The hotel industry seems to be obsessed with RevPAR and, in particular, RevPAR growth. Typically, one of the first items discussed in a public hotel company’s quarterly earnings report is the percentage of RevPAR growth achieved. STR executives have touted the industry’s significant accomplishment of 85 consecutive months of RevPAR growth in the United States, a feat that dates back to 2010.
And while RevPAR is a convenient and easy-to-understand measurement tool, it’s not always the best one, especially in an economic environment of uncertainty or even recession. In times like now, when no one knows whether continued prosperity lies ahead, it’s better for hotel GMs and revenue managers to pay attention to market share, as expressed in RevPAR Index. Like RevPAR, RPI (also known as Revenue Generating Index) is easy to comprehend and calculate. It’s usually expressed as a percentage, so a property with a RevPAR Index of 102 means its RevPAR is two percentage points higher than the hotels in its competitive set; 98 and it’s two points lower than its competitors.
Lately, hotel companies and asset managers have paid more attention to RevPAR Index and tout their achievements in public statements and announcements. During a call with stock analysts to discuss the company’s first-quarter earnings, Hyatt Hotels Corp. CEO Mark Hoplamazian said the chain gained market share on a systemwide basis for nine straight quarters and that gains were achieved in every region in which the company operates and for both managed and franchised hotels.
Similarly, Marriott International CEO Arne Sorenson said in the first quarter the company posted a one-point increase in RevPAR Index across the company’s 30 brands.
Calculation of RevPAR Index is a crucial part of many management agreements, with many contracts requiring operators to achieve indexes between 90% and 110%, with owners able to terminate management contracts if those tests aren’t met.
Strategies to Drive RevPAR Index
A key component of RevPAR Index is the competitive set. Focusing on RevPAR growth in a silo without the context of a competitive set or market benchmark provides an incomplete view of a hotel’s performance. The competitive set needs to be those hotels that line up as closely as possible in terms of facilities, age, size, market segment, customer base, brand affiliation and rate.
If a hotel measures itself against the average of the entire market—hotels of all sizes, segments and rates—it risks commoditizing the asset to be literally average to the market and discounts its ability to create a market-leading hotel.
How a hotel boosts its RevPAR Index is also crucial to its bottom line. In an upmarket, growth in occupancy is much less profitable than growth in rate. Another important variable is the cost of acquisition from various channels of demand, which has impact on so-called Net RevPAR. The cost of room revenue needs to be understood by each demand segment to truly understand the best Net RevPAR to maximize a hotel’s net operating income.
A hotel’s position in its competitive market also influences the importance of RevPAR and RPI. If a property is No. 1 in RevPAR Index then year-over-year RevPAR growth is more important. If the hotel is last in RPI, then obviously the focus should be on increasing the Index ranking.
No one knows what’s ahead for the hotel industry, and each market and street corner faces their own challenges and opportunities. In these times of uncertainty, the role of revenue management becomes more important. And the key to building profitable RevPAR Index is having the right information to make the right distribution decisions and then having the nerve and conviction to stick with them. Of course, that’s also true in a market that’s setting records.