February 2012 Archives

The standard key metric used to measure an individual hotel's room revenue performance achievement is revenue per available room, which is calculated by dividing an individual hotel's room revenue by the hotel's available rooms.

Hotel management performance is typically determined and judged by its ability to maximize a competitive set's RevPAR index. Individual managers' goals and objectives are frequently designed around improving these statistics so as to underscore the notion "what gets measured gets done."

But, the calculation of the RevPAR index is not straightforward and depends upon the relevant competitive set.

What is RevPar?

Taking this one step further, one of the most widely utilized benchmarks in the hotel industry is the metric known as RevPAR Index, also referred to as Revenue Growth Index. RevPAR Index measures an individual hotel's performance compared to market-wide RevPAR and is calculated by dividing an individual hotel's RevPAR by the market-wide RevPAR.

The RGI of a hotel reflects a measurement of the property's ability to obtain its fair share of RevPAR for its specific market. An Index above 100% indicates a hotel achieving more than its fair share of the market-wide RevPAR, while an Index below 100% represents a property not attaining its fair share of the market-wide RevPAR.

The most commonly defined "market" to measure an individual hotel's performance is the property's competitive set. A competitive set is typically defined by hotel ownership and/or management and in some cases with guidance provided by the subject's brand affiliation.

Properties included in a competitive set should represent direct competitors of a specific property. Factors in determining the selection of direct competitive properties might include: location, number of rooms, type of property, brand affiliation (if any), amenities, available meeting space, etc.

How to Choose the Competition for Comparisons.

Competitive set selections should be reviewed on a continuous basis to ensure their relevance, as markets are continuously in flux due to, but not limited to: the addition of new hotels, reduction of supply, vagaries in brand affiliations and changes in requirements of surrounding hotel demand generators.

Fundamentally, a comp set with the most accurate depiction of a subject property's competitiveness can drive and impact actual results.

Grading performance

For a moment consider the elementary school report card as an STR Trend Report, the hotel's RevPAR as the student's performance, the market as the criteria to measure the performance of the student, and RevPAR Index as the actual grade.

Back in my elementary school days the grading system did not consist of letter grades but rather a simple three tier ranking system; Unsatisfactory ("-"), Satisfactory ("S") and Better than Satisfactory ("+").

Therefore, if the report card is considered to be the STR report, then an "S" equates to a RevPAR Index of 100% while a "-" is likened to a RevPAR Index below fair share or less than 100%, and so on.

School report cards are segmented into subcategories referred to as course subject, just as an STR report can be divided into submarkets such as market class, tract, comp set, etc. Each course subject contains criteria by which the performance of a student is measured, similar to individual properties within each sub market and/or competitive set.

The measurement criteria for the course subject of Physical Education might include items such as: participates in class, works well with others, positive attitude or follows instructions. These criteria seem adequate for gym class but would not be suitable for the sole measurement of English class, where the expected criteria should include topics such as spelling, grammar and reading comprehension.

Therefore, it would not be relevant to measure a student's performance in English class by the criteria for gym class. This might result in a skewed evaluation.

The same can be said for a competitive set. Including hotels that are not truly direct competitors is comparable to measuring a student's performance in one subject using the criteria from another.

Measuring the correct items on report cards allows students to identify their individual strengths and weaknesses, which enable them to grow, learn and improve. The same can be said about a properly selected competitive set, which allows management to focus and improve performance against the hotel's direct competitors.

A Relevant Case Study

The following is an example of a recent assignment executed by LWHA Asset and Property Management Services. The selection of a competitive set can have implications on the actual performance of a subject property.

LWHA reviewed a 200-plus room, limited-service midscale property located in a major airport market. When the property originally opened, it was the only limited-service facility in the immediate market. The immediate market, excluding the subject, consisted of four full-service properties and one upscale limited-service property.

Management and ownership of the property included all five properties in the competitive set, which was a clear representation of the entire local market at the time the subject entered the marketplace.

Over time, an additional five limited-service hotels opened. In addition, during this time period two of the competitive set properties underwent a change in brand affiliation.

Management/ownership of the subject property did not adjust the existing set to reflect the changes in the marketplace, as the full-service properties were closer in proximity to the subject. The subject's RevPAR Index averaged a RevPAR Index of 110% compared to the competitive set described above. Based on these results, it was concluded by ownership and management that the property led the market in RevPAR.

But, during our engagement, an additional STR report had been analyzed to reflect the actual changes in the competitive marketplace. This revised competitive set included the sub-market's limited-service midscale and upscale properties, and excluded the full-service properties.

The performance of the subject went from an RGI ranking of 110% to 90%. Obviously, the actual RevPAR of the property remained the same; however, the performance of the RevPAR Index as compared to the new set fell below its fair share. Therefore, management and ownership's conclusion that the property led the market in RevPAR was a misnomer.

After a thorough analysis, we determined the original competitive set no longer represented the direct competition of the subject property, as these full-service properties relied heavily on airline crew and group rooms for the majority of their business, while the subject property marketed to and depended on transient rooms for a preponderance of its business.

The full-service competitors sold a significant number of rooms at lower base rates to group and crew customers, leaving a smaller amount of rooms available for transient guests. With fewer rooms available for transient business, the full-service properties sold the remaining rooms at higher room rates than the limited-service properties in the local market.

The subject property, a limited-service hotel, mirrored the pricing strategy of the original comp set and out-priced itself as compared to its true competitors, the limited-service properties, which resulted in a RevPAR Index of 90%, achieving a level below fair share.

As a result of this performance, we recommended the property alter its selling strategy to be more competitive with the revised and more accurate competitive set. The subject property quickly improved its RevPAR Index to more than 100%. The conceptualization and implementation of the revised sell strategy of the subject hotel came about as a result of the competitive set modification.

The STR report is a valuable tool and is considered the hotel industry's report card. However, if a selected competitive set is not an appropriate representation of a subject's competitive landscape, the outcome can be misconstrued by producing inaccurate and sometimes detrimental results.

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This has been a guest post by Gary Isenberg. Gary Isenberg has more than 28 years of diversified hospitality experience. He joined LWHA Asset and Property Management Services as president in May of 2011. He leads the firm's practice of providing third-party asset management, property management and an array of advisory services specializing in hotel operational and financial functions. Mr. Isenberg can be reached at 212-300-6684 x 108 or [email protected]

What will make your hotel stand out above all the rest in your area, or competing for the same market?

Some can rely on their location, or the building, or history. But what if your hotel has none of that?

One way of capturing the interests of your guest or prospects is to imagine your perfect guest sharing some of the same passions, values or interests as you. It's a lot easier to sell something you have an interest in, you are passionate about or that's important to you. If you don't love what you do, or feel it's important, it will show. It will be very hard for you to deliver a good service if you are dealing with people with whom you share no values, interests or enthusiasm.

Anyone who knows me will know that I love my garden, and love visiting other gardens. So if it was my hotel an obvious target market would be other garden lovers. This would not only allow me to attract guests who share my interest and passions, it provides a theme, which can be built on. Such as - sharing knowledge of local historical or famous gardens, forming joint ventures with a local plant nursery, garden designer, gardening author, manufacturer of garden products, or market gardener (or all of these); designing menus planned around locally grown produce.

I could tie in with any specific gardening events happening locally, such as RHS flower shows, Gardeners' Question Time, etc. Or host my own Gardeners' Question Time calling upon local gardening celebrities. I might include talks from experts, transport and free entry to a number of local gardens of interest (maybe as exclusive guests of the owner). You get the idea......

To take another example, Hotel TerraVina in the New Forest, where Nina and Gérard Bassett used Gérard's knowledge and passion for wine - Gérard is the only person in the world to hold the combined titles of Master of Wine, Master Sommelier, Wine MBA and, as of April 2010, World's Best Sommelier. (And I was pleased to have the opportunity to interview Nina and Gérard as part of my interview series - How to Give Your Hotel a Competitive Edge.)

As a result Hotel TerraVina attracts both hotel guests and restaurant diners who have an interest in wine, and Gérard is happy as he has an opportunity to cater for people who are interested in what he's offering. By employing others who share this interest and knowledge Nina and Gérard are able to be consistent. And all this provides them with great PR opportunities.

But what if your theme is not so obvious?

Start by listing what you enjoy, what you are passionate about, and what's important to you. Can these be incorporated into your business? Then consider your interests. What are the hobbies or pastimes you enjoy (or used to before you ran a hotel and had more free time!) What particular knowledge or expertise do you have? This could be nothing to do with the hotel industry, it might just be an interest or from a former career.

  • So it could be something you love: be that golf, shopping, dogs, cars, cooking - you'll then know the types of things others enjoy who share your love, so cater for these interest.
  • Something you value: such as supporting your local community, being in the countryside, or energy conservation, so give examples of the steps you've taken to contribute to these.
  • Or it might be a particular hobby or expertise you can share with your guests: your knowledge of Italian cuisine and offering cookery lessons, your interest in classic cars, and attracting like minded enthusiasts and promoting classic car events in the area, or you might have a specific skill or talent to pass on to others.

Very few of us could honestly say there is nothing we can get excited or enthusiastic about, but I'd certainly recommend checking there is enough of a market there of others who share our passion before modelling our whole business around it! Then we'll want aim to recruit people who at least have a remote interest.

And once you have identified what it is that you have that others don't, make sure you share this at every opportunity.

If your business reflects your interests, value or expertise the likelihood is you'll attract other people who share them. Having a specific interest or expertise also makes it easier for you to find a forum or networking group where you can get your name known, as well as finding potential opportunities and prospective joint ventures.

Then tell and show your guests how you incorporate these into your business. Show your guests in as much detail as possible what you do that is different, so they can see all this before they choose you. It could be why they choose you.

It's very easy to be enthusiastic and passionate about something that interests you, and this enthusiasm will translate into bookings if managed smartly. It means you are more likely to attract the type of guests with whom you can build up a good rapport and a better prospect of repeat business.

If your passion appeals to your perfect guests, it will make your job of marketing your hotel and making it unique so much easier.

This has been a guest post by Caroline Cooper, a professional business and leadership coach.  As a professional business and leadership coach, specialising in one to one coaching, mentoring and training, her key focus is in helping you, as owners of independent hotels make your businesses more successful and more profitable through increasing sales, controlling costs and improving productivity, to help improve your bottom line.

In 2010 Carmen M. Reinhart and Kenneth S. Rogoff wrote a book entitled "This Time is Different: Eight Centuries of Financial Folly". Writing on the heels of the Great Recession the book's message was a simple one: no matter how different the latest financial crisis always appears, there are remarkable similarities with past experiences from other countries and from history.

We have been here before.

Other nations and other leaders---notwithstanding the hubris, or maybe because of the hubris--always think that this time is different.

The vast range of crisis considered and analyzed in This Time is Different demonstrates that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater risks than it seems during the boom. "Debt fueled booms all too often provide false affirmation of a governments policies, a financial institution's ability to make outsized profits, or a country's standard of living. Most of these booms end badly."

Almost two years after the Great Recession officially ended the franchise market writ large is still struggling to cope with the boom that ended badly.

The International Franchise Association reported that 2012 will be the year that franchising rebounds. Last month the IFA released its Franchise Business Economic Outlook for 2012.

In short it stated, "after three years of restrained growth, due to the recession and its lingering effects, franchise businesses show signs of recovery in the year ahead." The IFA went on to state that "franchise business growth has been restrained over the past three years due to underlying factors, such as the weak rebound in consumer spending, that have been a drag on the economy as a whole.

In addition, tighter credit standards have limited the formation of new franchise small businesses and the expansion of existing businesses." (I think it important to keep in mind that the IFA has been forecasting for the last 2-3 years that this year will be the recovery year. In fact, the IFA has restated its numbers for the previous year's franchise unit growth in each of the last three years. For example, the 2012 report said that the number of franchise establishments in 2008 was 774,000; the report in 2011 stated that the number of franchise establishments in 2008 was 791,000; and the 2009 report claimed that the number in 2008 was 864,000. )

But in light of This Time is Different what struck me as particularly interesting about this latest pronouncement from the IFA was the statement by Stephen Caldeira, President of the IFA, in which he said in referring to 2012 "the rate of growth is far below the growth trends we experienced before the recession."

Most individuals understand that the growth that franchising experienced in the 4-5 years prior to the recession was fueled by the exact same economic and financial factors that gave rise to the larger American macro-economic bubble--and it subsequent collapse.

Thus I think the most important question that we in the franchising industry must ask is what growth rate do we want and what growth rate should we expect? If we expect a growth trajectory similar to the 4-5 years prior to the recession how do we plan to achieve that without a similar type economic environment? Or, do we care how we get there just so long as we do?

Toward that end, recently I had an executive remark to me that he hopes that we experience another liquidity bubble because it would return the franchise market to its pre-recession days. But is that what we really need and/or want as a country or as an industry?

Turning again to This Time is Different, the book reminds us that the boom we experienced in America was powered by a liquidity bubble--a bubble that was destined to burst--and was fueled in large part by the sub-prime mortgage market. "In the end run-up to the sub-prime crisis, standard indicators for the United States, such as asset price inflation, rising leverage, large sustained current account deficits, and a slowing trajectory of economic growth, exhibited virtually all the signs of a county on the very of a financial crisis--indeed a severe one."

A severe one indeed. We have millions out of work still, and those that are employed have seen their wages stagnate and their home value drop precipitously and not recover. But that is exactly what history has shown always occurred after a financial crisis. Reinhart and Rogoff state: "an examination of the aftermath of severe postwar financial crises shows that these crises have had a deep and lasting effect on asset prices, output, and employment. Unemployment increase and house price declines have extended for five and six years, respectively.

Real government debt has increased by an average of 86 percent after three year....Historical experience is that V-shaped recoveries in equity prices are far more common than V-shaped recoveries in real housing prices or employment. Overall the analysis of the post crisis outcomes for unemployment, output, and government debt provides sobering benchmark numbers for how deep financial crises can unfold."

Notwithstanding the remark of the executive I reference above, I do not think most in the franchise industry--nor the country--consciously want another liquidity bubble. The out-sized short term profits fueled by a large amount of liquidity in the system appear to be Faustian bargain that few in the franchise industry want to engage in again.

What the executive likely meant was that he wanted another great macro-liquidity event in our Nation's economy, he just did not want to have it become a "bubble". In that case, he, as well as most in American business today, is eagerly awaiting the next economic boom. And if that boom is to be fueled by complicated financial instruments and unrestrained access to the debt markets then "this time will be different" is the refrain that is soon to be repeated.

But as Reinhart and Rogoff detail with much precision it is unlikely from a historical perspective that the next time will be different. "The fading memories of borrowers and lenders, policy makers and academics, and the public at large do not seem to improve over time, so the policy lessons on how to avoid the next blow up are at best limited. Technology has changed, the height of humans has changed, and fashions have changed.

Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant." Franchising touches all segments of our economic society--technology, labor, finance, consumer, etc. Franchising will wax and wane depending on the over-all economic health of our country.

The question that must be answered is this: will franchising plot a course that is complimentary too, but not dependent on, the next banking and finance led American boom? Or, will franchising as a industry continue to aim for, and the IFA continue to lobby for, the good 'ole days of "outsized profits" and rapid franchise unit growth fueled as it was by what we now know to be an excess of debt accumulation both on the micro- and macro level of our economy?

My guess is that few are even thinking about the future of franchising in these terms. Most simply want growth, and they care not how that growth comes about. (Of course this is how most in our country feel and is the emotional genesis for the boom and bust cycles examined in This Time is Different.)

Every six months the IFA puts out a statement about how the tight lending standards are retarding the growth of franchising. While that is undoubtedly true, it would be helpful to learn exactly what the IFA deems as the optimal level of liquidity in the system. If by loosening the IFA is silently longing for the loose credit standards that reigned supreme in the middle of the last decade then that perhaps is the wrong path down which to proceed. If it is not, then it is incumbent upon the leadership to set forth with more particularity the goals because liquidity in the system is inextricably linked to the franchise growth projections.

In order to assure that we in franchising do not repeat the mistakes of the past, the franchising industry needs perhaps a different approach. The industry needs leadership that does not repeat nor countenance the thread-bare and statistically suspect mantra of "franchises do better in recessions."

We need leadership that understands that while prospective franchisees are more difficult to come by now then they were in 2007 that may not necessarily be a bad thing. In the same way that it is now settled wisdom that there were many who were allowed to take out a mortgage five years ago that should not have been permitted to do so, so too must the leadership in franchising state unequivocally that there were franchisees that should not have been awarded franchises and business that should not have been franchises as well.

And if that be the case, then the growth rate that was experienced in the years leading up to the Great Recession cannot be the benchmark for growth in the next decade.

The economic outlook published for 2012 projects an increase of 1.9% in franchise establishments. But as stated above, the one constant with the economic outlooks produced by the IFA over the last four years is that each year the reports change many of the figures stated in the previous years report.

The reports do have a convenient escape mechanism in that all of the reports state that the numbers are "estimates". In other words, neither the IFA nor the high powered accounting and consulting firms commisioned to compile the reports know conclusively how many franchise establishments exist today--and if you read the reports carefully you will see that the PWC reports state that 2007 was the first time that there was enough data to even put forth a sound estimate.

So while 1.9% may well be the appropriate and realistic growth rate for 2012, given the track record of the reports put forth by the IFA we must be more than a little skeptical about the numbers set forth.

All of us with a stake in franchising want to see franchising grow again. We all believe in the fundamentals that under-gird its special place in our economy. In order to achieve a prudent and sound franchise growth rate we need "tough love" leadership and sober, intelligent responses to the challenging times in which we live.

Doing so, however, requires an honest appraisal of how we got here and whether the good 'ole days were really that good. Simply running the same plays out of the same playbook, and using statistically suspect boom year expectations of growth is not a game plan for long-term success.

We have read this book before. We know how it ends. And no, this time will not be different.

This has been a guest post by Garth Snider, CEO of Franchise Opportunities Network. At FranchiseOpportunities Network we identify, create and distribute valuable information regarding franchising and small business opportunities. The FranchiseOpportunities Network lead generation network was created in order to high-quality franchising and business resources in a secure, collegial, professional and ethical business environment. As the web's largest directory of franchise opportunities, we aspire to continue giving potential franchisees simple and easy search practices, as well as thorough franchise and business resources.

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