“Eschew obfuscation, espouse elucidation” is a humorous fumble rule used by English teachers and professors when lecturing about proper writing techniques.
The press release by the MD of a hotel built during the colonial era informs of increased occupancy and revenues in the nine months ended 31 December 2013.
Statistically, total arrivals to Sri Lanka in 2013 were up 26 percent over that of 2012 and undoubtedly this hotel has benefited from this upward trend. Reading guest comments on TripAdvisor about this particular hotel, 7 of 14 very recent comments were unflattering with headlines such as, “Great location, nice rooms, horrible meal service”, “Grand old hotel but disappointing”, “Rank average but truly pretentious”, “Losing its charm”, “Great service but rooms have seen better times”, “Nice exterior and lobby, poor service and room”.
So, when the MD goes on to state that the increases were due to higher yields on improved products, quality of food and service to guests – I am left wondering. Not stopping there, the release also quotes him as follows ‘Our hotel has outperformed many hotels in the region and in the country’. He could be right and the hotel may very well be making good profits but, in the absence of any validation to support this claim, it makes for arcane reading.
As Hotel management organisations formulate strategies and programmes regarding existing and future hotel facilities, services, and positioning, a question that arises is: What actually drives a hotel’s profitability? Should an owner be building a hotel that will command a huge average daily rate (ADR), or is a hotel that fills ups every night that will have the highest net income levels? Though the profitability goal of hotels is abundantly clear, there exists a significant level of ‘noise’ in the hotel industry regarding the actual relationship between hotel revenue indicators including occupancy percentage and average daily rate.
Average Daily Rate (ADR) and Occupancy percentage
Recently, at a well-attended evening social gathering, I overheard several hotel managers exchanging information on the ADR’s each of their hotels were achieving. Almost all of them had this smug glow of self-congratulation and appeared to be in a very buoyant mood.
The ADR figures they mentioned had nothing to do with Alternative Dispute Resolution, which in the world of law refers to any means of settling disputes outside of the courtroom. For those in the hotel industry, the term ADR is known as the Average Daily Rate. Calculating one’s ADR helps hotels see where they stand in the marketing field. It also indicates in a simplistic manner their place in comparison to competition. The Average daily rate (ADR) is calculated by dividing the total revenue from room sales by the total number of rooms sold. Let us imagine a hotel with 70 rooms which sold 50 rooms last night and earned room revenue of $ 4,150/.It’s ADR is 4,150 / 50 = $ 83/- and its occupancy percentage for rooms sold last night is 50 / 70 x 100 = 71 percent.
Predominantly, and especially in Sri Lanka, most managers still think that ADR is the best tool to measure the hotels performance because it shows whether a property is earning enough money for each room – but again, a high ADR is only good if the hotel rooms aren’t sitting empty. Some managers even superficially judge their efforts solely by the percentage of room occupancy that has been achieved, because it shows how full the hotel is on any given night. But, looking at occupancy in isolation ignores the price paid and the revenue earned on each room, which are obviously also important factors in pricing.
It is worthwhile to remember that ADR or PO% (Paid Occupancy percentage) alone is far from adequate proof to measure any hotel’s efficiency. To illustrate this, let us return to our imaginary hotel which achieved $ 83/- ADR at an Occupancy (PO) of 71 percent. A similar hotel close by may have achieved 66 percent PO at an ADR of $ 96/-. It is not difficult to judge which hotel is in an enviable position. However, Occupancy can play a pivotal rate during low or off-peak seasons. During such periods occupancy could be the larger contributor to a hotel’s bottom line than ADR - where all other factors been equal, hotels with higher occupancies (i.e. ‘heads in beds’) may in fact trade Some ADR, for greater efficiencies, allowing them to be more profitable.
Revenue Per available Room (RevPar)
If ADR and Occupancy percentage is considered inadequate to evaluate the efficiency of the hotel management in selling rooms, what is it that reasonably indicates efficiency in a qualitative perspective? Knowledgeable hoteliers rely on a combination of ADR plus Occupancy as a reasonably better index to measure the efficiency and success of the management insofar as room sales are concerned.
This combination is called RevPAR (Revenue Per Available Room). RevPAR is the total guest room revenue divided by the total number of available rooms. Let us understand this concept by our imaginary hotel which we had discussed earlier. Earning $ 4,150/- last night, from the sale of 50 rooms (out of a total 70 rooms), its revenue per available room (RevPAR) is 4,150 / 70 = $ 59/-. RevPAR differs from ADR because it provides a convenient snapshot of how well a hotel is filling its rooms, as well as how much it is able to charge. ADR on the other hand shows only the average rate of rooms actually sold and unlike RevPAR, it is unaffected by the amount of unoccupied available rooms.
It should be noted that RevPAR, by definition, is calculated on a per-room basis. Therefore, one hotel can have a higher RevPAR than another, but still have lower total revenues if the second hotel manages to sell more rooms. As I mentioned earlier, savvy hotel operators opine that RevPAR (Revenue Per Available Room) is the way to go, because not only is it one of the most important gauges of health among hotel operators - it is also something that you can actually take to the bank.
Revenue Generated Index (RGI)
RevPAR which has been the traditional benchmark to monitor a hotel’s performance is now been challenged by the emergence of the Revenue Generated Index (RGI). An Hotelier Middle East GM Survey carried out last year revealed that General Managers increasingly prefer to judge their hotel’s performance on RGI (Revenue Generated Index).
The survey had 34.5 percent of GM participants declaring that they prefer to have their hotel’s performance assessed by RGI, compared to the 31 percent of hoteliers who rely on RevPAR.
Commenting on this year’s survey results, Kempinski Hotel & Residences Palm Jumeirah general manager Alessandro Redaelli said: “A few years ago RevPAR was the new key performance indicator for the industry because it allowed us to combine occupancy and ADR to create a more impartial performance indicator. Using RGI seems to bring this a step further to the next level, with hotels able to compare themselves against a determined group of hotels with common characteristics.”
Explaining his own preference to RGI, Radisson Blu Hotel, and Dubai Media City general manager Francois Galoisy said: “In a dynamic environment like the Middle East and especially Dubai, forecasting growth is a real challenge. For example, if you reached budget RevPAR of 10 percent Year-on-Year growth, but in the same period your competition increased by 12 percent, your hotel growth is slower that the rest. Your RGI index decreases and indicates that you have missed opportunity on occupancy market share or on rates.”
Optimising room revenue generation index (RGI) – the relative share of the market for room revenue that the subject hotel enjoys compared to its competitive set - is a good way to maximise profitability. RGI for the moment appears to be hugely favoured by International Chain hotels where most of the branded operators demonstrate an obsessive regard for RGI. There is however some risks involved in banking too heavily upon RGI which relies on comparing hotel performance against a set of other hotels of similar standards located in the same city or in other major cities in the country or region. As Hotel consultant Ian Green explains, “Assume that there may well be significantly high demand accommodated in hotels that are reluctant to share this information or contribute to such surveys. Even hotels that are in different price categories, situated in different locations need to be considered and not treated as ‘invisible’.
There is a real risk that focusing on beating a very small number of directly competing branded hotels obscures the prize that exists from competing against some or all of these invisible hotels. One of the ‘known unknowns’ in any business decision is the competitor reaction. If you increase a price, will they increase theirs, decrease theirs or leave theirs alone? One really can’t predict the reaction, but we do know for sure that the competitor will react. As a tool, RGI is potentially very powerful – but, as with any tool, it’s the way the tool is used that separates the craftsman from the apprentice”.
Metrics matter but making money matters most
At the end of the day though, metrics only matter so much. Yes, metrics are an important part of the revenue management process. Yes, we need metrics to be able to evaluate whether one initiative, promotion or sales channel sells more rooms than others. And of course, we need metrics to prove to the management team that we are being effective. The harsh reality is this though: at the end of the day, if you’re not making money, metrics are never going to make up for that fact.
(Shafeek Wahab has an extensive background in Hospitality Management spanning over 30 years. He has held key managerial responsibilities in internationally renowned hotel chains, both locally and abroad, including his last held position as Head of Branding for a leading Hotel Group in Sri Lanka. Now focusing on corporate education, training, consulting and coaching he can be contacted on email@example.com. Website: www.in2ition.biz)