Hotel Benchmarking – it’s time to get serious about costs

RevPAR (revenue per available room), is the function of hotel room rate and occupancy and its uses range from the comparison of the hotel market in different cities to the terms of hotel performance tests in management agreements. Useful though it is, it only take account of revenues, and as hotel owners and their asset managers know, these only tell half the story.

Before we go on, let's consider the following; the majority of international hotels in this region are operated by major brands under management contracts that guarantee them (the operator) a good slice of total turnover, typically anything between 2% and 4%. This is only fair, these major brands have invested heavily in promoting their brands globally and establishing and enhancing powerful reservation systems that deliver high volumes of business. Having made this investment the operators are very keen to maintain their ‘brand integrity', something that involves, amongst other things, minimum standards of facilities, physical appearance and service at any hotel that bears their name. Unfortunately this drive to maintain these brand standards can lead to hotel management loading the business with unnecessary additional cost. I have participated in a business review meeting during which the GM explained to the owner that high payroll had been in anticipation of an internal brand audit visit, ‘but don't worry, once the hotel has passed the audit I'll get the payroll down' he promised. The fact that it was the owner's money he was spending seemed simply not to have occurred to the GM.

Most management agreements also offer the operator an incentive fee, calculated as a percentage of Gross Operating Profit (GOP), in addition to the revenue (base) fee, and it is this element of the agreement that is designed to keep the operator lean and mean when it comes to cost control - hence the term ‘incentive'. In reality many operators regard the incentive fee simply as a bonus if it materialises, and set their internal budgets on the basis of the much more secure base fee.

So we can see that maximising GOP may not always be the operator's priority. Most hotels have a competitive set that they benchmark their RevPAR against, which usually consists of four or five competitors that trade in similar market segments and within a similar average rate band.

As we shift the emphasis to cost lines the need to benchmark locally becomes less significant, and comparisons against hotels of a similar type, quality rating and size within the region becomes more instructive.  There are characteristics that are for example, common to conference hotels, or airport properties and these enable benchmarking of specific cost lines.

At Vision we receive some 130 hotel profit and loss statements each month, and, (without compromising the confidential nature of this data) this enables us to look at each cost line in the subject hotel's P&L, select a basket of hotels against which it can be benchmarked, and provide a ranking for the hotel over a specified trading period.

In the sample page from the Vision Internal Benchmarking Engine (VIBE) Room Direct Expenses are analysed. Line 1 looks at Agents commission. In absolute terms the subject hotel is US$4.6 below the group, or 4.5 %. These calculations are made on a per occupied room basis, where appropriate other measures such as per available room may be used. The group (sample) size is nine, and the hotel achieves a ranking of four within this group.

Every line of both departmental and undistributed expense within the P&L are analysed in this way, which clearly represents a mass of information. The good asset manager who is familiar with his hotel, will know the hot spots to look out for when sifting through this data and preparing for operator review meetings.

Sometimes hotel management feels threatened by this information; often their only access to cost benchmarking has been by comparison to sister brand properties. The best tactic, however, is for the asset manager to introduce this data as a tool to help the hotel management, rather than as a stick with which to beat it. By taking ownership of the issue, and accepting the challenge to improve, the operator can improve his incentive fee, and the owner is of course delighted to see that a number of small cost savings can add up to significant growth in his return.