Should your Primary Focus be Room Revenue in 2025?

As we move into 2025, hoteliers are faced with the question: is room revenue enough to sustain long-term profitability? With the landscape of hospitality rapidly evolving, diversifying revenue streams has become more important than ever. This article delves into the crucial role of non-room revenues and why a Total Revenue Management approach is vital for future success.

We studied reports from STR’s Total Revenue Management analysis and CBRE’s findings on the financial performance of hotel food and beverage offerings to bring you the insights for a successful 2025.

Understanding the relationship between revenue growth and profitability

In order to understand the impact of room and non-room revenues, we need first to understand the relationship between revenue growth and profitability. GOP (Gross Operating Profit) growth is consistently 1.5 to 2 times the growth rate of revenues, indicating stronger profitability potential.

Projected GOPPAR (Gross Operating Profit per available room) and EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) margins for 2024 and 2025 indicate positive growth, driven by a RevPAR increase of 4.7%.

The importance of non-room revenues

Given the strong correlation between revenue growth and profitability, focusing solely on room sales might be limiting.

In fact, non-room revenue accounts for 32% of total revenues, underscoring the importance of diversifying income sources. This trend is particularly pronounced in resorts and conventions, where nearly 50% of the revenue comes from outside the rooms.

F&B: A key revenue & profitability driver

The Food & Beverage (F&B) department is the biggest contributor to non-room revenues with over 80% contribution across all categories, making it critical to profitability.But at the same time, the F&B department accounts for the highest expenses, necessitating strategic cost control to protect margins.

In the past few years, there has been a rise in costs that can primarily be attributed to an increase in labor costs and a rise in food costs.

F&B performance analysis

F&B has long been seen as both an essential revenue stream and a key contributor to a hotel’s overall profitability. However, its dual role as a profit driver and a high-cost department often creates a delicate balancing act for hoteliers. The rising expenses in recent years have made this balance even more challenging.

According to a study by CBRE done with over 2,500 US full-service resorts and convention centers, between 2021 and 2022, F&B expenses saw a significant increase—82.3% to be precise, which was driven by an 85.9% increase in labor cost in the same period and a 73.5% increase in cost of goods sold. This growth in expenses far outpaced the average increase in expenses for other hotel departments, which stood at 63.5%. These rising costs placed immense pressure on F&B departments to maintain profitability.

Despite these financial challenges, the F&B department has shown remarkable resilience. Even with rising costs, the department was able to achieve a stunning 145.2% increase in profits during the same period. This performance can be attributed to enhanced operational efficiency and a strong focus on cost control measures. These efforts led to a notable improvement in profit margins—from 23.6% in 2021 to 29.3% in 2022.

According to the STR study, by April 2024, though worldwide,  F&B profit margins saw a decline in 2023, they have started to return in recent months, crossing 30% in April 2024. This showcases a positive outlook for 2025.

The surprise elements

Miscellaneous income comes out to be the surprise element in the non-room revenue category. It has shown substantial growth, with resort and cancellation fees becoming key revenue streams, seeing growth of 175.3% and 89.2% in 2024 compared to 2019.

Additionally, profit margins from amenities like golf and spa services have remained robust, averaging between 30-40% from January 2023 to June 2024—significantly higher than the pre-COVID average of around 22% in 2019.

Hotels can capitalize on these growing trends by enhancing their amenity offerings and clearly communicating fee policies to guests, ensuring alignment with the overall customer experience. This not only boosts revenue but also improves guest satisfaction.

Conclusion

In conclusion, as we look ahead to 2025, it's clear that while room revenue remains a vital component of overall profitability, diversifying revenue streams is essential for sustained financial health in the hospitality industry. The strong correlation between revenue growth and profitability, particularly through the lens of GOP, highlights the importance of not solely relying on room sales. 

Non-room revenues, especially from F&B, have proven to be significant contributors, underscoring their role in enhancing financial performance. With strategic cost management and a focus on optimizing these diverse income sources, hotels can better navigate the evolving market landscape. Embracing a holistic approach of total revenue management will not only bolster profitability but also ensure resilience against potential economic fluctuations, setting the stage for a successful year ahead.