Everyone has heard of RevPAR and its importance to the hotel industry, but is it still the preeminent measurement tool to assess financial performance of hotels?
Back to Basics – How Is RevPAR Calculated?
Revenue per available room, or RevPAR, is believed to be the most crucial ratio commonly used to measure the financial performance in the hospitality industry. The metric is a function of both room rates and occupancy. Indeed, it provides a useful snapshot of how well a company is filling its rooms and how much it is able to charge. There are two ways to calculate RevPAR; the first formula is:
Total Room Revenue in a Given Period, Net of Discounts, Sales Tax, and Meals
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# of Available Rooms in Same Period
Alternately, the same figure can be calculated as follows:
Average Daily Room Rate (ADR) x Occupancy Rate
It is worth highlighting the difference in computing ADR and RevPAR as hotel general managers adjust their RevPAR measure by placing some of their room inventory out of order so that RevPAR index increases. Few hotel chains have forbidden the use of “out of order” function unless authorization is given by head office to avoid a misleading figure of RevPAR; ADR is computed by taking your total gross room revenue and dividing it by the number of rooms occupied, while RevPAR is computed by taking your total gross room revenue and dividing it by your total available room nights (minus out of order rooms).
RevPAR identifies how a hotel is combining the two strategies of maximizing rooms sold and maximizing the average room rate in order to maximize total room revenue. If a hotel’s selling strategy focuses only on one of these measurements, it can miss significant opportunities to maximize total room revenue with the other measurement. RevPAR requires a hotel to be evaluated on its ability to manage and maximize both rate and occupancy measurements. Therefore, it is useful in that it provides market trends which can be used to extrapolate future performance. Moreover, it is used to compare the hotel performance to similar hotels in the same market. In addition to that, owners, outside investors, financial institutions, and management companies use this measurement tool as a benchmark to see which hotel management company (Four Seasons, Ritz Carlton, Hyatt, Starwood, Marriott, etc.) produces the highest RevPAR in a given market. This helps them to select which company they hire to manage their hotel.
The Pitfalls of An Over Reliance on RevPar
Despite the importance of RevPAR, demonstrated in the daily operations of hotels, in the competitive set (STR*) as a commonly used performance comparison information, in annual reports, in the preparation of annual operating budgets, and in forecasts discussions, the inherent pitfalls in this performance indicator make it a poor representation for the complex hospitality sector. Indeed, practitioners and academics have expressed the danger of an over reliance on RevPAR as it only measures total room revenue generation while it ignores revenues achieved in other areas of the hotel such as Food and Beverage outlets, in-room product and service sales, gift shops, the property’s operational costs, and other factors that may directly affect the profits shown on the hotel’s income statement. Thus, they advocated the new concept of GOPPAR / ProfPAR, which reflects the total underlying operating profit of a hotel.
*STR stands for Smith Travel Research. Hotels subscribed with STR share their performance data such as occupancy, ADR (average daily rate) and RevPAR. STR uses this data to develop indices for the above mentioned measures to compare subscribed hotels’ performance with their respective competitive set.
ProfPAR and GOPPAR Provide Clearer Picture
ProfPAR (profit per available room) or GOPPAR (gross operating profit per available room) provide a clearer picture of a hotel’s operating performance and bottom line that is not revealed in the RevPAR. GOPPAR aids hoteliers in analyzing the results of cost-saving measures, how well the operation is sustaining them over time even when the market conditions improve, and how these measures affect the outcomes of the property. Thus, GOPPAR is a more accurate indicator of an operation’s effectiveness.
From an ownership perspective, GOPPAR / ProfPAR account for sales growth and management competencies in controlling operating costs/expenses. It shows owners what the value of their asset is at any given time and allows them to make balanced decisions on renovations, capital spending, closures and others. Thus, GOPPAR / ProfPAR explain management’s capacity to make enough revenue and profit for owners to meet their ROI (return on investment). A hotel is really two assets in one; a real estate asset and an operating profitable business. Hence, GOPPAR / ProfPAR become a way to evaluate the true business performance of a hotel.
At the hotel level, GOPPAR / ProfPAR are crucial to many departments; revenue managers need to look at this figure to make better, smarter and more profitable decisions; executive housekeepers should know how their duties impact this figure; financial controller needs to know the trend of GOPPAR in order to give the best valuation on what makes or does not make the property valuable.
The ability of a business to last in time is closely linked to the results it pursues. Thus, in certain economic conditions, it appears to be crucial for managers and owners to look deeper into the numbers in order to identify a competitive edge over their competitors. Hence, the importance of looking at GOPPAR / ProfPAR as measurements of evaluating a hotel’s success cannot be ignored.
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