Trends in the Caribbean Hotel Industry

By Scott Smith

Lodging accommodations in the region have increased in number, quality, and variety over the past few decades as a result of the enhanced appeal of the Caribbean as a destination. In 2007, the Caribbean overcame the lingering effects of recent hurricanes, the rising costs of energy and most specifically fuel, and the recovery of other competing tourist destinations, such as Costa Rica.

Travel Trends

Tourist stay-over arrivals continued to grow in 2007 as the Dominican Republic remained the most popular destination in the Caribbean with 3,979,582 tourists. Cancun tourism increased considerably as more hotels were restored after Hurricane Wilma struck.

Cruise passenger visits to the Caribbean during 2007 varied considerably by region. Most of the islands that increased cruise passenger arrivals in 2007 received a large share of their business from Europe. Due to rising fuel costs and more price sensitive vacationers, the demand for shorter cruises has continued to increase. As a result, southern Caribbean destinations have recorded the sharpest arrival decreases.

According to Smith Travel Research, average room occupancy in the Caribbean decreased by 1.9 percent in 2007. The average revenue per available hotel room (RevPAR) increased by 0.1 percent to approximately $121 in 2007. Hurricane season in the Caribbean officially lasts from June 1st to November 30th. Many travelers plan their trips to the Caribbean outside of the most active hurricane months. As a result, a significant portion of the region experiences a low season, between August and October, in which both occupancy and average daily rate are considerably lower than the rest of the year.

Tourist travel to the Caribbean is composed primarily of people from the United States, Canada, and Europe. In 2007 a larger proportion of visitors are coming from regions other than the United States.

Revenues

Rooms revenue represents 54.9 percent of the total revenue earned by our sample of Caribbean hotels. This is a slight increase from previous survey results indicating the recent strong increases in average daily rate. The unusually high revenue from Other Operated Departments, which is 13.2 percent of total revenue, reflects the extensive recreational and retail services offered at resorts in the Caribbean.

Please note that all-inclusive resorts were excluded from our Trends sample. Therefore, the revenue information presented in this report is derived from true guest expenditure data, not estimated allocations of an inclusive package price.

Expenses

The unique business environments of the Caribbean islands have an impact of the expense ratios of hotels operating in the region. Often the size of the island and availability of transportation will limit management’s ability to control operating expenses.

In most circumstances, there is an abundance of labor available on the larger islands. Hospitality is frequently the largest employer in each country. In addition, wage rates are typically lower than those paid to hotel workers in the United States. The favorable combination of available personnel, plus low wages, helps to lighten the expense ratio in those departments with high labor requirements, such as the rooms department. Rooms expense for all Caribbean properties continues to have less of an impact (21.8 percent) compared to U.S. resorts (25.2 percent).

Most Caribbean islands are small, under-developed, and typically lack a variety of natural resources. This limits the availability of the goods and services needed to operate the extensive, high-end, resorts that are pervasive in this region. The result is the need to import everything from food, to guest supplies, to spare parts for machinery. In turn, this inflates the operating expenses for the food and beverage, maintenance, and utilities departments.

With respect to undistributed operating expenses, utility expense has become a critical factor in maintaining profitability. With all Caribbean hotels reporting utility expenses of 7.3 percent, operators and owners must continue to invest in conservation.

At 0.9 percent of total revenue, property taxes and other municipal charges appear to be low relative to U.S. hotel operating averages. Two factors influence this low expense ratio. First, several resort developments receive government assistance in the form of reduced, or abated, property taxes. Second, some Caribbean nations thrive on hotel and sales taxes. This too will lower, or eliminate, local property taxes.

The 2008 Caribbean Trends in the Hotel Industry report contains 30 pages of information on the average property-level financial performance of resort hotels located throughout the Caribbean. In addition, the report contains commentary on current development trends in the region, as well as visitation data from a variety of sources. To purchase a copy of the report, please visit our webstore at www.pkfc.com/store.

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Scott Smith, MAI, is a Senior Vice President in the Atlanta office of PKF Consulting.