Guest Column

Unlocking the RevPAC potential

The Indian hotel industry, currently in a phase of strong revenue and profitability growth, may not be fully capitalising on RevPAC (Revenue per available customer) potential. Hidden opportunities like managing demand, optimising customer mix and sales channel mix can improve revenues by 6-10 per cent and increase profitability by 6-8 per cent (as percentage of sales). To unlock this RevPAC potential, companies will need to implement an integrated optimisation strategy say Pankaj Gupta, Angshuman Bhattacharya and Amit Shah

The Rs 12000 crore Indian hotel industry (2006), growing at a Compounded Annual Growth Rate (CAGR) of 11 per cent (2000-2006) is witnessing an unprecedented boom. This growth has been driven by factors like rising disposable incomes, 390 million domestic tourists and 4.48 million inbound foreign tourists, affordable air travel and an overall climate of growth. Expectedly, the demand-supply gap (especially in the premium segment) has been narrowing in the same period, with demand growth (CAGR of 14 per cent) outpacing supply growth (CAGR six per cent) resulting in ARRs touching dizzying heights.

The future capacity inflow across cities might rationalise the ARR movement to a certain extent. The industry today has transformed into a virtual monopoly in most cities where hotels are able to command sky high ARRs. However ARR as a growth lever may have reached a saturation level with the current ARRs in India for Mumbai and Delhi being higher than the ARRs in comparable global destinations like Singapore or Beijing. In the future, companies would have to look at alternate levers for growth.

Our analysis suggests that there are huge hidden opportunities for hotels to further increase revenue and profitability through these alternate levers of growth.

The latent opportunity

The hotel industry is unique and complex in its own way with revenues dependent on a plethora of products (rooms, food, spas, MICE etc.), channels (GDS, internet, over the counter etc), customers (international, domestic) and customer sub-categories (business, leisure, corporate, individual etc.) Naturally, this complexity throws up a challenge for revenue managers to budget and implement the best possible combination of customer, product and channel, with respect to the dynamic demand across the year.

Our analysis shows that hotels in business destinations achieve only 68 per cent (64 per cent for leisure destinations) of the theoretical maximum revenue potential annually. For every Rs.100 of achievable revenue, there is an opportunity loss of Rs 26 due to the customer mix and Rs 6 because of fluctuating demand. (The corresponding estimates for a leisure destination are Rs.25 and Rs.11 due to customer mix and seasonality respectively). Further, there is a cost of Rs.5 (Rs.9 for leisure destinations) due to channel mix (intermediation costs) affecting the profitability. Capitalising on even a small portion of this opportunity could lead to significant benefits for the business.

Therefore, the three challenges that clearly emerge for the industry are:

• Managing demand
• Optimising customer mix
• Optimising channel mix

Managing Demand

The hotel industry is inherently prone to fluctuating demand with Occupancy Rate (Ors) in certain periods 10-20 per cent lower than annual average. This could be attributed to the following aspects.

Seasonality of demand

Analysis of the foreign tourist inflow in India and domestic airline load factors (used as a proxy for domestic tourist pattern) indicates that there exists a high level of variation in demand in different parts of the year. These could be caused by a host of factors like events, seasons, weather, festivals, financial year ends etc.

The weekend phenomenon

Insights into ORs across the week indicate that hotels in business destination which have a larger proportion of business guests are more prone to lean business during weekends while leisure destination hotels which cater largely to leisure guests expectedly experience lean business during week days. Four and five-star hotels which have a larger proportion of 'domestic - business' guests are more prone to lean business during weekends compared to five-star deluxe hotels which have a larger share of 'foreign - business' guests.

Preference of hotels to maximise RevPAR through ARR growth over OR

An analysis of dynamic pricing reveals that RevPAR growth through ARR growth is preferred in the industry as it raises the overall industry ARR levels. This approach is also preferred as the revenue growth is achieved at no extra cost implying a favourable impact on the bottom-line.

Our analysis suggests that revenue loss due to seasonality and the weekend phenomenon can be significantly reduced by increasing ORs to 80-85 per cent without significantly compromising on the prevailing ARRs. This opportunity has the potential to increase revenues by three to five per cent.

Managing the customer mix

The customer mix profile of a hotel is largely governed by its product offerings, brand positioning, segmenting and location. While hotels employ levers like tie-ups, promotions, targeted pricing etc. to influence the customer mix, our analysis indicates that there still lies a huge opportunity to increase revenues through strategic customer segmentation and offer management. This hidden opportunity has the potential to boost revenues by three to five per cent.

Managing the sales channel mix

The increase in on-line bookings over the last decade has restructured the sales channel mix for hotels, compelling the channel partners to reposition and restructure themselves. It is also now being realised across the travel and hotel industry that the large number of intermediaries which are an integral part of the system result in higher complexities, lower profitability & commoditisation of hotels.

Our analysis indicates that the next phase of growth should see hotels striving to maximise their profitability through optimisation of channel mix and minimisation of intermediaries, thus unlocking value for the hotels as well as their customers. Our estimates suggests that optimising the channel mix could result in reduction of intermediary costs by one to three per cent.

The road ahead

The hospitality industry is at an important cross-road with unprecedented investments being committed by domestic and global brands along with the entry of new formats like 'smart basics' ( full facility, limited service formats), changing the rules of the game. Further, with ARRs in India reaching global highs, new levers would be necessary to sustain revenues and profitability growth to maintain a competitive edge.

Companies would need to continuously review and monitor the three challenges analysed above which cumulatively offer untapped opportunities to increase revenues by 6 - 10 per cent and reduce intermediary costs by 1-3 per cent, there by resulting in an overall profitability increase by 6 - 8 per cent (as a percentage of sales). This can be achieved through an integrated growth optimisation strategy built on the foundation of an understanding of customer, sales and channel trends to redefine traditional market segments and reposition the offering at each customer touch point.

A rigorous implementation of the same would enable RevPAC maximisation and provide a source of sustainable competitive advantage in the industry. First movers would not only have the advantage of maximising revenues and profitability, but also developing the resilience needed during downturns in this inherently cyclical industry.

Pankaj Gupta is the practice head - consumer and retail, Angshuman Bhattacharya is the project leader - consumer and retail, and Amit Shah - associate consultant - Consumer and Retail at the Tata Strategic Management group.
© Tata Strategic Management group.