In the hotel industry, normality has been put on hold, requiring hoteliers and stakeholders to rethink how to move forward.
One example is budgeting season, which is quickly approaching. Zero-based budgeting, a method of budgeting in which all expenses must be justified and approved for each new period, is now fundamental. This involves addressing the variable and fixed cost lines to protect the bottom line.
Another is space optimization, which is gaining further relevance due to social distancing procedures and the like. How do we maximize the now-limited space in hotels? The issue is not necessarily being creative; hoteliers are normally well equipped in that arena.
The key lies with how data is used to assist in driving these processes. Revenue per available room (RevPAR) remains the driving indicator of hotel performance. But should it?
Share price, hotel management agreement performance tests, fee structures, operational reviews, bonuses and incentives: all of these are typically tied to revenue. As such, hoteliers have become very good at generating revenue derived from the sale of rooms, and operational discussions are dominated by that driving pursuit.
Within this is the focus on average daily rate (ADR). Consider this: If I had a pound for every time someone quoted the link between increased ADR and growth in profit, I’d be one very rich bloke. Stakeholders often point out that the increase in profit must have been ADR driven. This, however, is shortsighted and discounts the complexities of the entire hotel operation — from revenue to expense and down through to profit.
Outside Room Revenue
Maximizing the use of space is almost a science; it takes understanding how the different areas of the business are connected. Modeling purely off rooms-focused ADR and RevPAR is self-limiting. A more holistic view is available in the forms of total revenue per available room (TRevPAR) and total revenue per occupied room (TRevPOR).
Think of TRevPOR as your total hotel ADR. It does the same thing as ADR, but takes all revenue generation into account. It includes food and beverage (F&B) spend, car park, room service, dry cleaning and so on. It balances the output of your decision-making across the business. TRevPAR, then, is your total hotel version of RevPAR.
Now, the challenge is simple, but it is also complex. It’s not as simple as replacing focus on RevPAR and ADR with their total hotel equivalents. What is obvious, however, is the advantage of focusing attention and strategy setting on total business impact, while constantly fine-tuning to suit the business environment.
As hoteliers, most would rightly point out that we are strong in establishing service culture and driving hotel room revenue performance. We are not restaurateurs, spa and wellness experts, golf or tennis club professionals, conferencing and meeting planners or car park operators by trade. That said, hotels incorporate all of these areas, and to ignore their value is to lose sight of potentially lucrative revenue streams.
To this very point, for many hotels, driving performance in other areas of the hotel is how they drive room revenue. Conference centers, golf and spa resorts and well-established F&B operations drive rooms revenue performance, not necessarily the other way around.
For this reason, there is much more to the “occupancy or rate” strategy that we often revert back to. In some hotels, particularly in the economy segment, ADR will have a direct correlation to profit. However, TrevPOR is the enhanced version of ADR, capturing all revenue centers.
How Profit Is Driven
After spending a fair bit of time evaluating, discussing and challenging our recent break-even analysis, one point is clear: Profit is not driven by occupancy. It is also not driven by ADR. It is driven by three factors that we constantly refer to:
- TrevPOR: Does your strategy consider how you will balance the need to maximize the price of the guest room with the need to capture every penny throughout the customer’s journey?
- TrevPAR: Are you utilizing the space of the property to its maximum potential? Could that older, unused meeting room be converted into something that there is clear demand for?
- Cost base: Your business model will drive different levels of costs in both a variable and a fixed nature. This is a consideration in setting your strategy, but cutting costs does not always lead to better profit. More people serving beers during peak times will drive higher profit. (The hotel industry can’t wait until that is a problem to consider again.)
These three factors are part of the total equation that results in the one metric most important to hotel owners: gross operating profit (GOP). In the hotel industry, it’s profit — not revenue — that pays the bills. Remember: RevPAR doesn’t cover debt service or payroll.