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David Lund: RevPAR versus GOPPAR
What’s important and what people are talking about for metrics is always changing — albeit slowly, says hotel financial coach David Lund. For the longest time RevPAR has been the king, but it might be time for the king to move on…
By David Lund
I have been around awhile and it’s not like I’m ancient or anything, but I have seen some BIG changes in how we as an industry look at numbers and what numbers we focus on. What’s important and what people are talking about for metrics is always changing — albeit slowly. Inside the current look is the driver for how we operate. For the longest time RevPAR has been the king. However, it was not always that way and I think it’s time for the king to move on.
I can remember when we didn’t even use RevPAR; it was only occupancy and rate. Long gone are those days. I can also remember when we didn’t have anything more complex than seasonal rates to play with. I can also remember the introduction of a weekend rate in one of my hotels. My, how things have changed.
As soon as our industry discovered revenue management the quest for a higher revenue per available room has been the battle cry. Rightfully so, as we have enjoyed a prolonged period of top line room revenue growth at over 100 straight months according to STR.
Some of the reasons that have contributed to this winning streak:
— Relentless use and growth of OTA’s
— Economic recovery following the 2008⁄09 recession
— Increased use of sophisticated revenue management tools
— Ownership’s intense involvement and business focus
Now things are changing yet again. Just this year in America we have hit an industry record occupancy of 66 per cent. Never before have we accomplished this on an annual basis. Coupled with this record occupancy we are still inking out modest gains in room rates, producing the gold we seek which is an increased RevPAR. But hold the phone on this one because for the first time in almost a decade we’re seeing operating profit falling at the same time. Reported this summer in several markets as well as a full nationwide month, we are seeing growing costs outstrip revenue growth.
From my recollection, this is a different set of business circumstances than we have ever seen in the past. Prior hotel profit meltdowns have been consistently predicated by a loss of occupancy or rate and usual both at the same time, created by a broader economic set of negative circumstances. We have not seen data from the past (that I can find) that supports an erosion of operating profit with a continued growing top line. What this means to me is we are heading for what could be described as the perfect storm.
Here is a recipe for that perfect storm: a 1, 2, 3 punch.
One, we now have the need for continued profit growth like never before with more institutional owners focused on one thing, and one thing only, continued uninterrupted constantly increasing profits. Gone are the days for most of us where we were in it for great guest service and the long haul.
Two, labor costs that are increasing in many markets by what we used to enjoy with RevPAR — double digits. Minimum wage increases that have taken place and are promised at the state and municipal levels. These have a profound effect on hotels where many jobs are at or close to minimum wage.
Three, a lack of operational elasticity when it comes to managing costs. Hotels are largely unable to react due to a high proportion of fixed costs and the inability to react positively to a downward, flat or even modest improvement in top line.
Back to the new champ we need. GOPPAR is a very different number than RevPAR. As we know, you can’t take increased RevPAR to the bank. You can take GOPPAR most of the way to the bank and as hotel managers this is what we ultimately get paid to produce. Gone are the days of high single and even double digit RevPAR growth. Now we need to figure out how to drive increased operational profits on small, flat or even declining revenue streams with increased per hour labor costs.
First the definition of GOPPAR – From Wikipedia
GOPPAR is the abbreviation for gross operating profit per available room, a key performance indicator for the hotel industry.
It gives greater insight in the actual performance of a hotel than the most commonly used RevPAR as it not only considers revenues generated, but also factors in operational costs related with such revenues.
GOPPAR is the total revenue of the hotel less expenses incurred earning that revenue, divided by the available rooms.
GOPPAR does not take into consideration the revenue mix of the hotel, so while it does not allow an accurate evaluation of the room revenue generated it demonstrates the profitability and value of the property as a whole.
To better and more consistently deliver profit at different revenue points, hotels need to deploy and support tools to assist their leaders in delivering superior financial results. They need to educate their managers to not only be able to look after their guests and colleagues, but also to teach them to be on top of their numbers.
Here is the short list of four must-haves at your disposal going forward inside your hotel’s financially engaged leadership team if you want to be out in front of that storm that’s coming.
Each department needs their own plan. Each department manager must be the master of their expenses and payroll. To accomplish this, they must be producing their own monthly financial forecasts with detailed line by line data for all expenses and payroll.
Payroll pans need to be supported by staffing guides based on approved formulas for variable payroll and a sharp eye to fixed positions. Gone are the days of staffing heavy to ensure we can handle the customer volume. It’s about right sizing and making sure we don’t waste resources. For some managers this is next to impossible due to their past bad habits. Creating and sticking to productivity targets vis-à-vis the schedule on a daily and weekly basis is the key to controlling the payroll cost. I also know what you’re going to say here and that’s you telling me about your wiz bang payroll planning software. News flash – they don’t work unless they are productivity based! See my article on creating your own productivity tools and request my rooms and F&B productivity sheets.
Expenses need to be zero based. Operating on a cost per room occupied target is completely ineffective when it comes to controlling or trying to reduce expenses. If we don’t have the nauseating detail of each line item for our expenses we’re sunk. This in the modus operandi for almost every hotel. Don’t believe me, ask your hotel manager or the director of finance for the “detailed list of the rooms guest supplies account.” I guarantee that 19 times out of 20 you will get “we use a cost per room occupied target” which is the code for we don’t know what’s in the middle of our statement.
An effective example I teach in my workshops goes like this. I give you $200 for groceries and I send you to the store. Sure enough, you come back with lots of stuff worth $200 but what did we actually need? And how many? What I want and what you need is to send you to the store armed with a complete list of items, quantities and prices to ensure you spend your money wisely. Now comes the pivot and this is what we train for. This month things are tight and I don’t have $200 anymore. I have $170 to spend. Now the rubber hits the road and with your list you have a good shot at getting what is essential and curtailing where necessary to manage the flow. Without your list in the first place you’re up a creek. You cannot manage your expenses properly without a zero-based budget and monthly detailed forecast.
The last tip is to make the numbers as important to your leaders as the guests and the colleagues. What I mean by this is treat them with the proper respect and do not make the numbers or their messenger the villain that will blow up in your face every time. Make the numbers fair and equitable and train your leaders on a system to manage their departmental picture. Teach them that the numbers are just the way we keep score and the numbers are just another part of our business.
These strategies will help you manage the GOPPAR because absolutely everything counts and without a system and a plan to manage the profits, you’re lost and at that point just about any road will take you where you want to go.
David Lund is a hospitality financial leadership pioneer who has branded himself “The Hotel Financial Coach.” His background includes over 30 years as a Regional Controller, Corporate Financial Director, Hotel Manager and Controller throughout North America at multiple locations. Contact him at firstname.lastname@example.org