The relationship between hotel RevPAR and gross operating profit per available room has shrunk with profit margins near peak levels.
BROOMFIELD, Colorado—Hotel profitability is the primary measure of success for hotel owners, managers and operators. However, revenue and top-line data continue to be the focus of the industry.
One major reason for this is the availability of revenue-per-available-room data, which is directly linked to the success of STR at aggregating rooms revenue data across a substantial portion of the industry. Alternatively, profitability data is much more difficult to amass because hotel ownership and management groups are much more fragmented than hotel brands. For example, the HOST P&L program collects profit-and-loss data from owners and operators for more than 9,000 hotels (1.9 million rooms) globally, the largest source for hotel P&L data. Of course, this is only a fragment of STAR participation, which collects rooms revenue for more than 70,000 hotels. (STR is the parent company of Hotel News Now.)
There is, however, a clear relationship between top-line performance (RevPAR) and overall profitability (gross operating profit per available room). For instance, each year when collecting HOST P&L data, we examine the relationship between revenue growth and profit growth in order to help validate the data. Generally, profit growth tends to be between 1.5 and 2.0 times the growth in revenue. So a 10% increase in revenues equates to a 15%-20% increase in profits (GOPPAR). Currently, with profit margins near peak levels and significant profit growth tough to come by, this ratio tends to be lower than in past years. If we look at individual hotel performance growth, the relationship is immediately apparent.
The trend lines in the charts above illustrate a multiple of 1.9 for U.S. full-service hotels, and 1.8 for limited-service hotels. In other words, a 10% increase in revenue would equate to a 19% increase in full-service house profits. Of course, this also means a 10% decrease in revenue would lead to a 19% decrease in house profit as well.
We can also examine this relationship by class. As shown below, the ratio for the upper-upscale class is greatest at 2.0. This likely has to do with a large percentage of revenue coming from the food-and-beverage department and other revenue sources for upper-upscale hotels, as well as the efficiencies of large banquet and catering departments.
In addition to looking at percentage growth, we can also examine absolute growth in dollars. The chart below illustrates increases in GOPPAR as a function of RevPAR growth. This is actually a much better model, since in the previous model low profit margins one year could lead to large increases in margins the next year. As a result, the correlation is much higher when looking at absolute RevPAR and GOPPAR growth.
The trend lines tell us that for every dollar increase in RevPAR, full-service hotels see an increase of $0.80 in GOPPAR. There is also a fixed element in this relationship. The constant tells us that for a static RevPAR, GOPPAR actually decreased $1.36 for full-service hotels in 2017. This demonstrates the rising levels of operational costs, particularly labor costs. Take for example, a 250-room, full-service hotel with a RevPAR of $150 and GOPPAR of $50. A $5 increase in RevPAR equates to a $2.64 increase in GOPPAR or an absolute profit increase of $240,900 for the year.
For limited-service hotels, the incremental profit increases were actually lower. Take a 100-room hotel with a RevPAR of $75 and GOPPAR of $35. A $3 increase in RevPAR would lead to a $1.20 increase in GOPPAR, or $43,800 more in profits for the year. Apologies for the math exercise, but this does show us with increasingly modest RevPAR growth and rising operational costs, incremental profits are much more difficult to generate than in past years.
In fact, the break-even point for GOPPAR growth for full-service hotels was a $1.70 increase in RevPAR. That represents 1.1% RevPAR growth in the full-service example. So then, anything below 1.1% RevPAR growth in 2017 actually led to a decrease in GOPPAR. For limited-service hotels, the break-even point was a $1.40 increase in RevPAR. This is a 1.9% increase in RevPAR for limited-service hotels, just to generate the same profits as last year. These break-even points could be even higher this year, as labor costs and other expenses continue to rise.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.