Running a hotel is expensive. Really, expensive. But if done right, it provides satisfying returns on these expenses along with the fulfilment of making other people happy.
While 2023 was overall a great year for the hotel industry - with RevPAR, a hotel’s key topline metric bouncing back above pre-pandemic levels, the rising costs are threatening to deplete the profits many generate.
A high-level metric to understand the profitability of a business is the EBITDA — Earnings Before Interest, Taxes, Depreciation and Amortisation. In layman's terms, it’s the amount of money the hotel made minus what it spent to make that money — before paying out interest + taxes (and considering any depreciation or amortisation of their assets).
Many obsess on this metric but interest and taxes are real expenses which need to be paid out. And paid out, in huge numbers for an establishment like a hotel.
Regardless, even though the EBITDA at hotels, globally, has recovered from the pandemic slumps, it has only reached pre-pandemic levels. And pre-pandemic, it wasn’t growing at a stunning rate.
Notice how even though travel spending globally has been increasing, the EBITDA has stagnated (aside from the clear recovery post pandemic).
The main reason for this has been the increasing operating costs that hotels incur. This implies the criticality of how understanding hotel operating costs, the KPIs that help you measure them and constantly implementing strategies that help you improve those KPIs.
Before we get to the KPIs, lets breakdown, on a high level, the operating costs that hotels incur. We can divide them under 2 categories : Fixed and variable costs.
Fixed Operating Costs at Hotels
Fixed operating costs are expenses that remain constant for a period of time (usually a year), regardless of the hotel's occupancy rate. They do not fluctuate with the level of business activity. Fixed costs provide a baseline for the minimum expenses to operate the hotel.
Examples:
- Property Taxes: These are taxes levied by local governments based on the assessed value of the hotel property.
- Mortgage Payments or Rent: Regular payments made for the property's lease or loan.
- Insurance: Premiums paid for property, liability, and employee insurance that do not vary with the number of guests.
- Salaries for Permanent Staff: Wages paid to full-time employees, such as hotel management and administrative staff.
- Depreciation: The gradual deduction of the hotel's capital assets' value over time, such as buildings and equipment.
- Utilities (to an extent): While usage can vary, a base level of utilities like water, gas, and electricity is needed regardless of occupancy.
Variable Operating Costs at Hotels
Variable operating costs change in proportion to the hotel's level of business activity, particularly its occupancy rate. Variable costs are essential to manage efficiently to adapt to changes in occupancy and market demand
Examples:
- Hourly Wages: Wages for part-time or seasonal staff whose hours vary based on the hotel’s occupancy.
- Utilities (variable portion): Costs for electricity, water, and gas that increase with higher occupancy and usage.
- Supplies and Amenities: Costs for items like toiletries, cleaning supplies, and guest amenities that fluctuate with the number of guests.
- Laundry and Housekeeping Services: Costs that increase with more guests due to more frequent laundering of linens and cleaning services.
- Maintenance and Repairs (Variable Portion): While some maintenance costs are fixed, additional repairs and upkeep may be required with higher guest traffic.
- Marketing and Advertising: These costs can vary depending on the hotel's marketing campaigns, which might be scaled up or down based on occupancy needs.
KPIs to monitor hotel operating expenses
EBIDTA tells you overall how much your earnings were for a specific period. What it doesn’t tell you is where you are losing money and how to think about improving your costs. Thats one reason why many investors consider EBIDTA a vanity metric.
Following are some more specific metrcis that, if tracked, could help you get a better insight into your expenditures and position yourself to mitigate them effectively.
1. Cost Per Occupied Room (CPOR)
CPOR measures the average cost incurred for each occupied room in a hotel. It helps in understanding the direct costs related to room occupancy, which includes costs such as housekeeping, utilities, and guest supplies.
CPOR helps hoteliers assess the efficiency of their operations by quantifying the average cost associated with maintaining an occupied room, aiding in budgeting and pricing decisions.
Sample Calculation:
Suppose in a month, a hotel incurs total costs of $50,000, and it had 1000 room nights occupied.
CPOR = Total Costs / Total Occupied Room Nights= $50,000 / 1000= $50 per occupied room
This means it costs the hotel $50 on average to operate a room for a night.
2. Operating Efficiency Ratio
This ratio measures how well the hotel is managing its operating expenses relative to its revenue. It is a measure of the hotel's efficiency in converting revenue into profit by keeping operating costs in check.This ratio provides hoteliers with a clear picture of how effectively they are managing their operating expenses relative to total revenue, highlighting areas for potential cost reduction and efficiency improvement.
Sample Calculation:
Let's say the hotel's total operating expenses for a month are $75,000, and its total revenue for the same period is $150,000.
Operating Efficiency Ratio = Total Operating Expenses / Total Revenue= $75,000 / $150,000= 0.50 or 50%
An operating efficiency ratio of 50% means that for every dollar earned, 50 cents are spent on operating expenses.
3. Gross Operating Profit Per Available Room (GOPPAR)
GOPPAR is a profitability metric that assesses the gross operating profit made from each available room, regardless of whether they are occupied. It takes into account all revenue streams and operating costs.GOPPAR offers a comprehensive view of a hotel's profitability, considering all revenue streams and costs, which is essential for strategic planning and overall financial management.
Sample Calculation:If a hotel's gross operating profit in a month is $60,000 and it has 100 rooms available throughout the month, then:
GOPPAR = Gross Operating Profit / Total Available Rooms= $60,000 / 100= $600 per available room
This indicates the average profit generated per room available in the hotel, offering a broader view of the hotel's financial health beyond just room sales.
4. Labour Cost Percentage
Labour cost percentage measures the proportion of total revenue that is spent on staff wages, including salaries, wages, and benefits. It's a critical metric for monitoring the efficiency of labour expenses.
This metric calculates the average cost of energy (electricity, gas, etc.) per occupied room, highlighting the efficiency of energy use in relation to occupancy.
Sample Calculation:If a hotel has total revenue of $200,000 in a month and incurs $50,000 in labour costs, then:
Labour Cost Percentage = (Labour Costs / Total Revenue) × 100= ($50,000 / $200,000) × 100= 25%
This means 25% of total revenue was spent on labour cost.
5. Energy Cost Per Occupied Room
This metric calculates the average cost of energy (electricity, gas, etc.) per occupied room, highlighting the efficiency of energy use in relation to occupancy.
Energy Cost Per Occupied Room allows you to track and manage energy efficiency, crucial for reducing operational costs and improving sustainability.
Sample Calculation:Suppose total energy costs for a month are $10,000 and there were 800 room nights occupied:
Energy Cost Per Occupied Room = Total Energy Costs / Total Occupied Room Nights= $10,000 / 800= $12.50 per occupied room
This implies the hotel spends $12.50 per occupied room.
6. Food Cost Percentage
Food cost percentage measures the cost of food sold against the food sales revenue, crucial for hotels with dining facilities. It's a key indicator of the profitability of your food and beverage services.
This metric helps ensure that your food and beverage operations are profitable and efficiently managed, guiding menu pricing and cost control strategies.
Sample Calculation:If food sales are $40,000 and the cost of food sold is $12,000, then:
Food Cost Percentage = (Cost of Food Sold / Food Sales Revenue) × 100= ($12,000 / $40,000) × 100= 30%
This means the hotel spent 30% of the F&B revenue on food and beverage cost.
7. Utility Cost as a Percentage of Revenue
This KPI measures the proportion of total revenue that is spent on utilities (electricity, water, gas, etc.). It's a critical metric for assessing how much of your revenue is consumed by utility expenses.
This metric allows you to assess the impact of utility expenses on your profitability, guiding you in strategies to optimize energy usage and reduce costs.
Sample Calculation:If your hotel generates $100,000 in revenue and the utility costs for the same period are $10,000:
Utility Cost as a Percentage of Revenue = (Utility Costs / Total Revenue) × 100= ($10,000 / $100,000) × 100= 10%
This means 10% of total revenue was spent on utilities.
8. Maintenance Cost Percentage
Maintenance Cost Percentage calculates the ratio of maintenance expenses to total revenue. This includes costs for repairs, upkeep, and routine maintenance of the hotel.
This KPI helps you monitor the portion of revenue allocated to maintaining the property, ensuring that you are balancing cost control with maintaining quality standards and guest satisfaction.
Sample Calculation:If the total revenue for a month is $150,000 and maintenance expenses are $15,000:
Maintenance Cost Percentage = (Maintenance Costs / Total Revenue) × 100= ($15,000 / $150,000) × 100= 10%
This implies 10% of the total revenue went into overall maintenance expense.
Avoiding costs should certainly not come at the cost of guest experience. Understanding your operating KPIs is the first step to streamlining your costs with ideas that will boost profits and even elevate guest experience.
We’ll discuss a few strategies to improve these metrics in a separate topic. Until then, team Haven wishes you a Merry Christmas and Happy 2024!
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