Maximize Hotel Profitability With Group Business

By Matt Curry

An analysis of the U. S. meetings and events market by PwC,¹ revealed that the U.S. meetings industry generates approximately $30B – or just over one in five dollars – in hotel room revenue, while another $110B in revenue is generated from ancillary services such as food and beverage, event space, equipment rental, ground transportation, audiovisual (AV) support, and other services. Unfortunately, current revenue management practices tend to evaluate hotel group business performance based on the revenue per available room (RevPAR) index, which is not the best metric for determining a group’s overall profitability. There are several factors contributing to this faulty approach.

Factors Contributing to a Lack of Profitability with Groups

Group Business is More Complex

When dealing with transient business, revenue managers work with unconstrained demand, using price as a lever – yielding to maximize revenues which simultaneously decreases demand from your more price-sensitive customers. Attempting to apply transient revenue management techniques to your group business doesn’t work. The challenge with groups, is that you must manage interdependent, fixed inventories: guest rooms and meeting rooms. And to optimize profitability across these inventories, you must strive to achieve the best possible business mix between convention groups, local catering groups, and transient business.

RM Focus on RevPAR

The RevPAR index is a key performance metric that drives a myriad of decisions within your organization. However, growth in RevPAR does not mean that your hotel profits are increasing,² just as a decline in RevPAR does not necessarily indicate a decline in profitability. When making decisions related to group business, RevPAR only calculates your income as a percentage of room sales and it does not incorporate other revenue streams that contribute to your profitability, such as function space, food and beverage, and AV rental. If you rely solely on RevPAR to determine whether or not to accept a particular piece of group business, you may end up making poor decisions that are detrimental to your hotel profitability.

Incentives for RM Leaders

Further contributing to the problematic focus on RevPAR, is the distorting factor of revenue management incentives. According to research from professional services firm ZS and the HSMAI Foundation,³ industry incentive compensation often relies heavily on the RevPAR index or room night revenue. This creates a culture that leads to counterintuitive decisions about group business because it doesn’t benefit managers to account for the considerable revenue and profit generated from areas outside of guest room bookings.

Not Incorporating Meeting Space in Decision-Making

Group business is varied, including meetings and conventions, trade shows, incentive trips, sports tournaments, and SMERF (social, military, educational, religious and fraternal) events. It also includes local catering groups. With the right tools and proper forecasting that accounts for the differing lead times (conventions typically booking further out than local catering groups), you can maximize hotel profits on function space as well as guest rooms. Once you have meetings/convention groups and transients on the books, you can fill – and optimize yielding on – unused function space with local catering groups.

Not Incorporating F&B in Decision-Making

In a recent International Association of Conference Centres (IACC) survey of event planners,⁴ hotel F&B was found to be a determining factor in site selection. And a trend report from Avendra⁵ found that F&B is growing in importance as a revenue stream. Groups that frequent full-service hotels are spending more on F&B, and they’re moving up to hire-tier proteins and beverage options – with group business being the biggest, most important driver of F&B demand.

A STR research presentation⁶ during a Hotel Data Conference, showed that food revenue made up:

• 57 percent of catering-and-banquet revenue at luxury hotels.
• 59 percent of catering-and-banquet revenue at upper-upscale properties.
• 58 percent of catering-and-banquet revenue at upscale hotel.
• Plus, hotels earned an additional 6 to 10 percent in beverage revenue.

Clearly, F&B is crucial to overall hotel profitability and must play a bigger role in decision-making when it comes to your group sales strategy.

Improve Profitability Through Total Revenue Opportunity

Rise Above the Competition

Cvent recently published their Q1 2019 Group Business Outlook,⁷ a 24-month forecast that highlights group booking activity in the U.S. Data within the report showed that while there was a substantial increase in awarded request for proposal (RFP) activity at the end of last year, that increase was likely fueled by meeting planners’ desire to finalize group contracts before major hotel chain commission policy changes went into effect this year.⁸

Looking forward through Q2 2021, group bookings are actually pacing down due to relatively flat group business demand and increasing supply. This combination is creating a hypercompetitive market that will require hotel owners to reevaluate their group strategy. By proactively changing from a RevPAR or “rooms first” focus to a total revenue management focus, you will increase profitability from your group business and stay ahead of market trends.

A Practical Look at Total Revenue Opportunity

In order to form an effective group business strategy and grow group revenues, you must focus on the total revenue opportunity for each piece of group business – accurately and thoroughly calculating all revenues associated with each booking. Because there may be times when you should accept a group, even though a RevPAR analysis makes it appear as if the booking is losing revenue. It’s only when you look beyond room revenue to include ancillary options like food/beverage and meeting space in your group business evaluation that the true value of the business is revealed. Only then can you decide whether to accept or reject a particular piece of group business, as well as determine the optimal rate to offer for that business.

Consider the following scenario:

A 300-room hotel is considering a large group opportunity spanning four days, beginning on October 5, 2020, at a rate of $200 per room/per night.

Based on the analysis completed by the hotel, it would appear as if accepting the group would result in a loss of $32,100 in room revenue due to displacement of other higher-rated transient business. However, by including food-and-beverage minimums as well as meeting room rental fees into the calculation, it becomes clear that accepting this piece of group business actually increases profits.

Even when examining historical performance, if the hotel accepts the group, the hotel’s revenue generation index (RGI) may drop below last year’s level, perhaps even below the level of its competition. But in fact, the hotel would still have generated more revenue. This example illustrates the potentially negative impact on profitability that can come from focusing on rooms revenue as your only goal when evaluating group business

The time has come to rethink the way we measure group revenue – with an eye toward optimization. By taking a scientific, data-driven approach to managing your group business, one that accounts for total revenue opportunity, you’re empowered to drive further performance improvement from groups and thus maximize overall hotel profitability.

SOURCES:
¹Green, Cindy Estes. “Groups & Meetings Special Report: The Economics and Complexity of Intermediation.” Kalibri Labs, 2018, www.kalibrilabs.com/groups.
²Chen, James. Revenue Per Available Room (RevPAR). Investopedia, 16 Feb. 2019, www.investopedia.com/terms/r/revpar.asp.
³Yeung, Tony. How to Upgrade Hotel Sales and Revenue Management Incentive Practices and Improve Plan Satisfaction. ZS and HSMAI Foundation, 2015, www.zs.com/~/media/files/publications/public/zs-hsmai-ipr-executive-summary.ashx
⁴“IACC Meeting Room of the Future – 2018 Report.” IACC, 2018, www.iacconline.org/meeting-room-of-the-future-2018-download.
⁵“Avendra Releases Findings From Lodging Industry F&B Study.” Hospitality Net, 4 Apr. 2018, www.hospitalitynet.org/news/4087761.html.
⁶“F&B Trends: Catering, Banquets Lead in Revenue Growth.” Hotel News Now, 21 Aug. 2017, www.hotelnewsnow.com/Articles/206251/FandB-trends-Catering-banquets-lead-in-revenue-growth.
⁷Group Business Outlook Q1 2019. Cvent, 2019, explore.cvent.com/groupbusinessoutlook.
⁸Thornley-Brown, Anne. “Advice for Third-Party Planners as Hotels Cut Commissions.” Plan Your Meetings @ Meeting Professionals International, 9 May 2018, planyourmeetings.com/out-of-commission/.