For hotels, revenue is the sprint, profit is the marathon
Usain Bolt is a sprinting legend. At 9.58 seconds, he holds the world record for the 100 meters, making him the fastest man to ever put on running shoes and earning him the well-deserved nickname. “Flash.”
The short time it takes to run 100 meters is vastly different from the longer time it takes to run a marathon. The 26.2-mile stretch is typically covered in just over two hours by champion distance runners.
In the hospitality industry, revenue is a sprint and profit is a marathon. For a runner like Bolt, all that matters is running fast: the revenue. So when the shot rings out, all he cares about is getting to the finish line as quickly as possible regardless of factors like fatigue. He doesn’t need to pace himself.
Conversely, a marathon runner must consider many variables: income and expenses. He or she can’t expend all of their energy from the gate because it’s a long race to the finish line. In this case, taking into account fatigue, injuries, when to run faster and when to calm down or when to take water are all considerations.
Unlike Bolt, hotels are a long-distance race, where profit is the ultimate goal. If revenue is the quick win, profit is what keeps a hotel in the winner’s circle for years to come.
In other words, income is like gasoline for a car; this is what powers the motor and allows it to move. But once it has entered the reservoir, there are other variables at play within the system itself. And at the end of the day, what comes out of the exhaust will dictate how long your car will stay in motion and in what condition.
The input is the income. The output is the profit. And the latter is what matters most. You can’t have profit without income, but how you manage that input dictates how much or how much you produce.
Hoteliers fuel the hotel engine through the sale of rooms, food and beverages, meeting spaces, spa services, and a host of other revenue-generating levers. Along with revenues, however, there are costs. Expense management is a lot like how someone drives a car: smooth, erratic, full throttle, or easy. The quality of a hotel’s management dictates the amount of profit that results. And in the end, it’s the hotel owners who hold the bag.
What a way to run
Hotel management companies are usually incentivized or compensated based on their ability to generate significant revenue. The only problem with this is that they sometimes lose sight of the big picture: profitability.
One of the smartest minds in hospitality made this point at a recent hospitality conference and it’s something he preaches on a regular basis. Tyler Morse is CEO of MCR Hotels, the fourth largest hotel owner/operator in the United States, with premier properties including the TWA Hotel at JFK. It is succinct, honest and clear: “Revenue is good, but profit is better. Not all revenue is created equal and this industry is all about revenue. But profit is what matters. Focus on profit, not income”, he said.
Morse is a proselytizer of profit and it’s a position that makes perfect sense: RevPAR doesn’t pay the rent.
For hotel owners, GOPPAR (gross operating profit per available room) is the metric that explains how revenue is converted into profit. It’s easy to calculate by taking the total revenue, subtracting the total departmental and unallocated expenses, then dividing by the total number of rooms available.
GOPPAR = Gross Operating Result (GOP) / Total Number of Rooms Available
Since GOPPAR considers all revenue sources and cost variables, it allows hoteliers to make smart decisions about running their business. It also helps explain when revenues fall in the face of rising costs or, conversely, rising revenues complemented by falling expenses. Additionally, you can use the GOPPAR Index to compare a hotel to its set of competitors, a crucial metric that provides insight into why a hotel is outperforming or underperforming its direct competitors. This understanding can enable a hotel to make critical changes to improve its operations.
Consider the United States, where February 2022 RevPAR was down 26% from February 2019, according to HotStats data. Meanwhile, GOPPAR over the same period was down 33%, evidence that costs were further eating away at P&L in that month.
Full-year data shows a different story, with RevPAR in 2021 increasing by 77.9% compared to 2020, while GOPPAR increased by 488%. 2020 has of course been a trying year for the hospitality industry, but the overall rise in GOPPAR could be a sign of better revenue combined with better cost control.
Like a racer or a car, hotels are a machine that must be constantly fueled and monitored. Income is part of it; profit is everything. For hoteliers, it’s all where the rubber hits the road.
HotStats provides monthly P&L benchmarking and market insight for the global hospitality industry, collecting detailed monthly financial data from over 8,500 hotels worldwide and over 100 different brands and independent hotels. HotStats provides over 550 different KPIs covering all operating revenue, payroll, expenses, cost of sales, and departmental and total hotel profitability.