The coronavirus is taking a toll over hotels and motels across the United States as analysts forecast a 10% decline in annual revenues. Several employees have been laid off work as company profits plummet at record rates.
Let’s take a deeper dive into the industry and what it’s future holds.
There are several key external drivers that influence the profits of this industry which include:
- domestic trips made by residents in the United States,
- inbound trips from foreigners,
- consumer confidence index, and
- consumer spending.
During the past five years, the industry benefited from high travel spending which contributed to increasing corporate profits.
The coronavirus pandemic and inadequate safety measures taken by the U.S Government have decimated both domestic and international travel which weakened consumer confidence and spending.
The industry also suffered from several weaknesses including high competition, high customer class concentration and high capital requirements.
Hotels and motels require the sufficient amount of infrastructure and amenities to suit their respective guests which puts a heavy cost burden.
The high competition within the fragmented hotel industry translates to lower profit margins and revenues.
In fact, the four largest operators account for less than 5% of the industry revenue.
Operators tend to get involved in price wars with competitors which places a downward pressure on profits. The average profit margin is 11.8% and is expected to decrease within the next two years.
Infrastructure and utility costs have also been increasing over the past several years despite the fact that hotel operators have opted for energy saving alternatives like LED light bulbs and green technologies.
Motels in populous locations are expected to contribute a higher portion of their revenues towards utilities and the current share they approximate to is 4.6% of total revenue.
To be successful in this industry, a business needs to target a niche market to generate sales.
Nearly 90% of businesses within the hotel industry have less than 50 employees and have a significant marketing barrier. Establishing brand recognition and a client base seems to be their largest challenge.
companies that have international networks have offered reward programs and memberships that fuelled their growth.
Few of the most well-performing companies in the industry include Hilton Worldwide Holdings (NYSE: $HLT) which manages over 6,100 hotels and employs over 173,000 individuals; the InterContinental Hotels Group (NYSE: $IHG) and Marriott International Inc (NASDAQ: $MAR) are other companies that service niche markets.
The pandemic has affected global occupancy rates which steeply decimated the stock prices of these industry giants.
The profitability in this industry is relatively low and IBR predicts that it will take at least 2 years for companies to fully recover their lost revenues and continue expanding across both the United States and the globe.
Our conclusion is backed by low consumer confidence, high competition and capital requirements of hotels as well as the declining revenue figures that companies will foresee in the coming future.