Industry Update
Opinion Article 1 September 2020

How Turning to Benchmarking Can Stave Off Financial Ruin

By David Eisen, Director of Hotel Intelligence and Customer Solutions for HotStats

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When the winds of crisis whip, and a hotel's cash begins flying away, it's easy to panic. During a crisis, it might feel like the whole market has been pulled out from under you.

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However, there is hope even in the worst financial crisis. With hotel benchmarking, it's possible to fight off financial ruin, even in the middle or during the aftermath of financial turmoil.

Wondering how?

In this article, we dive into ways hoteliers can use benchmarking to keep a hotel out of the red and steer operations to long-term profit amid a nightmarish market.

First, What Happens During a Financial Crisis?

Every financial crisis will be different, but understanding the general structure of financial pitfalls makes it easier to navigate them.

In most cases, an unexpected event or series of events will strike an initial dagger into the heart of the industry. As bad as the initial financial hit is, the event usually spirals into bigger events that disrupt wide-sweeping markets.

For instance, in 2008, a subprime mortgage crisis sent the U.S. financial markets into free fall. The crash echoed into an even broader market and ultimately led to a global recession. More recently, COVID-19 forced businesses to shut down and travel halted in the face of a spreading illness. During COVID-19, that has meant hoteliers have needed to adjust to new preferences and correct for a travel demand drop-off.

The good news?

Regardless of which stage of a financial crisis a hotelier is facing, it's possible to right the ship, adjust operations and avoid financial devastation. Here's how to use benchmarking for financial success at each stage of a crisis.

Pre-Crisis Benchmarking

If you're lucky enough to see a financial crisis on the horizon, it's possible to batten down the hatches with hotel benchmarking. Here's how:

Establish a Baseline

Whether the hotel is preparing for a crisis or the damage has already begun, it's important to set up a financial baseline. That means determining the hotel's break-even points. By nailing down exactly how many guests the hotel needs to stay profitable, it's easier to prioritize new spending and locate where to cut back when a crisis strikes.

Measure Hotel Costs

The more hoteliers understand their operations, the easier it is to be flexible during a crisis. It's crucial to understand the expenses bogging down the operation. Here are some costs to dig into:

  • Labor
  • Departmental expenses
  • Utilities
  • Maintenance and property costs

By examining the hotel's major expenses, hoteliers can see where there is wiggle room to make cuts if a crisis hits. Combined with knowledge about the hotel's baseline needs, these figures help hoteliers protect their operation from financial downfalls.

Hotel Benchmarking Amid Financial Collapse

Usually it's difficult, if not impossible, to see a financial tidal wave mounting. However, even if your financial vessel has capsized and you're losing money, it's possible to avoid long-term financial damage. Here's how:

Pause, Plan and Adjust

Rather than succumbing to panic, it's best to pause, gather data and put a plan in motion. This tactic requires uncovering current trends and making adjustments.

How?

Start by getting to know the ins and outs of the hotel's operations. That means examining operating expenses and comparing those costs to the current market's demands. These figures can inform cuts or new investments. For instance, in the current COVID-19 crisis, many businesses are seeing demand for some food and beverage (F&B) services dwindle. At the same time, golf operations are thriving.

By poring over hotel metrics during the crisis, hoteliers get a handle on market demand, even during uncertainty. With that, they can chart a new course toward profit.

Focus on Profit

The key to navigating hotels through any crisis is becoming laser-focused on profit. When profit is driving plans, it ensures that new moves are turning into meaningful returns, not just top-line cash.

Wondering how to measure hotel profit?

One solid profit-focused metric is gross operating profit per available room (GOPPAR). This figure shows how much profit is coming in on a per-room basis. That means hoteliers can use it to gauge financial health and see how changes are hitting the hotel's bottom line.

Avoiding Financial Problems in the Future

When the financial storm subsides and travel demand is restored, the scars from a crisis will linger on. But hoteliers can still take steps to thrive in a postcrisis market. Here are some things to keep in mind in a crisis's aftermath:

It's Easier to Focus on Revenue in Steady Financial Environments

Most hoteliers get it backwards. They base their full hotel performance strategy on shallow revenue numbers, namely revenue per available room (RevPAR). Unfortunately, RevPAR does little to indicate a hotel's financial health, and revenue tends to be in short supply during a financial dry spell.

Still, revenue plays a key role in hotel performance, after operations have been adjusted to ensure profitability. In fact, it can be an excellent indication of what's working and what isn't in a new market.

In order to measure demand when the financial storm has passed, consider diving into revenue by department and seeing how it stacks up against total revenue. Here are some metrics to examine:

  • F&B revenue as a % of total revenue
  • Conference revenue as a % of total revenue
  • Golf revenue as a % of total revenue
  • Spa revenue as a % of total revenue
  • Parking revenue as a % of total revenue

Keep Profit at the Center of Planning

As long as profit is guiding moves, hotels will be able to recover quickly in a postcrisis world. In fact, studies suggest that hotels that focus on operational efficiency will be the fastest to recover from the current COVID-19 crisis.

Even when demand is restored, it's important to use profit to lay out a long-term hotel performance strategy. A focus on profit doesn't just make for a faster recovery, it also insulates the hotel from future downturns or residual crashes.

Use Hotel Benchmarking to Stave off Financial Ruin

The more in-depth the hotel benchmarking is, the easier it is to stave off financial ruin during a crisis. No matter what stage a hotel is at in the crisis's lifecycle, deep hotel benchmarking will provide the foresight to fight off financial damage and the materials to adjust for higher returns.

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David Eisen

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