Performance metrics in the hotel industry

This blog is prompted by two things – a debate on social media concerning RevPAR (revenue per available room) and reports from the recent HOSPACE conference (which focuses on technology in the hospitality industry) also expressing concerns about this metric.  So here is my take on this issue.

First, it has long been known (at least from the time the balanced scorecard became common place) that relying on a single performance metric is not a good idea.  So there is nothing wrong with RevPAR per se – it is a good way of managing revenue by adjusting prices to reflect the level of demand at any given moment in time.  It does have some shortcomings however, most noticeably with regards recognising the potential level of repeat business from a customer and non-room spend of any guest.  So, if RevPAR is OK but has limitations, what other metrics should also be measured and managed?

Second, revenue management systems that enabled the management of RevPAR were basically hotel reservations systems into which a forecasting tool had been incorporated.  Today’s technology has much more computing power so that more sophisticated analytics can be undertaken.  So there is no barrier to having more performance metrics…

Finally, what has been proposed in the discussions I have been following?  Here are a couple…

  • Profit per available room (ProPAR).  My colleague Prof. Lockwood and I presented a paper proposing this in the late 1980s i.e. 30 years ago.  Our argument was that a similar approach could be adopted for rooms to that adopted in the restaurant industry for menu management*.  Clearly our proposal had no impact on industry practice.  Today the same argument has resurfaced largely due to the different rates of commission cost across distribution channels, especially OTAs.  Given that profit is more important than revenue, ProPAR makes sense so long as it is possible to clearly establish the cost of selling each room.  But the point of any metric is to enable management action to be taken, so the issue with regards to ProPAR is how can it be managed?  Presumably it would be to shift taking reservations from expensive distribution channels to cheaper ones, which only makes sense when total demand exceeds supply.
  • Customer lifetime value (CLV). I’ve always had a problem with this metric.  This is because making one forecast is challenging enough, but CLV requires two – a forecast of how far into the future a customer will continue to purchase and a forecast of the transaction value of each future purchase.  It works best when customers are aggregated, but is not much use when making a decision with regards to taking a reservation or not.  De facto hotel chains do this through their loyalty programmes and the discounts this offer based on previous usage.

Over reliance on one single metric is unwise.  Just as important is to understand what the metric is telling you and how reliable it is.  Finally, it is of no value if it is not clear as to what action to take in order to improve performance.

*I may well blog about menu management as it is an area where definitely the wrong measures were being used to measure performance…..

 

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Posted in Chap 07 Capacity and demand, Sector: Hospitality & Tourism | Tagged , , , | Leave a comment

Digital logistics

This article reviews the nature of digitisation in the field of logistics.  It proposes the developmental process that logistics firms will go through when adopting digitisation, as follows:

  1. Functional excellence – operations will be able to improve fulfillment processes and implement current generation, real-time warehouse management; optimise inbound and outbound transportation; and increase labour productivity and employee satisfaction.
  2. Enterprise logistics management – at this stage supply chain visibility will be implemented; adopt enterprise command and control systems; and use more sophisticated performance metrics to engage in continuous improvement.
  3. Supply chain integration and collaboration – finally collaborative digital applications spanning different firms will further improve efficiency and velocity.
Posted in Chap 06 Materials and inventory | Tagged , , , , | Leave a comment

Life at Lego

This three minute video gives insight into Lego’s organisational culture.

Posted in Chap 11 Jobs and people, Sector: Manufacturing | Tagged , , | Leave a comment

Operations Insight: ASDA – designing sustainability into their new product development process

This detailed case study can be found on the WRAP website.  WRAP is a charity set up in 2000 to encourage and support the sustainable use of resources.  It works in a range of areas – food, hospitality, electrical, textiles, agriculture, waste management and local authorities. The ASDA Insight explains how this supermarket chain rethought its new product development process in order to build in more sustainability with regards how products are sourced and processed.

Posted in Chap 12 New products and services, Sector: Retail | Tagged , , , | Leave a comment

Research Insight: why long queues might be desirable

This article identifies that retailers should not be too worried if long queues form during seasonal sales.  This is because sales attract a different kind of shopper to those who regularly shop in the store.  Sales shoppers are more price sensitive and less time conscious.  Hence the effect of a long queue is two fold.  First, it deters regular shoppers and hence helps ensure they buy at normal prices.  Second, it encourages sales shoppers to buy more items in order to ‘justify’ having to queue for so long.

Source: Qiu, Chun and Zhang, Wenqing, (December 17, 2013) Managing Long Queues in Seasonal Sales Shopping, SSRN.com

Posted in Chap 08 Queuing and customers, Sector: Retail | Tagged , | Leave a comment

Risk management and offshoring

This Deloitte report looks at the the risks associated with offshoring and outsourcing.  They identify the risks and how to mitigate them for each of the five stages of their “outsourcing/offshoring life cycle”:

  1. Strategic assessment – deciding on whether to proceed with outsourcing/offshoring
  2. Business case development
  3. Vendor (i.e. partner) selection
  4. Contracting
  5. Service transition, delivery and post-transition management
Posted in Chap 13 Projects and crises, Chap 17 Internationalisation and CSR | Tagged , , | Leave a comment

Operations Insight: Sunseeker

This video provides insight into how upscale leisure boats are manufactured.  The last time we blogged about Sunseeker was in September 2012.  Over these last five years, the company has faced some difficulties, due largely to the global financial crisis, which dramatically reduced demand for luxury yachts.  But after years of losses, earlier this year the company reported a 25% increase in revenue to £252.4 million, and EBITDA of £6 million.  This turnaround has been credited to a new CEO who previously worked for Jaguar Land Rover.  He introduced “streamlined production methods”.  He also secured finance from the company’s owners in order to invest in new facilities.

Source: http://www.telegraph.co.uk/business/2017/04/03/yacht-builder-sunseeker-sails-profit-turnaround-takes-hold/

 

Posted in Chap 03 Processes and life cycles, Sector: Manufacturing | Tagged | Leave a comment

Hotel asset management – the other way of making money in this industry

The obvious way that hotel chains make money is from their operations – letting rooms and selling food, beverages and events.  But there is another way – by increasing the value of the asset i.e. the hotel property itself.  The hotel industry is a capital intensive industry, so managing this investment is just as important as managing the operations.  However these two aspects of the business may have very different business cycles and may respond very differently to external forces such as economic downturns, consumer trends, and government legislation.  It is for this reason that hotel chains may choose not to own the asset, and even sometimes not even operate the hotel….

This is because hotel chains are predominantly brands, supported by a marketing infrastructure that delivers reservations and a loyalty programme.  Everything else – ownership of the property, management of the property, and employment of the hotel staff – can be done by a third party (a specific kind of outsourcing), if the chain so decides.  Hence there are a multitude of ways in which an hotel can be owned and managed, including:

  • hotel is owned by the branded chain, managed by the chain, and chain employs all the staff
  • hotel is owned by a property developer or asset management company, chain manages it and employs all the staff (this is known as a hotel management contract)
  • hotel is owned by a property developer or asset management company, chain employs the management team but owner employs the staff (also a hotel management contract, tends to be in overseas markets due to local employment regulations)
  • hotel is owned by the property developer or asset management company, managed by the owner who employs all the staff (typically known as a franchise agreement)
  • hotel is owned by a property developer or asset management company, it is managed by a third party hotel management company who employs all the staff (for instance Aimbridge Hospitality manages 400 hotels across a number of different brands and owned by a number of different owners)

Some chains choose to invest in and manage their own properties, whereas others choose to be ‘asset light’.  Most have a mixed portfolio depending on the geographical areas they operate in and the market their brands are aimed at.  In addition, most chains would not have sufficient capital and/or access to suitable sites to invest in property development during periods of high demand – such as that being experienced in the USA right now (see previous blog).  So hotels get built by developers with a deal in place with a specific chain, or not.  Moreover, established hotels get bought and sold, so ownership can change; or management contracts expire, so new operators can be brought in – both of which may lead to the hotel being rebranded.

Posted in Chap 14 Operations strategy, Sector: Hospitality & Tourism | Tagged , , | Leave a comment

Insight into Google’s organisational culture

This BBC video takes a look at Google’s organisational culture.

 

Posted in Chap 11 Jobs and people, Sector: I.T. & ecommerce | Tagged , , , | Leave a comment

Hotel asset management – the preoccupation of hotel chain CEOs?

The annual U.S. Lodging Conference is taking place right now in the Arizona Biltmore hotel.  As is usual, there has been a panel of hotel chain CEOs discussing the issues of most importance to them, as reported on here by Hotel Management.  Three things predominate…

  1. New hotel construction.  In the USA there are 5,000 hotel projects under development resulting in a planned growth of 608,837 rooms.  In New York alone there are 181 projects in the pipeline.  This being fuelled by two factors – strong demand and the low cost of debt.  Neither are predicted to last much longer.
  2. Soft brand proliferation.  All hotel chains are launching new brands in an effort to appeal to new segments.  For instance, Wyndham Hotels has 18 different brands.  Many of these brands are “soft” i.e. independently named hotels that are marketed as belonging to a ‘collection’ of hotels rather than a chain – even though they are a chain property.
  3. Technology.  Recognition that chains must invest in new technologies such as IoT, but a lack of certainty about the return on investment of these technologies.  Linked to this is a concern about getting the balance between high tech and high touch just right for each brand and segment.

Overall it is clear that CEOs are focused on strategy.  It is also clear that asset management is a key aspect of this.  So I am planning a blog that explores this concept in more detail…

Posted in Chap 04 Location and design, Chap 13 Projects and crises, Chap 14 Operations strategy, Sector: Hospitality & Tourism | Tagged , , , | Leave a comment