentage decrease in ADR experienced by the Hayman House?

b) Assume that this month and last month each contained 30 days. How many total rooms would have to be sold at an ADR of $139.00 to equal the rooms revenue achieved last month?

c) What would be the percentage increase in occupancy required to equalize the rooms revenue achieved last month?

d) Show mathematically why a 10 percent decrease in ADR requires more than a 10 percent increase in occupancy percentage to equalize room revenue?

e) What additional factors would you suggest Bob and Rachel might mention to this owner as they discuss the advisability of his proposed pricing strategy?

Explanation / Answer

Solution:

a) old ADR = $159.00; new ADR = $139

Percentage change = (new ADR - old ADR)*100 / old ADR

= (139 - 159)*100/ 159 = -12.5786

This percentage change is negative, thus it is a decrease. Hence percentage decrease in ADR is 12.5 (on rounding to 1 decimal point)

b) ADR = room revenue / room sold

So, room revenue = ADR*room sold

Now, previously room revenue = $159 * (300*58.5%) = 159*175.5 = $27,904.5

At ADR of $139, room sold = room revenue / ADR = 27,904.5/139 = 200.7 (on rounding)

c) Occupancy last year = 58.5%

Ocuupancy this year required to equalize room revenue from last year = 200.7/300 =66.9%

Percentage Change in occupancy = (66.9 - 58.5)*100 / 58.5 = 14.358

Which is positive, thus percentage increase is 14.3 (on rounding)

d) As we saw, room revenue = ADR * room sold(RS)

If we want room revenues to be same for any time periods say 1 & 2, i.e, ADR1*RS1=ADR2*RS2 ... (1)

Also, we are given (ADR1-ADR2)/ADR1 = 0.1 ... (2)

We have to show, (RS2-RS1)/RS1 > 0.1

From (2), we can say ADR1 - ADR2 = 0.1*ADR1

0.9*ADR1 = ADR2 or ADR2/ADR1 = 0.9

From (1), ADR2/ADR1 = RS1/ RS2

0.9 = RS1/ RS2

0.9*RS2 = RS1

dividing both sides by 0.9, RS2 = 1.1 *RS1

Subtracting RS1 from both sides, RS2 - RS1 = 1.111*RS1 - RS1

RS2 - RS1 = 0.111*RS1 or (RS2 - RS1)/RS1 = 0.111 >0.10

which is the required percentage increase i.e, 11.1% > 10%. Hence, proved

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