Seeking solutions to increase hotel profitabilityby Jonathan Humphries
How has the hotel industry been faring in terms of revenue and profit management in recent years and what should hoteliers be doing to tackle the challenges they’re facing, either from online travel agencies (OTAs) or rising wage and insurance costs?
Those are some of the questions we posed at a hotel ROI breakout session at the International Hotel Investment Forum (IHIF) in Berlin earlier this month, with the aim of drawing out solutions from the panelists taking part.
Recent trends show RevPAR (revenue per available room) has been on the rise despite terror attacks and the global financial crisis, while global gross operating profit performance has declined across many markets. Since 2000, according to data from HotStats, improvements in gross operating profit per available room (GOPPAR) across a significant sample of hotels in the UK, have dramatically lagged behind gains in TrevPAR (total revenue per available room).
Putting this into context, Jonathan Langston, co-founder of Hotstats, said this showed “how driven we are to focus on profit conversion as a key performance measure of the hotel industry. RevPAR tends to flatter to deceive because it doesn’t tend to take into account rises in OTA costs.”
“Looking forward I suppose where we don’t see much yield compression coming through to increase values, the only way to enhance value for owners and create more of an alignment between operators and owners is to extract more profit out of the business, to drive the bottom line, absent any yield compression and rising capital values.”
The reasons for the declining gross profits are many, ranging from the OTAs increasing their share of the business to wage increases, and ultimately a more complex and competitive operating landscape. In the lively session, we discussed what could be done to reverse the trend. The panelists identified the following possible solutions:
- Michael McCartan, Managing Director (EMEA) of Duetto, proposed creating customized pricing packages for every single guest, for every single stay. (“Undifferentiated discounts are not driving loyalty, they’re diluting revenue in my opinion. What hotels need to do is understand their guests better … [and offer] a price that’s unique to them.”)
- Max Luscher, Managing Director of B&B Hotels Germany, suggested selective outsourcing where service, quality and also costs could be maintained. (“We’re very reluctant to outsource … Partners let you down and quality is not where it needs to be.”)
- Jonathan Langston of HotStats recommended the use of benchmarking and key performance indicators (KPIs) to identify positive operating trends to communicate best practices for improvement. (“Where I think the industry has dropped the ball a bit … is to recognize that the data technology is there, the data exists. Open your minds to what exits and use it in proper benchmarking techniques as – dare I say – more sophisticated industries have [done] in order to improve your margins.”)
- Stephen Cassidy, Senior Vice President and Managing Director of Hilton Worldwide for the UK and Ireland, suggested creating centers of excellence, in areas such as revenue management, collaborating in offsite, shared locations. (“Attracting and retaining talent is critical. The point of differentiation with the OTAs and some of the other disruptors is that we’re a people business serving people. And therefore talent has to be at the front and center of everything we do in attracting and retaining it”).
- Ken McLaren, Executive Vice President, International Operations at Interstate Hotels and Resorts, proposed instilling a culture of owner profit-driven focus on the business with every operational employee. (“It’s all about expertise. I think if we’re going to counter some of these trends, some of these challenges in our margins and ROI, it’s all about expertise and where you focus that expertise.”]
- Carl Oldsberg, Vice President, International Operations with Choice Hotels, suggested that owners’ interests should be balanced through transparent distribution costs and the selective use of performance measures. (“I would hate to be an independent hotel today to have to manage distribution, technology and the loyalty program. There’s no way you can keep up with that environment.”)
- Overall there should be a focus on creating solutions to maximize profitability, therefore alignment with the interests of owners is absolutely key.
As an industry, it was agreed we need to stay relevant. Given the challenges we face today, we have two choices: 1) do nothing; or 2) do something different. If we do nothing, we will be unable to reverse the trends; however if we do something different, we have a chance to be more profitable, survive as an industry and of success.
Jonathan Humphries is a senior lecturer at École hôtelière de Lausanne (EHL) and is the chairman and owner of HoCoSo, a Swiss-based hospitality consulting company specializing in asset management and advisory services within the extended-stay hotel and serviced apartment sectors in Europe.