© The Hotel Solutions Partnership Ltd 2008

Welcome to this first edition of 2008 to hit the desktops of hotel professionals. As in previous editions, we have four thought-leadership articles for you, each of which has been inspired by recent consulting assignments.

In one article, we discuss how a spa may add value to a hotel. In another, we share with you some observations on the use of RGI as a tool for operational excellence. There are also articles on developing a hotel marketing plan and how to chose a hotel operator (or if you are a hotel operator, how to explain what you do and differentiate yourself)

And we give you the chance to get to know one of our hand-picked consultants, Larry Bowman.

Our recent assignments have been very enjoyable and we've learnt a lot. We believe we have given world-class advice across a wide range of brand and operational issues, as well as hotel development opportunities - and all for excellent value for money.

We hope you enjoy this newsletter and we look forward to working with you in the very near future.

The Editor

Contents

• Marketing plans that deliver
• Ostrich attitudes to a recession
• Stairway to heaven
• Massaging returns
• Overheard
  

Marketing plans that deliver

Contributed by associate Alastair Stevenson and associate Frank Coan

Like most processes at a well run hotel, developing and implementing a marketing plan requires ownership by the people that will deliver the plan.

In a recent assignment relating to a 100-room five-star hotel in Ireland, we were asked to coach the team through the process. The hotel is part of a small and expanding group of top quality hotels. It is approaching its third full year of trading and was seeking support to develop a marketing action plan to deliver an established budget for the new trading year.

The coaches assigned tasks to the in-hotel team that ensured a factual base was developed from which the marketing plan could be developed. The hotel management team first researched internally and externally available background data based on detailed briefs provided, addressing specific market segments. The data assembled described past performance, value and future prospects.

Using a template prepared specifically for the hotel, the consulting team worked with the hotel team (including the managing director, the sales director, the rooms manager and the financial controller) to design the new plan. In an intensive workshop, the team studied the facts, discussed the options and agreed:

1. a detailed overview of the hotel's trading history and its competitive position
2. a review of past sales and marketing activity
3. future prospects for each market segment
4. growth segments to be pursued and repeat and new business targets for each market segment
5. sales and marketing actions required to capitalise on the opportunities identified, including past actions that should be repeated
6. the time and financial resources required to implement the actions
7. clear allocation of responsibilities for managing and implementing the plan

Our approach ensures ownership by those who have to go on and manage the process, implement the actions and take responsibility for achieving the targets. It also ensures the organisation provides the resources to enable the team to succeed.

During the working session, the team devised the strategy and wrote (literally) the plan with some focused and sometimes firm guidance from the consultancy team. The result was an effective plan, properly resourced, with strong individual and team ownership.

Ostrich attitudes to a recession

Contributed by principal Ian Graham

Despite the financial markets being in melt-down, few politicians are yet admitting that their countries are in, or are even entering, recessionary times. There seems little doubt however that the western world (and perhaps other regions) is going to experience a period of slowdown and this must impact hotels sooner or later. Let's shake off such ostrich-like attitudes and consider how a hotel or a hotel business might plan to survive, and indeed benefit, during a down-turn.

Improving financial strength

First, we need to conduct some balance sheet management. A business's life support system is its ability to generate cash and, at times like this (if not at all times), care must be taken to limit the investment in non-cash working capital.

Strategies for survival will include reviewing and limiting credit policies, reducing inventories of food and beverage, negotiating longer credit terms with key suppliers and even negotiating deferred payment of taxes.

Now is also the time to play the relationship card with your retail bank to ensure that you have the overdraft and other borrowing facilities needed and at an appropriate cost. This might well mean extending your long-term loan facilities to realise capital improvements. If you have long-term loans in place and the ability to pay them off, this will often be the right thing to do it - it's the equivalent of battening down the hatches as a recession approaches.

Finally it's also appropriate to ensure that your shareholders agree to a dividend distribution policy, or indeed cash injection policy, that is appropriate to the new environment.

Protecting profitability

With a strengthened balance sheet, attention needs to be paid to protecting the immediate profitability of the hotel. As we know, hotels carry a large proportion of fixed or semi-fixed costs so a small shortfall in revenue can have a disproportionately negative impact on profitability. Let's leave consideration of the revenue stream for later and consider first cost management in the context of hotels hit by a downturn.

Initial focus will be on eliminating un-necessary cost. Challenge yourself and your team to stop doing things that just don't add value to the customer. This might be as simple as the chocolate on the pillow or it might be to radically redefine the core offer in the way that easyhotel and yotel are doing.

Having stopped doing non-value adding things, the next thing to do is to look at what is left and to outsource those things that others can provide cheaper. This might be as simple as the valet parking operation or as complex as the provision of human resource management or provision of the IT environment.

Finally, you are left with the costs that can't be eliminated and the costs that can't be reduced by outsourcing. These are the costs that need to be managed in-house - by reducing both the unit costs and the units bought. With utility costs, for example, there should be renewed focus on aggressively managing down the units consumed, as well as on switching suppliers to obtain the best price. Ultimately, you need to recognise that the big cost centres of payroll and utility are most likely to offer the greatest scope for savings to ensure survival.

The right response to revenue weaknesses

As demand start to tumble, there tends to be an automatic response to drop prices to try to continue to hold in existing customers. This is often the wrong thing to do because it's addressing a non- or wrong issue. What's important is to identify those channels and those segments in which demand is dropping, as well as those channels and those segments where price resistance is being experienced. They'll be different, so different revenue management tools should be employed to address these different issues.

As demand in one segment seeps away in a recession, it's important to replace this business from segments that are not declining and from those segments that are even growing. There will be some. These may be segments not previously addressed, addressed historically by other hotels in other market positions or even segments that previously didn't use hotels. It's likely that you will start to steal business and open channels not previously used. And you'll re-price.

Refurbish, reshape and reposition

One of the lessons from previous recessions is that it is a good time to bring forward rolling room refurbishment programmes. With less occupancy, there is an opportunity to complete works without the profit disruption that would otherwise be incurred.

It may well be the time to bring in a professional management company to add the processes and disciplines that are missing in your current operation. And it may be the right time to challenge yourself in respect of the hotel branding, ensuring that the hotel features on branded e-channels and in branded collateral that speak to the new markets necessary for survival.

All of this requires your executive team, management and staff to work hard to reshape and reposition the business. Necessarily positions will be lost as the business evolves. Some of the cost reduction can be achieved by changing full-time positions into part-time positions and long-serving team members may prefer to be engaged in lower-paid positions than to lose their employment altogether. This will be a time when your approaches to people management and change management are fully stress tested, so you should invest in change capabilities.

In designing and implementing radical life-saving strategies for your hotel business, independent consultancies such as ours can play an important role.

And finally...

You'll be interested to know that an ostrich doesn't actually stick its head in the sand. It just ducks down when it detects danger, usually in high grassy areas. When ostriches feed they appear to be burying their head in the sand because they deliberately swallow sand and pebbles to help grind up their food. Burying their heads in sand would in fact suffocate the ostrich. Don't allow it to happen to your hotel business!

Stairway to heaven

Contributed by associate Frank Coan with principal Ian Graham

There can be no one way to maximise profitability – and hotel operators around the world increasingly start with the premise that optimising RGI (room revenue generation index = the relative share of the market for room revenue that the subject hotel enjoys compared to its competitive set) is a pretty good way to start.

Recent consulting assignments have served to remind us that most of the branded operators encourage a near-religious regard for RGI. General and revenue managers spend inordinate amounts of time seeking to hone improvements through monitoring day-by-day fluctuations in RGI.

While we applaud the focus on the real world as described by objective data, there is a risk that fundamentalism in revenue management obscures the real prize.

So let's just stand back for five minutes and consider. TRI report European RevPAR up almost 28% in Moscow in 2007 but also report a decline of more than 5% at both Hamburg and Prague. In all three cities, and others, hotel management teams will invested considerable resources (time, people, money) in monitoring and managing RGI, yet as we can see the markets in which they trade can be very different. Can one set of management processes deal with such radically different trading conditions?

At one level, we too are messianic in our support of RGI – but you can't put an index in the bank nor even an improved penetration of an index. We encourage our clients to recognise that:-

1. the market shown in these reports is at best a self-selecting sample of the market and there may well be much valuable demand accommodated in hotels that don't contribute to such surveys. The apparently invisible hotels need to be considered, even if they are in different price categories, situated in different locations, using different distribution channels, either independent and / or unbranded. There is a real risk that focusing on beating a very small number of directly competing branded hotels obscures the prize that exists from competing against some or all of these invisible hotels.
2. even within our own competitive set, without understanding the trends in each of the many and different segments, we are left trying to analyse a composite set of numbers that can hide as much as they reveal. A recent assignment concerned a market that has been in free fall for many years - yet even here we could identify and value segments that had grown, and could be expected to continue to grow, which our client was advised to address.
3. the data released for analysis is summarised and averaged. We have warned elsewhere of the dangers of tracking 'average' performance. A recent assignment suggested to us that a client was ignoring some very fundamental pricing opportunities by believing that the goal was to beat the average ADR (average room rate).
4. each and every customer comes with a different cost of sales and rooms management ought to be as much focused on driving upwards segment profitability as it is in improving room revenue. Many is the time we have seen improvements in RGI or in room revenue itself eaten away by the costs associated with the distribution channel cost implications of such revenue growth.
5. in those hotels where rooms income is the vast majority of income, management should focus on room revenue (e.g. budget hotels). In more complex hotels, full service, with spa and conference hotels, attention needs to be paid to the non-rooms income streams. Some types of customers have a much higher propensity to spend on food and beverage or the spa than others, so a simple belief in RGI for RGI's sake can be detrimental to profit. Note though that it is the profit contribution that needs to be maximised - one should not be chasing total spend for the sake of total spend.
6. one of the 'known unknowns' in any business decision is the competitor reaction. If you close a channel, will your competitor leave theirs open or will they close it too? If you increase a price, will they increase theirs, decrease theirs or leave theirs alone? We don't know but we do know that the competitor will react.
7. finally, it is worth remembering that all such data is historic - and, while the past is often a good predictor of the future, the opportunity to make real profit progress is by changing the nature of the future. The recent availability of daily RGI data better enables hotel management teams to shape the future by both identifying day-of-week strengths and weaknesses and enabling rapid feedback on experimental channel, package and price management. Our experience is that hotel management teams are often insufficiently brave or lack sufficient entrepreneurial flair to seek to change the shape of the competitive environment in their favour in the future.

We encourage our clients to remember that it is room revenue and not RGI that is the platform from which profitability is derived. Maximising room revenue comes from both a gain in the share of the current market and, critically, growing your business through attracting new segments, remembering that developing new segments can be very costly. Maximising revenue may come at a sacrifice of RGI if the segments attracted spend in the spa, the bar or the restaurant. Maximising profit may come from a below average RGI if the segments attracted have a low cost of acquisition and if they spend elsewhere in the hotel.

As a tool, RGI is potentially very powerful – but, as with any tool, it's the way the tool is used that separates the craftsman from the apprentice.

Massaging returns

Contributed by lead associate Katrina Craig with associate Carl Donnelly

Is now the right time to invest in a spa? In recent months, it seems as if, wherever one turns, hotel owners and operators are adding spas to their package of products and services. From the most luxurious hotels such as Mandarin Oriental and Four Seasons all the way to Butlins and Centre Parks, everyone is getting in on the act.

Hotel branding companies such as Starwood have added spa brands to their portfolio and we've got hotel brands like Six Senses which have a spa as a core element of the offer.

Following the trends

In the 1980s, every hotel seemed to feel the need to add waterbeds, faxes and a mini-bar into the bedrooms and in the 1990s every hotelier felt obligated to add a fitness room, outsource food and beverage, implement branded breakfasts and later internet connectivity and game joysticks. In this decade, we've seen a headlong rush to add flat screen TVs and free WiFi - and now spas. As the historic examples illustrate, sometimes such fashionable elements of product or service become embedded in the core expectation of guests and remain permanent features in brand standards. But some trendy items prove an expensive side show in the long term. Are spas here to stay as a core element of hotels or are they a passing fad?

Adding a spa

Some recent assignments have allowed us to research the matter and to form some tentative conclusions. Adding a spa typically represents a very considerable capital expense and usually considerably more per square meter than the investment in an equivalent space devoted to bedrooms. The treatments that are sought are subject to quite rapid change as fashions come and go making the requirement to frequently change and refashion the treatment rooms. This is a business that needs a large capital injection up front and the ability and willingness to inject further capital fairly frequently.

At the same time, the service that is being offered is very labour intensive. There is typically a one-on-one relationship between the customer and the treatment provider and with service being offered seven days a week for ten hours a day or more; the staffing cost implications are considerable. The spa business can be characterised as one that has both a high capital and high operating cost.

Increasing value

So the first question that needs to be asked is whether adding a spa to the hotel will better enable the hotelier and the brand to add to the lifetime value of existing guests and segments and/or significantly attract new segments either from competitor hotels or competitor locations? We believe that this can only be answered by robust research.

Our experience is that there is a lot of 'noise' but actually not a great deal of valid research findings available in the public domain. There is no shortcut and a serious investor needs to commit time and energy to researching the specific market under analysis. While in many situations the spa will serve the in-house population, there will be examples where the spa can be a tool to serve the local business and/or residential population better. For both the internal and external populations, adopting a well-known brand for the spa may be an important element in attracting and reassuring the market.

Income

There is no template but it seems that the core income stream will be from treatments. Setting the price of a one-hour treatment at the level that the market will bear and using the same yield management techniques (fencing rates, volume discounts, packaging, advance purchase discounting, etc.) as are employed elsewhere in the hotel to sell hotel rooms (and on the golf course to sell golf rounds) should ensure that revenue is maximised for each of the one-hour slots available for sale in each treatment room each day.

Membership income may not be the largest income stream but it will be important to have a large enough membership to offset the peaks and troughs of hotel occupancy, yet a small enough membership so that hotel guests can be offered and they can take up packages that include spa elements. Membership income is usually made up of two elements – an initial signing on fee and an annual fee. Local demographics and other factors will determine the rate of churn in membership and the signing-on fee can be a significant element of long-term value.

Conclusion

Our findings suggest that when the investor injects the right amount of capital recognising the revenue that can be earned and the profit generated, a spa in a hotel can indeed contribute to long-term value. The savvy investor will avoid developing spas that are too large, too expensive, in the wrong hotel or the wrong town, with the wrong number of treatment rooms or offering the wrong treatments, unbranded or not operated professionally, with inadequate regard to health and safety legislation.

Overheard

Along with 1,800 other professionals, Katrina Craig, Ian Graham and Douglas Wignall are just back from the 11th International Hotel Investment Forum held in Berlin.

Here are a few of memorable statements made from the podium.

"We've had a decade of gross financial excesses"

"Don't be an in-between"

"Interest rates are likely to fall almost everywhere"

"European hotels have loaded into the GDS rates for 2008 that do not show the same rate of growth as was shown in 2007"

"The euro will be strong with a likelihood of continued devaluation of sterling and the US dollar"

"On-line promotions are key in 2008 to winning on-line bookings"