Skift Take

Every commentary on hotel performance refers to revenue per available room as a key industry metric — RevPAR. Yet non-room revenue from cafes, co-working, spas, and events is growing in importance. Hoteliers should focus more on overall earnings per square meter.

Series: Early Check-In

Early Check-In

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Hotel investors want more reliable performance metrics. Hotel companies already offer a few performance measures — and the most popular is revenue per available room — so called RevPAR.

There’s a good reason to add others to the list, says HVS, a global specialist hotel valuation, consulting, asset management, and brokerage firm.

  • HVS isn’t saying we should outright reject revenue per available room.
  • It’s saying the metric shouldn’t take precedence over others that may better capture a hotel’s profitability.
  • “Hotel operators need to learn to manage the entire building they operate and speak the language of commercial real estate investors, who typically measure performance as an amount per square meter,” said Russell Kett, chairman of the London office of HVS. “And everyone needs to care about profitability.”

Revenue per available room is useful for its simplicity.

  • You calculate it by multiplying a property’s average daily room rate by its occupancy rate, two figures that are hard to fudge.
  • Or you calculate it by dividing total room revenue by the number of rooms available in the period.
  • Its simplicity enables comparability with different types of properties worldwide for owners, franchisees, asset management firms, and investment bank analysts.

Yet the biggest opportunity in hospitality is thinking beyond putting heads in beds. A hotel company isn’t a rooms factory. Non-room revenue matters, too.

  • As Skift glossed in 2018, the hotel of the future is everything to everyone as travel upselling gets smarter through better tech with access to data unified across a property or portfolio.
  • The pandemic amped up experiments in “hybrid hospitality.”
  • “Your average traveler is not necessarily just going to a hotel for an overnight sleep,” said Christopher Boyd, a senior associate at HVS. “They’re often looking at additional services, whether wellness or coworking, as examples.”
  • I would cite here the somewhat extreme example of The Social Hub (TSH). Its flagship property in Amsterdam offers student housing, flex-desk space, offices, event space, fitness and wellness offerings (including an Olympic-size lap pool), and a restaurant.
  • Pricing at The Social Hub varies in response to supply and demand. In the winter, it rents rooms to students. In the summer, it offers those rooms hotel-style to leisure travelers.
  • In another example, Selina runs the Remote Year program, letting digital nomads use its properties as temporary homes and offices.
  • Larger hotel companies also see the value of ancillary sales, such as renting access to co-working space.
  • Accor aims with its Ennismore joint venture to embed restaurants, bars, and cafes in hotels that appeal to locals, not just out-of-towners. In many places, hotels could add flexible working spaces with amenities encouraging impromptu remote working. They can either charge for space or upsell customers with food and beverage.

As a starting point, divide earnings by the size of your space.

One metric to consider is revenue per available square meter. It accounts for the building as a whole, including event space, wellness facilities, co-working areas, and restaurants.

  • “Say you’ve got a hotel that’s X number of square feet,” Kett said. “You want to know if we’re producing a good enough return on our investment by what you’re using it for.”
  • “If we all used a measure of overall earnings per square meter, people would at least be able to focus on whether their hotel is doing better than average or worse than average and figure out what needs improving,” Kett said.
  • “If I could only move the industry to adopt one new metric, it would be revenue per available square meter,” Kett said. “Because every hotel has square meters and every hotel has revenue.”
  • “Let’s say your operator is saying to you, ‘Mr. or Ms. Owner, we need to remodel this restaurant to improve our earnings,'” Kitt said. “You say, okay, it’s been five years since we re-did this restaurant, and, yeah, fashion changes. Therefore let’s estimate a return on investment. That’s one way of judging the feasibility.”
  • “But if you also looked at earnings per square meter, you could perhaps reach a different decision about where to go with that space,” Kitt said. “The new metric will make you more aware of alternate uses of that facility that might be more profitable.”

HVS’s other problem with revenue per available room is that the metric often doesn’t correlate well with a hotel’s valuation or profitability.

  • One of HVS’s preferred metrics is total gross operating profit per available room, or GOPPAR. You take total revenue and subtract overhead.
  • HVS London ran the numbers. It estimated that GOPPAR has a direct correlation of between 85 percent and 90 percent with the income capitalization value of a hotel property, while RevPAR correlated with only about 70 percent to 75 percent. 
  • “GOPAR isn’t on everybody’s lips because it’s not very catchy,” Kett conceded.
  • Investors, owners, and analysts usually choose performance metrics from what’s easiest to quantify and track — and keep in mind. But the most important stuff shouldn’t get left aside.

So far, so sensible. But I get nervous about some of the details.

  • Do you use gross or net internal area when measuring square footage?
  • Everyone will have to pick the same way to calculate, Boyd said.
  • In the end, there will never be a perfect measurement.
  • “Anything that can be measured and rewarded will be gamed,” wrote Jerry Muller wrote in his book “The Tyranny of Metrics.”
  • That said, profits are hard to game, and HVS makes a plausible case that the hotel sector should adopt some standardized earnings per internal square meter type measure.

A halfway compromise is to adopt total revenue per available room, or TRevPAR, which includes net revenue from all operating activities. A handful of hoteliers have begun to champion this.

  • Kett pointed out that commercial real estate has successfully used earnings-per-square-meter-based metrics for decades. So standardization of definitions is possible.
  • He also notes that every hotelier didn’t just magically agree one day to use revenue per available room. It took time for the metric to become popular.
  • Perhaps a couple of respected and charismatic industry leaders might push the industry forward by championing new metrics.

Need more nerdy detail? Earlier this month, HVS’s Kett and Boyd made their case, here.

What’s your view? I always read tips and feedback. Contact me at [email protected] or through my LinkedIn profile.

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Tags: ancillary revenue, Early Check-In, future of lodging, key performance indicators, performance indicators, revenue management, revenue strategy, revpar, Skift Pro Columns

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