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By Chuck Ross, Vice President, Smith Travel Research

As of June 30, 1997 there were more than 8,300 hotels containing over 900 thousand guestrooms in the Mid-Price
segment. That is, the actual or estimated average daily rate achieved by the operators falls in the middle 30
percent (40th to 69th percentile) of the rates in their respective markets. Approximately one of every four hotels in
the U.S. fits that definition. The relative importance of this group of properties is defined by the proportion of
total industry hotels, rooms available, demand and room revenue achieved by the segment in a given period (in
short, their market share). At December 31, 1991, the Mid-Price designation included 22.8 percent of the
properties and 24.8 percent of the available rooms in the U.S. At the end of the most recent 12-month period, the
share of hotels had climbed to over 25.1 percent, and that of rooms to nearly 26 percent. Although demand
generally kept pace, the portion of total industry room revenue attributable to this segment rose only slightly to
23.5 percent, less than the share of properties or rooms. Chart 1 shows the index of changes in market share in the past five years. In order to identify the reasons behind the variations in market share, we made a detailed analysis of the Mid-Price group including cross tabulations by Location, Size and Management (Chain - Affiliated / Independent). The results are shown in the accompanying Charts and Tables.

Market Share

Over 80 percent of Mid-Price hotels are located either in the Suburbs of major markets or on Highways (see Chart
2). Similarly (although not shown), 45.4 percent contain fewer than 75 rooms and another 36 percent are between
75 and 149 rooms in size. Only 31 percent are Independently owned and operated, a drop of 16 percent in the past
five years. Average room rates vary from less than $47 (under 75 room, Highway properties) to over $100 (large
Urban and Resort hotels) and current room occupancies range upward from 62 to 77 percent, so there are many
variables to consider when analyzing the Tables and Charts. The changes in market share of the cross-tabulated
Mid-Price hotels since 1991 are shown in Table 1. Some highlights of that comparison follow:

• Although the portion of rooms in Suburban properties rose only 6 percent, the share of demand increased by more than 9 percent, perhaps indicating a shift in customer preference.
• The share of demand in Highway locations dropped in spite of an increase in the portion of available rooms.
• Room demand in the smaller properties did not show the same increase in market share as the number of available rooms.
• A rather surprising change of 7.5 percent in market share of demand occurred in the group of Mid-Price hotels with over 500 rooms, although there was little growth in that group. Those hotels are located in very high-priced MSAs and resort destinations (Chicago, New York City, Las Vegas and Orlando, for example).

Performance Measures

In the twelve months ending June 30, 1997 room occupancy in Mid-Price hotels was 65.7 percent, down seven
tenths of one percent from the annual average change of the similar periods of the preceding five years. The

disparity between the growth in supply and demand in 1997 was 3.7 percent (supply) vs. 2.9 percent (demand)
compared with previous years when it was 1.5 and 3.1 percent respectively. The resulting rise in RevPAR was a
disappointing 5.8 percent vs. 6.2 percent nationally. Charts 3 and 4 show the comparison of the changes in
occupancy and RevPAR by Location, Size and Chain or Independent for the twelve months ended June 30,
1991-1996 and 1997. Some highlights of the analysis are:
 

• Growth in supply of Mid-Price hotels in Suburban and Highway locations exceeded changes in demand so that room occupancies in 1997 were below the averages of the past five years.
• Only in the large hotels in Urban and Resort locations was there any improvement in room occupancy compared with past trends.
• RevPAR changes in the current year in Chain-Affiliated, Mid-Price hotels with fewer than 150 rooms in Suburban and Highway locations were either below or only slightly better than the average annual increases of previous twelve month periods.

Operating Results

Using the techniques defined in a previous LODGING article (see Estimating Lodging Industry Financial
Results, September issue) we have estimated the Revenue, Expenses and Pre-Tax Income (Loss) for the Mid-Price
segment of the lodging industry. The relatively poor performance of various categories of Mid-Price hotels in the
first six months of 1997 is the bad news. The good news is: Mid-Price hotel operators generated an estimated
$17.2 billion in revenue from all sources in 1996, 23 percent of the total of the lodging industry, an increase of 6.5
percent in market share from 1991. Pre-Tax Income reached an estimated $2.7 billion vs. a Loss of over $50 million
five years previously. Since this group of hotels achieves 48 percent of its annual room revenue in the first six
months, the outlook for 1997 is an estimated total revenue of $18.5 billion, nearly 8 percent above the 1996 level.
Pre-Tax Income should rise to $2.9 to $3.1 billion, about 10 percent above last year.

In Table 2 we present a condensed statement of revenue, expenses and pre-tax income (loss) for the segment for
1996 and 1991 showing the estimated amounts per room and ratios to total revenue. Some highlights of the
comparison are:
 

• Room revenue increased to nearly 80 percent of the total largely due to a 17 percent rise in the average room rate and a 7 percent increase in occupancy.
• The portion of total revenue derived from Food & Beverage sources in 1996 was down 22 percent from 1991. This was primarily due to the sharp increase of 43 percent in the number of Limited-Service, Mid-Price properties compared with a rise of only 4 percent for Full-Service establishments in the five-year period.
• There was an absolute rise of $603 per room (11.2 percent) in total Payroll & Related Expenses; however, the proportion of the revenue dollar dropped. This was also at least partly due to the dominance of operations without food and beverage service, which could also account for the smaller portions, devoted to other undistributed expenses.
• The increased proportion of Chain-Affiliated properties in the Mid-Price segment is indicated by the higher amounts per room and ratios to revenue of Franchise and Management Fees.

Outlook

We expect Mid-Price occupancy for 1997 to range between 63 and 65 percent, down more than 1 percent from
1996. RevPAR is estimated to range from $44.00 to $45.00, up 6 percent compared with a year ago. A comparison
of expected ranges in those two performance measures for each of the segments of the group is shown in Table 3.
 

It is apparent from the table that only the larger, Independently operated properties in Urban and Resort locations
show any sign of improved performance from 1996. The continued disparity between the increases in supply and
demand in smaller, Chain-Affiliated, Mid-Price hotels in Suburban and Highway locations will most likely inhibit
improvement in most performance measures within this segment.