RevPAR, TRevPAR or GOPPAR?
Systematic monitoring of the company's performance is one of the key factors for a successful business. In this article, we will look at and compare three key performance indicators used by lodging properties to measure efficiency: RevPAR, TRevPAR and GOPPAR.
RevPAR
RevPAR (Revenue Per Available Room) is a measure of accommodation revenue per available room. It is calculated by dividing the total accommodation revenue by the total number of rooms available at the hotel. Or by multiplying the hotel occupancy (percentage) by the ADR (average room rate).
RevPAR is widely used in the lodging industry. For example, in the publicly available financial statements, Hilton Worldwide Holdings, Inc. and Marriott International, Inc. include RevPAR together with indicators such as EPS (Earnings Per Share) and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
However, the RevPAR has one drawback: it is measured based on room sales only. Income from the sale of other facilities and amenities, such as food and beverages or other services, is not considered. Although the greatest share of lodging revenue has traditionally come from room sales, RevPAR is not inherently an empirical measure of the performance of the entire hotel.
The TRevPAR (Total Revenue Per Available Room) indicator describes the total revenue per available number. It is calculated by dividing the total revenue by the total number of rooms available at the hotel.
For example, if in a hotel with 50 guest rooms, the total net income for one day is 7500 EUR, then TRevPAR is 7500 EUR / 50 rooms = 150 EUR.Unlike RevPAR, TRevPAR represents the operations of the entire property and is relevant in hotels where other facilities, such as convention centres, restaurants and bars, as well as SPA services, etc., are commonly offered in addition to accommodation services.
Both RevPAR and TRevPAR, however, are revenue metrics that do not consider costs. While revenue increases reflect a company's ability to expand, increase sales and market share, business owners are often much more interested in the company's profits. Furthermore, even in everyday life, these indicators can give a misleading impression when assessing the profitability of a potential business. For example, when two group booking requests are compared with the same RevPAR or TRevPAR, but with a different number of rooms or additional hotel services used, the cost may vary and the profitability of each group booking may be different.
Aware of the shortcomings of both revenue indicators, hotels are increasingly using the GOPPAR (Gross Operating Profit Per Available Room). It is calculated by dividing the operating profit by the total number of rooms available at the hotel.
For example, if in a hotel with 50 guest rooms the operating profit (total revenue minus operating costs) is 1000 EUR, then the GOPPAR is 1000/50 = 20 EUR.The GOPPAR indicator reflects the revenues generated from all of the hotel's revenue centres, which in turn helps to draw conclusions about the profitability of the operation as a whole. It can be a major challenge for any lodging property to conduct and calculate a GOPPAR on a regular basis, as correct cost items are not always available or understood. GOPPAR is easier to use when analysing and comparing the efficiency of a hotel over a time period (day, week, month, quarter, etc.).
There is still no clear answer to the question of which of the three metrics represents the performance of the operations of the hotel best.
The authors of a recent study* summarizing data from 500 US hotels from 2000-2017 and evaluating the correlations between RevPAR and GOPPAR with hotel operational factors, the financial performance of the business and macroeconomic indicators, found that:
- Operational factors (hotel class, location, operation style, number of rooms) better describe RevPAR and have a higher correlation than GOPPAR;
- RevPAR has significant correlations with the financial performance of a lodging company such as TSR (Total Shareholder Return). It was a surprising finding, counter to the belief that the net return on shares is typically influenced by the company's value, which in turn is influenced by the profitability ratios (GOPPAR in this case). However, financial market participants and potential investors are more likely to value the growth potential of a business, and revenue (RevPAR) explains it better than profit (GOPPAR);
- Two of the macroeconomic indicators (GDP per capita and unemployment rate) have significant correlations with the GOPPAR, while the total GDP indicator correlates with the RevPAR;
- RevPAR has significant correlations with GOPPAR.
In view of these findings, it can be concluded that, despite its shortcomings, RevPAR (as well as TRevPAR) more accurately reflects the long-term efficiency, growth potential and directly impacts GOPPAR, unless there are more important macroeconomic factors (e.g., drastic changes in the unemployment rate) affecting profitability. However, to obtain a comprehensive picture and draw reasonable conclusions, it is important to emphasize that any indicator or ratio must be assessed in the context of other parameters and processes taking place within the lodging company itself.
References:
*Lee, S, Pan, B, & Park, S. (2019). RevPAR vs. GOPPAR: Property- and firm-level analysis. Annals of Tourism Research, 76: 180-190. https://doi.org/10.1016/j.annals.2019.04.006