hotelmatters - Issue 11 - Jan 2010
© The Hotel Solutions Partnership Ltd 2010
Well, what a year 2009 was!
All of us at The Hotel Solutions Partnership Ltd know that you and your business got through it by focusing on the customer and on value.
In this edition of our newsletter for our clients and friends, we discuss some of our experiences and offer our advice in these and other critical areas. We hope you enjoy reading it.
And what a year 2010 is going to be. The assignments we've got in the pipeline look as if they will be very interesting - and we're looking forward to working with new and old clients around the world.
Please do contact any of us if you think we can help your hotel business.
With best wishes
From us all @ Hotel Solutions Partnership
Contents
- 15 tips for survival in difficult times
- Improving your sales and marketing SWOT
- EVA helps investment decision making
- Adding value;
- Building brand loyalty;
- Wake up to reality
15 tips for survival in difficult times
Contributed by associate Ewa Kossakowska
People often complain about the impact of the recession on their lives and business. Instead of developing new long-term strategies to help them manage in an ever-changing business environment, many will panic and introduce short-term quick-fix solutions that are not always successful.
It's not as if the hospitality industry hasn't suffered from a downturn in business before. All of us remember what happened after 9/11 in 2001 and the huge impact it had on the hospitality industry worldwide.
Here are some key pointers to help you survive during difficult times.
- Think very carefully about your advertising and marketing activities and adjust them accordingly
- Know your guests and understand their requirements; introduce on-line and in-house questionnaires so you can find out what your guests are really looking for instead of offering them what you want to offer. The market is changing all the time and many guests will be 'travel experts' who know what they want and expect to get it.
- Monitor your competitors on a regular basis.
- Research and refocus your target market segments and go for volume – for instance, choose 100 small contracted companies instead of five key accounts
- Make sure the correct rates for business and leisure guests are loaded into the right distribution channels. It is vital to keep control over revenues and prices.
- Do not forget about your existing regular contracted clients. Provide loyalty programs and, remember, it is easier and less expensive to keep existing clients rather than find new ones.
- Make your website a business generator – from individuals, corporates and conference/banqueting activities. Ensure your clients can book online or e-mail you to ask for prices. Check its functionality. Is it easy to use and navigate? Has the site been optimized for use with search engines, price-per-click , Adwords, tactics ? Check with e-commerce professionals which solution is the best for your hotel.
- Familiarise yourself with the latest and most up-to-date technologies and booking systems - and use the same level of technology that is used by your guests.
- Load promotional videos and advertisements on portals such as www.youtube.com; use social networks (Twitter, Facebook, etc.) and Web2 and deploy word-of-mouth strategies.
- Don't hesitate to keep co-operation going with third party intermediaries (such as HRS.com, booking.com), online travel agents, business travel agents (such as AMEX) and other tourism related companies. Treat them as additional booking channels instead of 'enemies'. If you have a solid relationship with them in the good times, you can rely on them to help you out in the bad times.
- Use customer relationship management systems in the daily running of the business to help build strong relationships with existing and prospective guests. Implement a quick and easy response system for all requests for quotes and control follow-up procedures, which are crucial for winning business.
- Create special offers for local clients to encourage them to use your hotel at weekends and during holidays. Think about new services and products which could be offered by the hotel to generate additional revenue.
- Develop new packages and programs to generate demand from new guests. Don't forget about partnerships with destination marketing organizations to promote your location.
- Drive cost-cutting activities in the hotel. Involve hotel staff in looking at how costs could be reduced in their departments and introduce incentive programmes to encourage come up with ideas. Renegotiate your contracts with suppliers and service providers. Outsource - if it makes sense to do so - functions such as human resources, finance, IT and PR.
- Always employ talented service-orientated people who are full of enthusiasm and respect for guests. Never forget that every member of your staff is critical to your quality of service and will help you establish strong relationships with colleagues, contractors and guests. Attentive professional staff will help attract business to your hotel.
If you focus on these 15 key points, you will be better prepared for 2010 and the future. Rather than cut back on your sales and marketing activities during difficult times, it is much more effective to adapt your plans to changing circumstances.
Good luck.
Improving your sales and marketing SWOT
Contributed by associate Frank Coan
I regularly see hotel sales and marketing SWOT analyses, but rarely see one that I believe is doing an effective job for the business. Is it time to review yours?
A good SWOT analysis should be the starting point for initiating product development, directing your marketing priorities and focusing your communications strategy.
The SWOTs I see are generally just the result of a brainstorming session without any further thought applied.
Looking at the 'SW' or strengths and weaknesses of the SWOT
Your strengths and weaknesses analysis will be significantly improved if you add the word 'competitive' - so it becomes competitive strengths and competitive weaknesses. Implicit in the idea of 'competitive' is that the competitive feature also has to meet consumer needs.
As an exercise, take your existing strengths analysis and, for each 'strength', ask yourself:
- Is it really true that this 'strength' gives you a competitive advantage? If it does, keep it as a 'strength'.
- If, on the other hand, this 'strength' meets consumer needs but, on reflection, your offer is similar to competitors, then reclassify it as a 'positive feature'.
Now do the same for your existing weaknesses and, for each 'weakness', ask yourself:
- Is it really true that this 'weakness' places you at a competitive disadvantage? If it does, record it as a 'weakness'.
- If, on the other hand, this 'weakness' is a consumer need that, on reflection, is not met by you but also is not met by your competitors, then reclassify it as a 'negative feature'.
I would be surprised if this did not dramatically alter your views on the strengths and weaknesses analysis of your business.
Building strengths and weaknesses from scratch
The following steps are suggested to help you develop a strengths and weaknesses analysis.
- First of all, identify your most important market segments. For each segment in turn, undertake the following steps.
- Identify your key competitors for the market segment. If you have not visited your competitors, now is a good time to get to know them better.
- For the market segment, do one or both of the following:
- Brainstorm strengths and weaknesses but, as you proceed, always ask the following questions. Is this a competitive advantage? Is this a positive feature? Is this a competitive disadvantage? Is this a negative feature?
- Make a list of the 'market segment needs' - these
are the factors customers/ consumers might use to evaluate/compare
your hotel with your competitors.
- Make a matrix with 'competitors' as rows and 'market segment needs' as columns.
- Write a cryptic statement of how this market segment might view your hotel as meeting the need.
- Now, for each competitor, make your own assessment as to whether or not their offer is: much better, better, similar, worse or much worse than your own. Be flexible about the comparison – 'better/more' or 'superior' might be more appropriate for a particular feature.
-
Now, review your analysis and create a summary matrix.
Market segment: A N Other
Competitive strengths Competitive weaknesses - - - - - - - - Positive features Negative features - - - - - - - - Avoid single word statements - these usually lack clarity or are ambiguous about the point being made. Use short statements and maybe include a number, so it is absolutely clear what you mean (from the viewpoint of customers). This approach will guide you towards appropriate action. The more care you put into expressing the strengths/weaknesses, the more likely you are to take the best possible action.
- Review the above matrix carefully. Examine each entry. Would somebody, not involved in your business, know exactly what is the point being made?
- Repeat steps (2) to (5) for each market segment.
This appraisal should help you:
- prioritise markets: it is generally better to be more ambitious about growing markets, where your competitive strengths outweigh your weaknesses.
- define product development: how can you invest in building on your strengths? Could you invest to reduce the impact of weaknesses? Be wary here - true weaknesses can be very difficult to overcome.
- check your price positioning: in the marketplace, price is usually used to 'balance' strengths/weaknesses. Genuine strengths should translate into price premiums and weaknesses into discounts.
- focus communications: strengths should take a prominent role in communications and be backed up with 'positive features'.
Creating a strong and robust strengths and weaknesses analysis is time consuming but the effort will be rewarded with a sales and marketing strategy and action plan that's more focused on beating the competition.
Let me know if this works for you.
Note: The next edition of hotelmatters will include an article on the 'OT' or 'opportunities and threats' of the SWOT.
EVA helps investment decision making
Contributed by associate Ibrahim Koura
The global economic crisis has revealed that decision makers need to focus on the fundamentals of business. This article looks at some of the essential elements of Economic Value Added (EVA).
Adding economic value is the core purpose of all hotel businesses - those hotels in operation and those being planned. In some parts of the world, and particularly in the United Arab Emirates where I lived for the past ten years, decision makers have occasionally ignored the fundamentals with disastrous results as far as the losses investors and operators are now facing.
EVA is nothing new to the business world but it has been neglected by many investors, especially in the hotel sector and especially in the Middle East by private owners and even by public companies.
True cost of capital
EVA established the true cost of all capital employed by private owners or shareholders. It measures the minimum return required in order to add value and create real wealth for the investors.
The true cost of all capital employed is the weighted average cost of capital (WACC), which includes the cost of borrowing, as well as the cost of equity. The investor knows the cost of the borrowed capital, at least in the short term, but what about the cost of equity, the money that the private owner or the shareholders provide? The true cost of equity is what the owner or the shareholders could be getting in dividends, price appreciation, or the return on investing in an almost risk-free secure investment such as 10-year government bonds.
The WACC is the return required to justify going ahead with a project. This is the minimum discount rate by which the net present value (NPV) of the project is calculated. A similar measure is the internal rate of return (IRR) which is the discount rate that gives an NPV equal to zero.
As virtually all hotel activities are 'local businesses', the return on individual hotel projects should be adjusted to local circumstances (currency) such as interest rates.
WACC should be based on the local interest rate (10-year government bonds) and include a risk premium for the equity portion to be determined by the owner or the board of directors; it also assumes a standard tax rate to arrive at the cost of equity before tax.
For the debt portion, a spread should be applied in order to assess the cost of debt. The spread, usually 1% or more, is also determined by the owner or the board of directors according to the current market conditions.
The mix of debt and equity should also be determined by the owner or the board members but it is generally recommended for hotel projects to utilise 60% debt to 40% equity (see WACC calculation model below).
Calculating WACC
The WACC is calculated on the forecasted net cash flow to be generated by the project i.e. cash flow from operations. Depreciation as well as debt service and income tax should NOT be included as the required level for the WACC is set to cover these payments.
Of course, the maximum financial risk that a company takes on should reflect the owner's attitude to risk so that no additional projects are carried out beyond a certain point, whatever the profitability might be. However, there are a few tests which a new project should pass to be viable.
- Does it offer a positive net present value (NPV)?
- Does the company overall debt-to-equity ratio remain below the gearing set by the owner or the board of directors for the project?
- Will the project give returns in excess of the company's hurdle rate; preferably if the project is strategically right and if the company has enough financial basis to include new projects.
While EVA is one of today's most talked about measures in business, it's not a new idea but it has sometimes been lost in accounting and other financial measures muddles.
WACC calculation model
| Cost of equity | ||
| 1. Inflation (as forecasted in the financial projection) | % | |
| 2. Real interest | % | |
| 3. Risk free interest (10 years' government bonds) | total (1 & 2) | % |
| 4. Risk premium (share holders calculated return) | % | |
| 5. Return required (after tax) | total (3 & 4) | % |
| 6. Tax | % | |
| 7. Total cost of equity | total (5 & 6) | % |
| Cost of debt | ||
| 8. Risk free interest (per 3 above) | % | |
| 9. Spread | % | |
| 10. Total cost of debt (borrowing) | Total (8 & 9) | % |
| Gearing (example) | ||
| 11. Equity (40%) | 40% of (7) | % |
| 12. Debt (60%) | 60% of (10) | % |
| WACC (before tax) | Total (11 & 12) | % |
Note:
- The above WACC is your minimum NPV to be used for your forecasted operations cash flow.
- The IRR should exceed the above WACC for the project to be a viable investment.
A timely reminder
I trust this article is a timely reminder to hotel investors about how essential it is to make sound business decisions. Calculating the WACC is one key element of cash flow projections. Decisions based on such an analysis, however, will only come to fruition if trading and other aspects of the projections are pragmatic and realistic.
Adding value
Contributed by principal Ian Graham
Recently I've been working with a group of experts in their fields providing consulting services to a client. We really like and want to help our client's team of people. My task has been to bring together a team of outstanding individuals and then let clients loose on the assembled team.
The service the Hotel Solutions' team gives to clients is enhanced because of the skills and experience we bring together.
I may never have known what we will be asked to tackle next but I do know that my associates and I can and will add outstanding value to assignments.
By focusing on only bringing into the network truly world-class expertise, we have ensured that our network is comprised of outstanding team players. We know from the feedback we receive throughout assignments that our clients are left hugely satisfied that they have chosen the right consultancy.
And we are not resting on our laurels. We know that to continue to be successful we will focus first and foremost on attracting only the right people into the network - and we are actively seeking to add further outstanding talent to our global network.
Working together as a team delivers extraordinary value to our clients and we continuously learn from each other as we collectively deliver assignments to clients around the world.
Building brand loyalty
Contributed by principal Ian Graham
A couple of clients have asked me separately to help them by conducting structured competitor shopping. As a result, I've tested the customer journey and looked for brand touch-points in several different 5-star branded hotels in East Asia and several branded and unbranded 2-star hotels in South Asia.
Let me tell you that it is jolly useful to go back to being a guest rather than a hotelier. Have you tried it recently?
My stays reminded me of some very important points.
Space is important. That's personal space - my space, give me time and space for me please. And that's closely connected with privacy - in my hotel room, I am in my nest and, when I am in my nest, most of the time I want to be by myself.
And by the way, if the hotelier takes shortcuts, I quickly notice them. I start counting and, when I get to a certain number, I lose respect. The pillow stuffed full of cheap filling; the over-laundered and hard towels; the small slice of soap; the repair that hasn't been done; the inadequate investment in broadband width; the under-managed-because-it–is-outsourced-housekeeping. Yes, I notice and I hold it against the hotel.
And yet at the same time when someone goes the extra mile, I really notice and it contributes to brand loyalty. One brand had put a Nespresso machine into my hotel room; a great alternative to the usual kettles and instant coffee and a real wow factor for a caffeine addict.
But so too I was wow-ed when having breakfast in an unbranded 2-star hotel in India; a guest service agent came to each table to see if every guest had had a good night's sleep.
That's what it's about surely - hospitality in the hospitality industry and a one-on-one relationship between the guest and service delivery team.
I stayed in a 'grand brand' room that quite frankly was less than grand in square meters but because PropCo had over-invested in interior design (presumably encouraged by OpCo which continues to over-invest in guest service delivery) I would not hesitate to go back and stay there if I were in town on my own account.
Wake up to reality
Contributed by principal Ian Graham
We had arranged to conduct some focus groups for one client to understand better the guest expectation. Based on our prior experience, we had recommended BDRC whose team, led by Matt and Sarah, helped our client and us with the design and delivery of the research.
Have you actively tried to get under the skin of your customers recently - or even ever? It's fascinating to sit like a fly on the wall as the skilled interviewer gets a group of frequent hotel users to discuss their experiences.
You will understand that it would be inappropriate to share with you much more – except that it might surprise you that the customer does not see the hotel experience as the hotelier does.
If our experience on these occasions is anything to go by (and frankly they are undoubtedly reinforced by my own experiences as a mystery guest), there are some things that we hoteliers prize that are almost unimportant to the guest; and there are some others things that the guest holds as central to whether or not the experience is satisfactory that we hoteliers do not hold sufficiently central to our thinking.
