Chapter 8 - Revenue management for hotels. In this chapter, you will learn how hoteliers decide what they will charge for the hotel rooms and the other products they sell. You will discover that hotels typically offer their guests a variety of room rates depending upon the specific characteristics of the rooms sold and the guests to whom the rooms are sold.
Chapter Revenue Management for Hotels © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Chapter Outline Establishing Room Rates Revenue Management Non-Room Revenue © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Learning Outcomes Utilize alternative methods when establishing a hotel’s room rate structure Apply revenue management and analysis techniques to the administration of a hotel’s room rate structure Recognize the importance to a hotel of properly managing and controlling its non-room revenue © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Establishing Room Rates Any serious exploration of hotel room rates and their management must include basic information about room rate economics Room rate economics recognizes that, when the supply of hotel rooms is held constant, an increase in demand for those rooms will result in an increase in their selling price Conversely, when supply is held constant, a decrease in demand leads to a decreased selling price © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Establishing Room Rates Understanding the law of demand is critical because, unlike managers in other industries, hoteliers cannot increase their inventory levels of rooms (supply) in response to increases in demand Hotel managers must also understand that their own inventory of rooms is highly perishable If a hotel does not sell room 101 on Monday night, it will never again be able to sell that room on that night, and the potential revenue that would be generated from the sale is lost forever © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Establishing Room Rates A rack rate is the price at which a hotel sells its rooms when no discounts of any kind are offered to the guests In some cases, it makes sense for hoteliers to create special event rates Sometimes referred to as “super” or “premium” rack, these rates are used when a hotel is assured of very high demand levels (e.g., Mardi Gras in New Orleans and New Year’s Eve in New York City) Hotels often negotiate special rates for selected guests In most cases, these negotiated rates will vary by room type In addition to rack and negotiated rates, hotels typically offer corporate rates, government rates, and group rates © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Establishing Room Rates Some hotels have great success “packaging” the guest rooms they sell with other hotel services or local area attractions When a hotel creates a package, the package rate charged must be sufficient to ensure that all costs associated with the package have been considered In addition, the use of one or more authorized fade rates, a reduced rate authorized for use when a guest seeking a reservation is hesitant to make the reservation because the price is perceived as too high, can result in even more room rates to be managed © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Establishing Room Rates A hotel’s revenue managers can also create discounts at various percentage or dollar levels for each rate type we have examined The result is that a hotel, with multiple room types and multiple rate plans, may have literally hundreds of rates types programmed into its property management system A property management system (PMS) is a computer system used to manage guest bookings, online reservations, check-in/check-out, and guest purchases of amenities offered by the hotel © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes The Hubbart Room Rate Formula The Hubbart formula is used to determine what a hotel’s average daily rate (ADR) should be to reach the hotel owner’s financial goals The Hubbart formula is a “bottom-up” approach as shown in Figure 8.2 To illustrate the Hubbart formula, the Blue Lagoon Water Park Resort’s Income Statement is shown in Figure 8.3 For a detailed analysis of the Hubbart formula, see Go Figure! following Figure 8.3 For a summary of the Hubbart formula calculations for the Blue Lagoon Water Park Resort, see Figure 8.4 © 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 8.2 Comparison of Normal and Bottom-Up Formats Normal Format for the Income Statement Bottom-Up Format for the Hubbart Formula Operated Department Income (Rooms) Net Income + Operated Departments Income (Excluding Rooms) + Taxes - Undistributed Operating Expenses + Nonoperating Expenses - Nonoperating Expenses + Undistributed Operating Expenses - Taxes - = Net Income = Operated Department Income (Rooms) Operated Departments Income (Excluding Rooms) © 2009 John Wiley & Sons Hoboken, NJ 07030 10 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 8.8 Vertical Income Statements Blue Lagoon Water Park Resort Vertical Income Statements For the Months Ended January 31, 2009 and 2010 Last Year (2009) % 1,105,000 847,850 1,952,850 56.6% 43.4% 100.0% 335,890 537,034 872,924 17.2% 27.5% 44.7% 353,100 558,300 911,400 16.8% 26.6% 43.4% 1,079,926 55.3% 1,188,750 56.6% Total Undistributed Operating Expenses 559,986 28.7% 560,760 26.7% Gross Operating Profit 519,940 26.6% 627,990 29.9% Rent, Property Taxes, and Insurance Depreciation and Amortization 146,700 105,000 7.5% 5.4% 146,700 105,000 7.0% 5.0% Net Operating Income 268,240 13.7% 376,290 17.9% Interest 106,000 5.4% 106,000 5.0% Income Before Income Taxes 162,240 8.3% 270,290 12.9% Income Taxes 64,896 3.3% 108,116 5.1% Net Income 97,344 5.0% 162,174 7.7% Revenue Rooms Non Rooms Total Revenue Operated Department Expenses Rooms Non Rooms Total Operated Department Expenses Total Operated Department Income This Year (2010) % 1,200,000 57.1% 900,150 42.9% 2,100,150 100.0% © 2009 John Wiley & Sons Hoboken, NJ 07030 41 Managerial Accounting for the Hospitality Industry Dopson & Hayes g o fig u re! From Figure 8.8, the Blue Lagoon’s flow-through for January 2010 is calculated as the change in gross operating profit (GOP) from the prior year divided by the change in total revenues from the prior year as follows: GOP This Year- GOP Last Year Total Revenues This Year – Total Revenues Last Year = Flow-Through or $627,990 – $519,940 $2,100,150 – $1,952,850 © 2009 John Wiley & Sons Hoboken, NJ 07030 42 = 73.4% Managerial Accounting for the Hospitality Industry Dopson & Hayes Flow-Through Flow-through was created by managerial accountants to measure the ability of a hotel to convert increases in revenue directly to increases in GOP When flow-through is high (over 50%), it reflects efficiency on the part of management in converting additional revenues into additional profits For most hotels, flow-throughs that are less than 50% indicate inefficiency in converting additional revenues into additional profits © 2009 John Wiley & Sons Hoboken, NJ 07030 43 Managerial Accounting for the Hospitality Industry Dopson & Hayes GOPPAR Gross operating profit per available room (GOPPAR) is defined as a hotel’s total revenue minus its management’s controllable expenses per available room For example, the costs of a hotel’s lawn care services, utility bills, and even food and beverage expenses are considered when computing GOPPAR These same expenses are not, of course, considered when computing RevPAR © 2009 John Wiley & Sons Hoboken, NJ 07030 44 Managerial Accounting for the Hospitality Industry Dopson & Hayes g o fig u re! Using the Blue Lagoon Water Park Resort January 2010 income statement in Figure 8.8, total rooms available to be sold are 7,440 (240 rooms x 31 days = 7,440) and GOP-PAR is calculated as follows: Gross Operating Profit Total Rooms Available to Be Sold = GOPPAR or $627,990 7,440 © 2009 John Wiley & Sons Hoboken, NJ 07030 45 = $84.41 Managerial Accounting for the Hospitality Industry Dopson & Hayes GOPPAR RevPAR indicates the performance of a hotel in terms of rooms inventory sales and marketing, however, it provides no indication of how much money the hotel actually is, or should be, making GOPPAR takes into consideration the cost containment and management control of the hotel and must be considered in any effective rooms pricing strategy The difficulty is not that RevPAR is a poor measurement, but rather it is the fact that RevPAR should not be the only measurement of a hotel’s revenue manager’s effectiveness © 2009 John Wiley & Sons Hoboken, NJ 07030 46 Managerial Accounting for the Hospitality Industry Dopson & Hayes Non-Room Revenue Non-room revenue is important to the managers of both limited service and full-service hotels It is common for limited service hotels to generate 520% of their total revenue from non-room sources In full-service hotels, the non-rooms revenue generated may range from 20-50% of total revenue Not every hotel will create revenues in every non-room revenue area © 2009 John Wiley & Sons Hoboken, NJ 07030 47 Managerial Accounting for the Hospitality Industry Dopson & Hayes Non-Room Revenue Non-room revenue on a hotel’s income statement is attributed to one of the following categories: s Food Health Center Beverage Swimming Pool Telecommunication Tennis Garage and Parking Tennis Pro Shop Golf Course Other Operated Departments Golf Pro Shop Rentals and Other Income Guest Laundry © 2009 John Wiley & Sons Hoboken, NJ 07030 48 Managerial Accounting for the Hospitality Industry Dopson & Hayes Food and Beverage Revenue Food and beverage revenues typically make up the largest portion of a hotel’s non-room revenue In a properly managed hotel food and beverage (F&B) department, the department head wants to financially support the hotel through sales However, this may be more complicated than it first appears © 2009 John Wiley & Sons Hoboken, NJ 07030 49 Managerial Accounting for the Hospitality Industry Dopson & Hayes Food and Beverage Revenue For example, in many hotels, complementary breakfast is served to all overnight guests The food and beverage department may be reimbursed for the “cost” of providing breakfast, but the actual “sales” value of the breakfast, including a profit, would not likely be transferred Another example is a holiday weekend package plan that includes one night’s stay, dinner, and breakfast sold to guests for one price © 2009 John Wiley & Sons Hoboken, NJ 07030 50 Managerial Accounting for the Hospitality Industry Dopson & Hayes Food and Beverage Revenue Food service is often viewed as an amenity to attract guests and to provide food and beverage alternatives to increase the hotel’s revenues The role of the F&B department is, appropriately, secondary to that of those departments that sell and service guest rooms Experienced managerial accountants understand this and resist the temptation to aggressively and expensively seek to market the F&B operation to nonhotel guests living in the local area © 2009 John Wiley & Sons Hoboken, NJ 07030 51 Managerial Accounting for the Hospitality Industry Dopson & Hayes Food and Beverage Revenue Food and beverage in a hotel may include revenue and expense detail one or more of the following categories: Room Service Banquets Breakfast Lunch Dinner Meeting room rental Meeting room set-up and décor Audio and Visual (A/V) equipment rental Service Charges © 2009 John Wiley & Sons Hoboken, NJ 07030 52 Managerial Accounting for the Hospitality Industry Dopson & Hayes Telecommunications Revenue In the not so distant past, in-room telephone toll charges contributed a significant amount of money to a hotel’s annual revenue Today, however, the advent of cell telephones, and the reputation for excessive charges that has plagued hotels have lead to significant declines in this revenue source Many hotel brands have had to reduce or even eliminate their local telephone charges As a result, for most hoteliers, focus on the telephone department has shifted from a “pricing” concern to a “cost” accounting and management concern © 2009 John Wiley & Sons Hoboken, NJ 07030 53 Managerial Accounting for the Hospitality Industry Dopson & Hayes Other Operated Departments Revenue Pay-per-view movies Pay-per-play in-room games In-room safes Internet access charges Miscellaneous other income © 2009 John Wiley & Sons Hoboken, NJ 07030 54 Managerial Accounting for the Hospitality Industry Dopson & Hayes Review of Learning Outcomes Utilize alternative methods when establishing a hotel’s room rate structure Apply revenue management and analysis techniques to the administration of a hotel’s room rate structure Recognize the importance to a hotel of properly managing and controlling its non-room revenue © 2009 John Wiley & Sons Hoboken, NJ 07030 55 Managerial Accounting for the Hospitality Industry Dopson & Hayes ... 25,201 ,80 0 2 ,85 4, 080 Payroll and Related Expenses Other Expenses ? 2, 188 ,80 0 534,960 54,000 180 ,000 48, 960 5,973,120 ? 532 ,80 0 201,600 28, 800 64 ,80 0 10 ,80 0 2,077,200 ? 2,340,000 2,076,000 - 180 ,000... 50,400 771 ,84 0 435,600 244 ,80 0 57,600 77,760 284 ,400 780 , 480 1,357,200 388 ,80 0 583 ,200 277,200 334 ,80 0 1,552,320 291,600 905,400 1,071,000 1,197,000 1,071,000 2,904, 480 3 ,85 7,040 6,761,520 8, 877,600... Dopson & Hayes Figure 8. 4 Summary of Hubbart Formula Calculations for the Blue Lagoon Steps 1-5 : Bottom-Up Format for the Hubbart Formula Calculations Before-Tax Net Income $ 3,243, 480 + Nonoperating