Opinion Article11 February 2019
By David Lund, The Hotel Financial Coach
When you are preparing your budgets, an incredibly valuable tool is what I refer to as the “citywide supply and demand analysis.” I didn’t come up with this, however, I am going to explain how it works, why it’s so important to complete it at least annually and how to analyze it.
In a previous post, I wrote about how to calculate your RevPAR index and how to measure this against your competitive set, sort of a manual version of what STR supplies. This concept is similar, but one does not replace the other and vice versa. The “citywide” report allows you to see where you are relative to your entire market, where you historically have been and most importantly where you think you’re going and what you need to employ to get there.
Most cities and regions have an entity that tracks accommodations statistics. This includes occupancy and rate and they publish this information at least annually. The typical organization is something like the “Blank City/Region Tourism Bureau.” Your hotel is or certainly should be a member. Other hotels facing consulting and data collection firms may also have the information you need to establish the baseline for your analysis. What you want to find is a report that lays out the entire supply (number of rooms available) and the annual occupancy and room rate for your city/region. Once you have the three items above you can also (if not included in their report) calculate the rooms sold, the REVPAR and the total room revenue for each year. I recommend going back at least four years to establish a solid baseline. You should expect to see changes in the supply as hotels get added or possibly removed depending on your market.
Once you have the entire market’s information laid out in excel for four years, you want to build a similar chart below the entire market section and do exactly the same for your hotel. Take note of whether you include your hotel information or not in the entire market section and just make sure year over year that you are consistent. Some people will calculate the information with their hotel included and some will remove their hotel. I think, depending on the size of the market, the bigger it is the less you need to be concerned about including your data, and the smaller the size of the market depending on your hotel’s size it may have an impact on the picture you’re looking at.
Once you have all the data laid out you will see the historical picture of how your hotel performs relative to the market. This comparison itself can be an eye-opener for your view of your property relative to the market. Now you need to add your current year’s forecast to the spreadsheet. Your property numbers should be readily available and based on your knowledge of the market relative to your hotel and you need to estimate the current year’s performance. Don’t forget to add any new supply that has recently opened. Now you have five years of hotel operating performance to look at in order to answer many questions. What has been the trend relative to the market’s performance and your hotel’s results? In relation to you, is the market over or underperforming on occupancy? If it’s one or the other, and it will be, then why? What drives these results and this dynamic? Is it your location, the brand or is your hotel recently removed or in need of renovations? The same analysis needs to be done as it relates to the average rate. What drives your results relative to the market? Are you winning or losing relative to where you should be based on your property’s characteristics and value proposition? The RevPAR analysis will tell the complete tale. Now comes the fun part. You need to plot out how the market will perform in the next three to five years doing the following:
- Adjust the market for any new supply.
- Determine how the market will adjust its occupancy for the additional supply.
- Do the same with the room rates.
Now you have a logical view of how you see your market performing historically and into the future. Does it make sense? Does your property’s performance line up with the historical results the way you thought it would? Now do the same forward-looking projection for your hotel, considering your historical and current performance. Also consider the effects of new supply, competitors’ renovation plans, and your hotel’s improvement plans. This is where the rubber hits the road. Is your hotel losing ground in the market? Is it going in the other direction and outperforming the market? Are your overall market or hotel projections realistic? The whole point of the analysis is to help you see what’s possible within your market and to generate ideas about what you need to do to remain or become more competitive.
The market never stands still and in order to be on top of it, you first need to be able to establish your business’s place in the market and make the necessary investments to keep or hopefully improve your position. Someone once said you can’t manage what you can’t measure. This simple and effective tool will help you manage your hotel’s market position.
The Hotel Financial Coach