For Hotels, Revenue is the Sprint, Profit is the Marathon
Usain Bolt is a sprint legend. At 9.58 seconds, he holds the world record in the 100 meters, making him the fastest human to ever put on running shoes and garnering the well-deserved nickname “Lightning Bolt.”
The short time it takes to go 100 meters differs vastly from the longer time it takes to run a marathon. The 26.2-mile stretch is typically completed in a little more than two hours by champion distance runners.
In the hotel 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 gun sounds, all he cares about is getting to the finish line as quickly as possible without any regard for things like fatigue. He doesn’t need to pace himself.
Conversely, a marathon runner has to account for many variables—revenue and expense. He or she can’t expend all their energy from the gate because it’s a long race to the finish line. Such the case, accounting for tiredness, injury, when to run faster and when to ease back or when to take water are all considerations.
Unlike Bolt, hotels are a long-distance run, 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.
Put another way, revenue is like gasoline for a car; it’s what feeds the engine and allows it to move. But after it goes into the tank, 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 stays moving and in what condition.
The input is revenue. The output is profit. And the latter is what matters most. You can’t have profit without revenue, but how you manage that input dictates how much or how little your output becomes.
Hoteliers feed the hotel engine through the sale of rooms, food and beverage, meeting space, spa services and a host of other revenue-generating levers. Along with revenue, however, are costs. Managing expenses are a lot like how someone drives a car: smoothly, erratically, full throttle or easy. How well a hotel is managed dictates the resulting amount of profit. And at the end of the day, it’s hotel owners who are left holding the bag.
Which Way to Run
Hotel management companies are typically incentivized or paid out on their ability to drive top-line revenue. The only problem with that is they sometimes lose sight of the bigger picture: profitability.
One of the smartest minds in the hotel business made this very point at a recent hotel conference and it’s something he preaches regularly. Tyler Morse is CEO of MCR Hotels, the fourth largest hotel owner/operator in the U.S., with blue-chip properties including the TWA Hotel at JFK. He’s succinct, honest and clear: “Revenue is nice, but profit is better. All revenue is not created equal and this industry is geared off revenue. But profits are what matters. Focus on profits, not revenue,” he said.
Morse is a profit proselytizer and it’s a stance that makes eminent 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 is easily calculated by taking total revenue, subtracting total departmental and undistributed expenses, then dividing by the total number of available rooms.
GOPPAR = Gross Operating Profit (GOP) / Total Available Number of Rooms
Since GOPPAR considers all revenue streams and cost variables, it allows hoteliers to make smart decisions about running their business. It also helps to explain when revenue dips against a rise in costs or, vice-versa, a rise in revenue complemented by a dip in expenses. Furthermore, you can use GOPPAR index to compare a hotel versus its comp set, a crucial measurement that gives guidance as to why a hotel is either outperforming or underperforming its direct competitors. That understanding can allow a hotel to make critical changes to improve business.
Consider the U.S., where February 2022 RevPAR was down 26% versus February 2019, according to HotStats data. Meanwhile, GOPPAR in that same time period was down 33%, evidence that costs were eating farther into the P&L in that month.
Full-year data shows a different story, whereby RevPAR in 2021 was up 77.9% versus 2020, while GOPPAR was up 488%. 2020 was, of course, a punishing year for the hotel industry, but the overall rise in GOPPAR could be indicative of better revenue mixed with better cost containment.
Like a runner or car, hotels are a machine that need to be constantly fed and monitored. Revenue is part of it; profit is the whole of it. For hotel owners, the whole is where the rubber hits the road.