Case study 14 - First steps in developing a hotel

The client: the principals behind a UK based private company.

Background: the client developed and operates an 80-room hotel situated on 3,000 square metres of land directly on the waterfront. The site is flanked by other hotels catering to the family and senior segments of the tourist market. Having recently experienced an increase in operating costs related to a deterioration of the building and plant facilities, the client wished to undertake a major renovation programme which includes the addition of a further 30 rooms, a spa and fitness area, and a new apartment building directly adjacent to the hotel. The client also wanted to upgrade the hotel's overall standard to achieve a higher classification in respect of star-rating.

Consultant/s: Ian Graham, Katrina Craig and Carl Donnelly

Project date: 2008

Project objective: to assess the economic viability of the project and establish a business model for the hotel, the client wished to appoint a suitably qualified and independent consultancy to prepare a business plan and might, in the future, need further advisory services when the project proceeds to the implementation stage.

Project scope
The team aimed to validate the proposed project in several dimensions- the market, the concept, the returns and the opportunity to take advantage of any support offered by the local government.

Methodology
Hotel Solutions developed a scope under which its multi-skilled team brought the appropriate knowledge and thinking to the assignment.

In the first place, Katrina and Carl conducted field and desk research into the market and determined whether there is a gap between supply and demand which may represent a lucrative opportunity. Both Katrina and Carl visited the city and interviewed key members of the local government regeneration authority, tourism development office and the relevant planning authorities. They also interviewed key players within the hotel sector, real estate agents and providers of business to the hotel and conference industries. Desk research was conducted and the data that exists on the performance of competitors in the market was bought. From this research, an idea of the market's true potential was formed.

The research showed that there was a clear market opportunity, but in a part of the market that the client was not thinking about. The team developed a concept for the hotel and residential offering that addressed that opportunity.

It included a recommendation for the optimal number, type and size of rooms, the hotel's food and beverage outlets, meeting and function facilities, spa/fitness facilities, and ancillary services and facilities necessary to cater to the demands of the target customer. With regards to the apartment units, we gave a recommendation of the number, configuration, level of finish and pricing of the units. Katrina created a high-level development cost estimate based on a preliminary area program. In parallel with this, Carl research operating costs and both bank and public sector funding options.

Using the output from the work of Katrina and Carl, Ian developed a model of the operating profits and losses that can be expected from the business. From the development cost estimate prepared by Katrina, Ian created an investment appraisal model that indicated the level of equity and debt that can be expected to be required. An indication of the returns to equity and terms and conditions that would be required by the debt providers was given. Appropriate estimates of the costs of recruiting and developing the necessary staff to operate at a higher standard of service and securing a hotel brand were included.

Katrina, Carl and Ian amalgamated their thinking and recommendations into a report for the client.

Results
Our market study revealed an opportunity that justified a major redevelopment plan including but not limited to the expansion of the hotel. A full business plan also developed that could be used to attract hotel brands and lenders to the opportunity.

The client was fundamentally challenged and has subsequently proceeded with the development largely as recommended by the Hotel Solutions team.

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