Gross operating profit per available room might be a more inclusive measurement of industry success, but sources say the availability and consistency of RevPAR make it the ultimate measuring stick.
REPORT FROM THE U.S.—As the hotel industry continues to recover from its deepest downturn in history, hoteliers and outsiders are looking for ways to measure just how successful the industry is today.
Data trackers often point to different metrics and compare those metrics to what they call “the peak,” or the period of time just before things went south.
One of the most common metrics used to measure industry success against those peaks is revenue per available room, or a hotel’s total guestroom revenue divided by the total number of available rooms at that property. Public hotel companies report RevPAR quarterly and analysts use the figure, among other data points, to evaluate company performance. RevPAR also is a common benchmark for yield management analysis and execution at the property level.
There is a growing belief, however, that RevPAR isn’t an accurate measure of industry-wide success and that, in fact, hotel profits are a better measure.
A recent report by TRI Hospitality Consulting suggests a rise in costs of generating rooms revenue means “RevPAR can be a misleading indicator of hotel efficiency.”
“Different constituent groups benefit from revenue over profit. However, an owner of a hotel may say, ‘I get my returns from profit levels,’” said Robert Mandelbaum, director of research information services for PKF Hospitality Research. “RevPAR is just rooms revenue, so it applies best to limited-service hotels. At a resort hotel, that could be less than half of your revenue.
“Obviously there is a cost to run these hotels,” Mandelbaum continued, “and it’s the profit that goes into the pockets of the owner and the owner has to use profits to pay their mortgage.”
Breaking down RevPAR
Increases in RevPAR can be driven by two factors: increases in a hotel’s occupancy or increases in a hotel’s average daily rate, said Jan Freitag, VP of global development for STR, which is parent company of HotelNewsNow.com and introduced RevPAR as a widespread measurement more than 25 years ago. Whether RevPAR is driven by occupancy or ADR depends on what part of a cycle the industry is in.
For example, he said, RevPAR gains immediately coming out of the most recent downturn were led by increases in demand, or occupancy. At that time, less revenue was being driven to hotels’ bottom lines because with increases in occupancy came increases in labor costs to take care of that influx of guests.
“Any additional dollar that comes from increases in occupancy only falls to the bottom line at about 30% because all of the costs associated with it,” Freitag said. “ADR increases fall more to the bottom line.”
“If your expenses are growing greater than your revenues, you’re losing your margin,” Mandelbaum added. “There needs to be an optimal mix, but in general you want RevPAR driven by ADR. That’s when the profit dollars really start to drive to the bottom line.”
Toward the end of 2011, occupancy growth tapered—almost flatlined—and hoteliers began taking advantage of high occupancies by utilizing pricing power. Increases in RevPAR continued, but today they are driven mostly by increases in rate. Freitag forecasted that ADR will drive RevPAR increases through 2016.
Freitag said there are alternative—perhaps even better—ways to measure success in the industry. Gross operating profit per available room, or GOPPAR, relates profit to capacity and, unlike RevPAR, takes into account that hotels make much of their profit from sources other than rooms, such as golf, spa and food and beverage.
But many hotel companies—particularly private ones—can be squirrelly about releasing profit numbers publicly. STR analyzes and releases aggregate profit numbers annually in its HOST Study.
“Should we do that more often? Maybe. But we’ve got resistance,” Freitag said. “Theoretically, GOPPAR would be a great data point to have.”
Count Asian-American Hotel Owners Association President Fred Schwartz in the camp that understands the importance of RevPAR as a measurement tool but looks to hotel profit as the be-all, end-all.
“There is a saying from way back when that you can’t take ADR to the bank,” he said. “A while ago we came up with a new metric, RevPAR, marrying occupancy and rate. But to a certain extent you still can’t take RevPAR to the bank because it’s the profit ball that can’t drop. As a hotel owner you‘re juggling many, many things—average rate, occupancy, payroll—the ball that can’t hit the ground is the profit ball.”
HHM continues to search for the right metrics to measure the company’s success, said Dustin Resnick, senior director of development and acquisitions. RevPAR is one tool, he said, but the company also looks closely at net operating income per room, which he said reflects top-line and bottom-line efficiency.
HHM also measures ADR flow-through, or how much increases in rate contribute to the bottom line.
“Probably better than RevPAR is market share—how we’re comparing to our competitors,” Resnick said.
One tool of many
However, the adoption of RevPAR as an industry-wide measurement has made it the optimal tool for comparison purposes because it’s consistent and most companies are willing to share it, said David Loeb, senior research analyst at R.W. Baird.
“Profit per room as a tool has many more variables and is harder to get,” he said. “In almost any industry that’s selling something, same-store sales are a very important metric. It tells you how many people are coming in the door.”
Loeb said the problems with GOPPAR and profit are that not all rooms are created the same.
“Sure, look at profit trends if you can get them,” he said, “but it’s just more complicated. STR revolutionized the industry by collecting RevPAR and disseminating it.”
“You want the measurement to be uniform and readily acceptable,” Freitag added.
Nick Lakha, president of Paramount Hospitality Management, said RevPAR is the industry’s ideal measuring stick.
“It’s the one constant we can all measure ourselves on,” he said. “There are so many variables when it comes to measuring profit, and at the end of the day not everyone uses the same measuring stick when they measure GOPPAR. My GOPPAR may vary from someone else’s.
“If I’m simply looking at how the industry is doing today over last year, RevPAR is the only accurate benchmark.”