The Case for TRevPAR over RevPAR, with Adam Mogelonsky

Episode Transcript

Adam: This one is from Winston Churchill. He said about democracy. “Democracy is the worst form of government, except for all the others that have been tried”. Similarly, you could say TRevPAR is the worst form of calculating a hotel’s top line performance, except for all the others that have been used. So TRevPAR isn’t perfect, but it is better than straight RevPAR in a lot of situations and it can be used alongside occupancy and ADR and other key benchmarks to tell you the overall picture of growth and to decide what to do next.

Robin: Welcome to the Innovative Hotelier podcast by Hotels magazine with weekly thought provoking discussions with the world’s leading hotel and hospitality innovators. Welcome to the Innovative Hotelier Podcast brought to you by Hotels magazine. I’m your host, Robin Trimingham.

Robin: Until 2020. Both hotel owners and operators just about all viewed RevPAR as the most reliable indicator of a hotel’s financial health. But as the recent events have shown us, it’s no longer expedient to put all of your eggs in one basket as a means of generating revenue. Nor does it make sense to analyse revenue separately from operational costs in a world of rapid inflation and wildly fluctuating material and labour costs. This outdated thinking is being replaced by a more holistic indicator known as TRevPAR, which is calculated by dividing the total net revenue of a property by the total number of available rooms. And it’s my pleasure to welcome back Adam Mogelonsky, the noted hotel consultant who’s going to discuss why you should never talk about RevPAR ever again and why not factoring in operational costs and over-focusing on room revenue is a recipe for disaster. Join me now for my conversation with Adam.

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Robin: Welcome back Adam, it’s great to chat with you again.

Adam: Yeah, great to be here.

Robin: Well, a lot’s happened since you and I first chatted, and I think we have a great topic for everybody today because we’re going to be talking about the end of Rev Par and the better replacement of it with something else. To start us off here, though. Historically, how did we wind up where we are? I mean, RevPAR really only calculates revenue flowing into a property from a single product line, usually room revenue, but it doesn’t really consider the cost of operations. How did we decide that this was the be all and end all metric in the first place?

Adam: In a word, finance. Without financing hotels are a great idea. With finance, hotels become a business. So with anything financial, you need to have benchmarks in order to evaluate loans and any other nice fancy financial services term that you’d have associated with that. And when we’re talking about hotels, we’re talking about asking for a loan that could be seven or eight figures. So we’re not exactly dealing with just a local audience. We’re dealing with international investors, international bankers. We have to draw from a global crowd. Therefore, we need universal benchmarks. And Rev is a great universal benchmark because then you can draw up a per key amount that you need or a per room amount that can then be totaled into a number that people can compare and utilize with cap rates and other financial real estate benchmarks to just get the ball rolling and make it in a nice, neat package for people to understand and do a lot of other stress testing debt service coverages or any sort of cap raise their loan against. It’s it really is a universal metric that we need to have and still need to have to keep the money flowing.

Robin: Yeah, I love your point that it’s a universal metric because of course from a financer’s point of view, it makes it much easier to compare one property to another. That’s very straightforward. But I know that you are a big believer in another kind of metric called TRevPAR. So where did the notion of using TRevPAR as a performance indicator actually come from? And what are some of the key advantages from your perspective?

Adam: So PAR has existed for a long time. It’s just never really been universally codified as such. We used RevPAG, which was revenue per available guest. Guest we used RevPOR, revenue per occupied room, we used ancillary capture or we just had siloed performance and everything was evaluated in between and then brought onto an owner’s desk. So the push for TRevPAR, is coming now because we need to look in a very competitive landscape at ways to grow per property performance, particularly in light of the travel normalization where high occupancy and high yield situations may not be there to support a pure RevPAR situation for a lot of properties. And really the rallying around TRevPAR, I like to apply the phrase that “in order to fight a monster you first have to name it”. And what I mean by that in a general sense is that you need these shorthands to really drive the conversation home and to get everyone thinking on the same page. So throughout the 20th century and even up to, let’s say five years ago, you had very siloed departments. Spa did its own thing, restaurant did its own thing, golf did its own thing, and somehow they all existed and somehow broke even or not. But they always sort of merged into the hotel in various ways. Now what we’re seeing is with the need for increased labor efficiencies, the need to continue to drive bottom-line performance to save costs. We need that rallying cry around TRevPAR, around that singular terminology in order to really ramp up performance and really drive, make all the ancillary amenities into profit centers in their own right in order to continue to drive that bottom line.

Robin: Fair enough. I think we better tell some of our listeners what the TRevPAR calculation actually is. Obviously if your director of revenue, you already know, but maybe some of our other listeners might not be quite so familiar.

Adam: Okay. So, TRevPAR. Total revenue per available room. So what we do is we get the RevPAR calculation and then of course we’re adding in total top line from other any other silo that is at the property. So common ones, restaurant gift shops, spa, golf activities and you could even throw in there if you have this separately siloed valet or even online gift cards and your ability to merchandise outside of direct performance on site.

Robin: Okay. So if I’m understanding this right, it’s reliant on having a unified guest profile and then combining that with predictive analysis from these multiple revenue-generating departments, you know, banquets, regular F and B golf spas, as you’ve mentioned. How then can you effectively calculate TRevPAR if you haven’t updated your tech stack? Can you do it?

Adam: You can you do a lot of quote-unquote “offline work”. So you’re looking at different excels. You’re bringing them in. And then, of course, from spas, you might try and align it, clean the data, merge data sets. Ditto restaurant or golf or these any other ancillary spend vehicle you have. Then you can get that to a partner. Of course, still dividing by number of available rooms. So that can all be done offline. The advantage of the unified guest profile is, of course, when you’re doing things offline, it’s labor intensive. It’s can get quite complicated to work with large data sets and you might not be able to do this in an automated manner that then can reserve back to the guest, back to future guests and really drive personalization and marketing and breaking this apart from the whole predictive side of things, because the predictive nowadays is a little bit of a loaded word. It’s loaded because whenever I think of the term predictive, at least for me, I’m now thinking about machine learning algorithms and the training data sets that we’re putting against to develop some accuracy for those algorithms or at least the recommendations that they’re coming up with. So the drive for unified guest profiles, I believe, is slightly more important right now than predictive analytics in terms of at least for top line performance in the sense of TRevPAR, where we want to get and know more about our guests and what’s motivating them to spend more on-site on a per guest amount or on a per room amount.

Adam: So the unified guest profile can tell us in a seamless manner, in a labor-like manner, what’s going to motivate that business guest to come in and dine at a restaurant or get a spa service or anything of that nature and not just be ahead in bed where the idea here is we know traditionally that mid-week the corporate and the group guests are what’s going to drive the occupancy midweek, help fill that heads and beds. But in 2023, lots of warning signs are suggesting that with the growth of remote and hybrid work, the road Warrior corporate travel pillar is dying. I don’t want to say it’s dead, it’s dying, and that the current state of a recession slash whatever we’re in, normalization does not support as much overall group and business travel. So the midweek occupancy is a big question mark.

Robin: Let me interrupt and see if I can take a swing at this one here. Of course. So I’m thinking that this might be a great tool for figuring out when you’re selling conference space, whether or not the piece of business on the table is really profitable, because sometimes the RFPs, they come in and it looks like lots of room nights. And yes, you’re assuming there’s going to be some F and B, but when you’re comparing different RFPs and they’re competing for space, who should get the space? Which piece of business is most profitable? I think this would be a great way of getting the big picture on the spend per conference attendee.

Adam: That’s 100% right, and that’s what it’s coming down to. I mean, but I would add that’s a good problem to have.

Robin: Oh, sure, yeah.

Adam: To have two competing groups that want the same room block at the same time. And you have to choose who you want in your hotel. That’s a great problem to have. But for a lot of properties that are in demand, that is a problem that they’re facing and they’re going to continue to face. And you have to decide whether you want to target the leisure guest, whether it’s a couple coming in for some sort of getaway where their per room spend is, let’s say, $600 per night versus a conference attendee who’s just a straight heads and beds business guest. And they’re already getting a big event planner, negotiated room block rate and their per night guest spend is only 300. So TRevPAR allows you to look at these situations and do these comparisons and. We’ve been in situations where when we analyze all the silos and the labor costs involved in that, we looked at a property we were helping out with their weddings and we found that some weddings, even with the enormous amount that weddings are being charged at and are being priced at these days, still wasn’t profitable.

Robin: Well, see, that’s exactly the point. Yeah, that’s exactly the point I’m getting at here. You mentioned labor costs. Can you give me an example of how TRevPAR can be utilized to better understand and contain something like labor cost or maybe utility cost?

Adam: So TRevPAR isn’t designed to be a direct cost-savings analytics tool. It’s the thesis of it is that when you grow total top line revenue performance, you’re then increasing the gross operating profits to give you more breathing room to then allow for more direct savings or to just pad margins. And the easiest one that I would use to show this, even though it doesn’t apply, is looking at a golf course and a golf course has a ton of maintenance costs to it. Grounds the grounds need to be maintained and paved, lots of landscaping, and that is a fixed overhead, relatively fixed regardless of the number of actual golfers and tee times that are there.

Robin: That’s very true.

Adam: If you have one golfer or you have 100 per day, the grass still needs to be mowed. And as an aside, check out from CES and Vegas this year they unveiled automated lawn mowers. So those are coming to help reduce golf course maintenance costs. But that’s a little bit futuristic for the here and now.

Robin: I want to know when they put Roombas into houses, they had pictures of dogs and cats riding around on the top of them. Or are we going to see raccoons and elk riding around on the lawn mower in the middle of the night?

Adam: Of course. Yeah, that’d be a fun one. I mean, maybe the elk will just trample them. I don’t know how stable they are, but raccoons, for sure. I mean, I’m from Toronto, and we have raccoons that are incredibly intelligent here. They basically operate like mini SWAT teams going around the city. But raccoons aside, there’s an interesting point to be made about TRevPAR as a cost savings tool. And you look at things like, I would phase this out. So phase one is you have your fixed overhead costs of any facility. So let’s look at something like the spa where you have the fixed costs, where, you know, regular maintenance of capital assets and utility bills, things like that. And your first step is to then fill the spa. And if you have solid bookings from 8 a.m. to 8 p.m., that’s going to more effectively cover those fixed costs than if you only have sporadic bookings from 10 a.m. to 4:00 PM. And this is the big asterisk there is labor of course, and then when you throw in the variable costs, you’re then looking at a lot of modern systems that are able to do something called dynamic availability, which is analyzing based on a cost of capital performance model, which treatments in the spa are generating the most bang for your buck. So that way you know that, let’s say Saturday at a 2:00 PM, right when everyone wants to be at the spa, you should be only allocating spaces to the highest margin treatments that you have available and not necessarily many pettys which are just your day guests and aren’t for your hotel guests that are the people coming in that are also filling the hotel.

Robin: That’s an excellent point. I really like this one.

Adam: I’m hardly the expert on dynamic availability. I’m at the altar of the Masters out there, but ask your PMS provider, ask your operations management to see what you can do to optimize performance. But that’s phase two. Phase one is always: fill your facilities. You have a spa, you have a restaurant, you have a golf course, fill them up. And that largely comes down to marketing. And right now in a labor-like manner, a lean team manner, you have to automate that marketing, which then goes back to that unified guest profile. So you want to fill the restaurant. I’m a wine nut, so you want to maximize per cover alcohol spend by advertising your new elaborate wine cellar upgrade. Well, who is that going to work on? How can you analyze your POS data and align that with your PMS data to know who to market to sell your restaurant to then drive as many dining reservations from hotel guests as much as possible so that way you can smooth out the labor allocations and not have this rush of walk-ins at the restaurant, which would then induce over time and or service delivery.

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Robin: I love this dynamic availability idea. Believe it or not, I’m thinking of my online grocery shopping and what they do is they’ll have a reduced delivery time at what they know are the times with the least demand. So you could really apply the same principle to when should happy hour be in order to actually increase traffic. And it might turn out that the time when you should increase traffic is not necessarily the traditional happy hour time or when you thought it should be.

Adam: Well, happy hour itself brilliant marketing term. And of course the deals on Happy Hour were always designed because that was sort of the pre-dinner phase when there was reduced per-cover amounts into the restaurant. So it was designed to drum up sales when and sort of had out that full time between lunch and dinner or pre-dinner if the restaurant was only open for the evening. And even during the pandemic and to this day a lot of restaurants that, pre-pandemic were open for lunch and dinner service, are now only open for dinner.

Robin: Yeah, that’s true.

Adam: And yeah, with the labor situation as it is in the hospitality sector, which can include restaurant you as a manager or a restaurant director, you have to decide if you’re only open for dinner or whether to then add lunch service or extend dinner service into pre-dinner or happy hour service and TRevPAR can help you make that decision one way or another based on past performance and the past performance that aligns with the restaurant covers that are driven by hotel stays because ultimately you want to drive hotel bookings. And if the lack of lunch service is going to deter a hotel booking, that’s a really big no-no. And at the same time is that if you are getting a lot of hotel guests that are using your restaurant or had previously used your restaurant for lunch service, that alone is a good justification to consider lunch service or reactivating lunch service.

Robin: So we’ve been talking about all the positive attributes of TRevPAR, but of course, there’s also going to be some limitations on this one as well, because the calculation doesn’t take into account a hotel’s actual occupancy level or some of the costs incurred. So what would you say to one of our listeners who’s reluctant to make the switch because of this?

Adam: So similar to previous quotes. I said, I’m going to apply another quote, and this one is from Winston Churchill. So he said about democracy: “Democracy is the worst form of government, except for all the others that have been tried”.

Robin: Yeah,

Adam: So similarly, you could say TRevPAR is the worst form of calculating a hotel’s top-line performance, except for all the others that have been used. And one of the whole things that we should sort of allude to in this is that everything is in a state of flux. Everything’s evolving. So TRevPAR isn’t perfect, but it is better than straight RevPAR in a lot of situations. And it can be used alongside occupancy and ADR and other key benchmarks that are derived from a star report or anything else to tell you the overall picture of growth and to decide what to do next. So TRevPAR isn’t perfect, but it’s yet one more way to get a better picture of where you are. And of course, every hotel’s ownership and management objectives are different. So therefore, it has to really be decided on a 1-to-1 basis.

Robin: I agree with what you said about everything being in a state of flux, and this is the best that we have for the current situation. So I understand that you have said that TRevPAR can positively impact guest satisfaction surveys, which is something that everybody cares about tremendously at the moment. Can you talk to us a little bit about this and give us a couple of examples of how this works in your mind?

Adam: Okay, So we need to first step back before going in. The overall idea is that the more a guest uses the property, the more satisfied they are. From a psychology standpoint, what we’re talking about here is memories. So. At a big box hotel. You walk into a room, I’m not going to mention any brands, but if you only use the room and you only are going lobby room, lobby room or lobby meeting, space room, lobby, meeting, space room, etc. how do you know if you’re in Atlanta or Toronto or Madrid or Dubai? Aside from the view that you might have. And it’s very psychologically or psychologically more difficult to distinguish. But if you’re also using all the other services, it creates these differential experiences that then culminate into the overall hotel experience. And. Where we see this reflected is when we do what’s called semantic analysis on reviews.

Robin: Tell us what that is.

Adam: So semantic analysis is basically putting some form of algorithm or computer process against the words in a review, not just averaging out of five stars but looking at the words in the review. And what we find is that they basically, at an overall sense, they align with how word of mouth. Amongst peers works. So you and I are talking. We’re friends. How was your hotel? Stay. Oh, it.

Robin: Was pretty good.

Adam: Yeah, it was great. I was in and out of there. I went to meetings and that’s it. Not exactly anything memorable there, but you say, How is your hotel stay? Oh, it was great. The room was nice. They had this special little detail like a special. All these new lights were added, warm lights. And then the restaurant. Let me tell you about the restaurant. We went down there, this great wine selection. We got this big tomahawk steak and had a fantastic deal. Oh, you got to stay there. So what we’re talking about is giving people something to talk about by painting a more vivid picture in their minds. And the semantic analysis of reviews reflects this, whereby the guests, by aligning the TRevPAR the guests that use the property. The satisfaction scores. So their rating out of five and then also what they talk about. The comments. The comments are better and the comments are more descriptive and more vivid. And that’s what semantic analysis is showing us, that to to validate this statement, that TRevPAR increases GSS.

Robin: That’s very interesting. I’m going to have to do a little more reading on that one myself. We’ve got a couple of minutes left here. Obviously, we’ve been talking about a lot of new ideas today, so there’s bound to be a few skeptics listening. What would you say are some of the biggest risks of continuing to just use RevPAR? And can you give us a couple of real-world examples as to how a hotel could get blindsided?

Adam: First off, I want to say that select service and limited service, the heads and beds model: RevPAR will always be important. That’s just that. Again, with for the finance financiers, the bean counters, the University of RevPAR is so important for benchmarking for any local market in order to draw in international loans or investments. That said, the risks are, number one: lost guests or diminished revenue. And this is important to unpack because. Guests are increasingly voting with their wallets for hotels that have amenities. So if you don’t have amenities, not only are you not able to charge for those amenities either by packaging them or upselling them as add-ons, but you’re also going to lose guests to those competitors who are looking on Expedia or booking and are comparing 20 different hotels and are selecting the one hotel because they have that facility and they’re within their budget or their price range and location relatively the same. Related to that, the second biggest risk is the inability to drive rate, which is to say commoditization. So if you don’t have things that are branded features, things that are attracting guests in a non apples to apples price comparison, then you are totally at the mercy of the market and the market will increasingly drive you down in terms of real ADR. So ADR that grows over time and indices versus versus total market. And this is of course taking into account total accommodations, not just hotels, where now we’re seeing increasingly that a lot of guests are comparing hotel products against alternative providers like Airbnb and VRBO. And then, of course, the third biggest risk is increased costs, where indirectly, if you have a siloed approach to rooms, restaurant and anything else, you’re not having synergies and therefore you’re going to have increased costs by not having those overlaps of, as we talked about, that that cost of capital comparison of two different groups coming in and deciding on the higher margin group or the higher margin segment to target.

Adam: So therefore you’re limiting your return on advertising, spend your ROS and a bunch of other costs just by not having synergies. I will add there that the in any TRevPAR, it’s still is RevPAR, it still is available room. And that is important to remember is that the biggest margin for any hotel property the biggest profit margin will most likely be always derived from the hotel room itself. The whole idea with the ship towards TRevPAR is to, number one, transform all ancillary amenities into profit centers in their own right and not just loss leaders that are designed to service in-house guests. And then number two is to actually increase hotel bookings based upon those amenities being available. The quote-unquote, reason to visit, so to speak. So if you have a great spa, if you have a great restaurant, those are reasons for hotels to select your property over others. So again, that risk number one, and then for you to wrap up all those silos and prevent rate commoditization. So TRevPAR allows you to make more money by ramping up ancillary spend and then it allows you to increase rate and also drive occupancy. It’s a real win-win.

Robin: I think there is a great deal to consider and I thank you so much, Adam, for sharing this really valuable information. I’m sure you’ve given people a lot to think about. You’ve been listening to the Innovative Hotelier podcast brought to you by Hotels magazine. Join us again soon for more up to the minute insights and information specifically for the hotel and hospitality industry. You’ve been listening to the Innovative Hotelier podcast by Hotels Magazine. Join us again soon for more conversations with hospitality industry thought leaders.