Hotel operators need to learn to manage the entire building they operate and start thinking of performance in terms of the total revenue or profit per available square meter, giving a more accurate assessment of the property’s success.
This is the conclusion of a new report from global hotel consultancy HVS, which considers the limitations of various hotel performance indices used in the hotel sector as a benchmark for hotel investment, property valuations, and for analysing operating success.
The most widely used performance index is Rooms Revenue per Available Room [RevPAR] which, HVS says, can be a useful measurement but does not take into account those hotels that have substantial non-rooms revenue-generating departments such as food and beverage and conference operations and also can’t be used to compare hotel performance against the performance of other types of real estate.
“A higher RevPAR does not always indicate an overall healthier financial performance if a hotel has other main sources of revenue, in which case it may well only account for perhaps half of the hotel’s revenue,” commented report co-author Christopher Boyd, senior associate at HVS.
“A further pitfall of solely measuring RevPAR is that this metric tends to penalise larger hotels as a smaller hotel is naturally more likely to achieve higher occupancy levels. In many cases, owing to economies of scale and incremental revenues a larger hotel may well have a healthier financial performance than a smaller hotel with a higher RevPAR,” added Boyd.
In the report, HVS evaluates the value of other indices including GOPPAR [Gross Operating Profit Per Available Room], TRevPAR [Total Revenue Per Available Room] as well as the more useful RevPAM and GOPPAM, which both consider the hotel’s total revenue or profit per available square meter.
“GOPPAM enables hotel owners to compare their hotel’s performance with that of other real estate classes such as offices, residential and retail. This is an essential step towards identifying dead or underperforming space and areas of the building with true potential for value creation,” concluded report co-author Russell Kett, chairman of HVS London.
“Effective and modern revenue managers must expand their focus from just the hotel’s rooms and put greater emphasis on measuring the entire property’s utilisation efficiency – including creating other uses for spaces that aren’t driving significant revenue. It’s time for hoteliers, rather than boasting about Annual Daily Rates [ADR] to focus on revenue generation and the profitability of the whole hotel.”