Hotel demand is high, rates are up, but what does it mean for the full spectrum of the profit-and-loss statement.
The global hospitality industry is still facing down operational headwinds, and Michael Grove, COO of HotStats, outlined those challenges during a panel session at the International Hospitality Investment Forum (IHIF) titled, “Decoding the Data.”
Grove’s presentation, which you can watch in full below, touched on myriad data points and honed in on four main issues impacting the hotel industry’s recovery from the depth of the pandemic:
- the labour challenge
- the return of corporate, group and conference travel
- the impact of inflation on cost lines and
- the energy crisis.
“One of the key items around the average rate growth is what’s going to happen when the full business mix returns,” Grove said. “We still have a lot more of the lower-rated business to come back—the tours and groups and the other segments. We need to look at the impact on the cost lines themselves, the expense items around the P&L and what impact inflation is having on those, what impact the labor challenge is having.”
Subsequent to Grove’s presentation was a panel conversation moderated by Ronit Copeland, CEO of Copeland Hospitality Partners. In it, she asked what the single most pressing issue facing hoteliers today is.
“The more fixed costs of the business being stripped out and replaced by oncoming growth in the variable areas changes the dynamic of the cost base,” Grove answered. “It makes them much more flexible and within a variable environment. That will assist the seasonal hotels in particular, to assist those regions where the low months are generally loss making. They will be able to adapt better because that fixed cost basis has reduced.”
Meanwhile, there is continued industry worry over the notion that corporate travel will never come back to where it was pre-COVID. “In a new world, where Zoom is now an option, it’s a reality, and there is some of that low-rated segment that could be displaced going forward. Certainly conferencing is susceptible to that,” Grove said.
The debate over the best metric to measure the industry was also eagerly debated. RevPAR, or revenue per available room, has long been the “go-to” data point to measure the health of the industry because it allows for an easy apples-to-apples comparison. What it doesn’t do is offer the complete operational picture: it only measures revenue generated from room sales, not total hotel revenue and, further, doesn’t take into account the costs hotels bear—from labour to utilities.
“It’s a historical thing,” Grove said of RevPAR. “But hotels are not simple anymore. They’re not bedroom blocks. Many hotels are less than 40% rooms business and are surviving on the other areas of the profitability model. “I think TRevPAR (total revenue) captures all of those various movements in creative revenue and management of allocations. It is much more of a combined metric and the industry is moving that direction.”
Beyond revenue is expense management—vital to ensure profitability. Amid the pandemic, much of the threads focused on the ability of a hotel—if it wasn’t closed altogether—to just be able to break even. Figuring out at what occupancy you can generate enough revenue and contain enough cost to potentially not make money, but not lose it either. Now, as travel makes a strong comeback, it’s about how to drive profit forward.
“We were talking about break-even during the pandemic. That’s where the incentive was, to be able to ensure profitability during that time,” Grove said. “Now, we should be looking at flow-through,” added, which is defined as the percentage of incremental profit that flows to the bottom line from each incremental dollar of top-line revenue when there is a revenue surplus relative to the budget or the previous year.
“It’s the key metric now. We were expecting around 70% to 80% based on how much we stripped the costs out and, actually, in Europe, we sat between 30% and 35% flow-through, right now. In the Middle East, they are up to 70% to 80%. They're certainly not being impacted by these cost lines, or they’re being managed in a different way than what we’re currently seeing here in Europe.”