Pinnacle Advisory Group


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Lasting Impact of the “Great Recession” on the Ultra Luxury Caribbean Hotel Market

Presented by:Gregory T. Bohan, ISHC
Managing Director – Pinnacle Advisory Group South Florida/Caribbean Practice
Adjunct Professor – Chaplin School of Hospitality and Tourism – Florida International University
Elizabeth Fournier, MS – Chaplin School of Hospitality and Tourism
Florida International University

This purpose of this article is to briefly analyze and discuss the impact of the global economic recession spanning the years 2007 to 2009 on the operations of ultra-luxury resorts in the Caribbean Basin. For purposes of this analysis, we sampled via questionnaire and/or interviewed selected representatives of ownership and management at a group of Caribbean resorts which we identified, based on our research, as being those with the likely highest average rate performance. We have, for purposes of this article, used the term “ultra-luxury” to describe these properties. Smith Travel Research (STR) supplied us with two Trend reports for our analysis – one comprising approximately 264 properties categorized as “Luxury Class” hotels in the Caribbean region and a second “Custom Trend” report for our chosen subset – comprising 29 of those properties. To lend perspective to the difference in strata, the chosen ultra luxury subset achieved an average daily rate of $648 in 2011, more than 80% higher than the $358 ADR reported for the overall STR Luxury Class set.

The impact of downturns in performance at all resorts is problematic to hosting area economies, but the impact of business slowdowns at this sub-set of ultra-luxury properties has, based on input received during our research, more direct implications. Many of the top-tier ultra-luxury resorts are located on islands with relatively small economies. In many cases, the economy of the hosting island is driven almost entirely by tourism and a drop in the fortunes of the major employers -the resorts – reverberates through the economy of the entire island. In many cases, ultra-luxury level resorts comprise a very large percentage of the resort inventory.

Scuttlebutt was abundant during and immediately after the Recession and before more historical data was available that the ultra-luxury resorts were LESS impacted during the recession than luxury resorts in general. The often presented rationale for this thinking was that the very wealthy clientele who frequent such resorts was less affected as far as their leisure travel plans by economic adversity than were clients of resorts with more modest pricing structure. To shed light on this issue, Occupancy, Average Daily Rate and RevPAR among STR’s “Luxury Class” sample is compared with the narrower sample we have defined as “ultra-luxury” for purposes of this analysis in the charts below:

As noted in the charts:

  • In terms of occupancy, the broader-based Luxury sample began its slide during the period 2006 into 2007 while the ultra-luxury properties peaked in 2007 and then began declining. Moving from 2007 to 2008 and onward, the occupancy progression pattern was very similar. Of note when examining the chart is the fact that the gap between occupancy levels reached at luxury properties and occupancy at ultra-luxury properties was quite wide in 2006 – 8 points. The gap narrowed to only 1 occupancy point in 2008 and 2009 before beginning to widen again. There is a 4-point gap in 2011 data.
  • Average daily rate progression was similar with the Luxury properties almost paralleling the Ultra-Luxury in terms of rate movement. Interesting, the margin between the two tiers stayed very similar with Ultra-luxuries remaining in a narrow band between 81% and 85% higher in rate than the Luxury segment in every year of the analysis.
  • Overall performance as measured by RevPAR also ran fairly parallel. The beginning of the business downturn from 2007 to 2008 can be seen clearly. Based on information provided during our interviews and the survey conducted, the brunt of the decline began to be felt in late 2008 subsequent to the collapse of Lehman Brothers in September, 2008.

In terms of future performance, the outlook is guardedly positive for the ultra-luxuries.

  • Based on information from our survey, more than 20% of the GMs surveyed/interviewed expect 2012 occupancy to increase by 1 to 3 points and an additional 30%+ expect an increase of between 4 and 6 points. While this is a positive trend for the ultra-luxuries, it is important to point out that 2012 occupancy, based on that prognostication, would still be well below the 2007 peak of 65%.
  • Increases in average daily rate are, in general, expected to be healthy. More than 40% of those interviewed said that they expect average daily rate to increase between 4% and 6% in 2012 with another 10%+ indicating that rate increases might be in the 7% to 10% range.

Based upon what we have discussed thus far, it is clear that the Ultra Luxury properties were not, in any significant way, immune to the difficulties presented by the Great Recession. In fact, their performance during the downturn paralleled, in many ways, the performance in the broader Luxury segment.

As for maintaining profitability during the downturn, the respondents to the survey shared some of the cost-savings measures they took in order to mitigate the dropping revenues:

  • One of the most common responses involved selective cuts in payroll of regular employees. There was reluctance to decrease payroll levels severely in that service levels must be maintained and consistent for the ultra-luxury guest. Some properties – primarily smaller ones – recruited temporary help (albeit quickly and heavily trained temporary help) as needed during peak season times such as Presidents week, Christmas week, Easter week etc. The limited selection of branded properties appears to have been able to take advantage of “sister” properties in order to borrow qualified staff.
  • Another measure taken by the management of the properties was to cut expenses in utilities. By mainland US standards, the cost of utilities in most island locations can, without hesitation, be described as “enormous”. In addition to standard utility costs, many of the ultra-luxury resorts must produce their own supply of potable water. Some of the strategies implemented at ultra-luxury properties include investment is solar panels which proved to be both a money saver and even a revenue generator in some cases; switch to low consumption lighting fixtures that included LED lighting for common areas and fluorescent lighting for guest rooms; and low water consumption plumbing fixtures in guest rooms and public areas.

Based on our interviews, operators of ultra-luxury properties seem guardedly optimistic that the current business recovery will continue. European travelers comprise a very large portion of visitors to the Caribbean at the ultra-luxury end of the market. With the concurrent reliance on European economic health, operators are anxious about the painful deleveraging and resulting economic contraction currently taking place in key demand-generating countries in the Euro Zone. However, there seems to be consensus that they ultra-luxury market in the Caribbean has survived the effects of the “Great Recession” and has emerged as a stronger contender than before in the global market to capture luxury travelers.

Since 1991, Pinnacle has provided advice and analysis on the full spectrum of hospitality properties: hotels, resorts, conference centers, timeshare and other residential resort facilities, golf courses, ski slopes, marinas, and such public assembly facilities as theme parks, arenas, convention centers and exhibition centers.