By Shafeek Wahab
The bulldozers are working and a construction crane is being erected on that vacant lot you pass each day going to and from home. The sign on the fence states that a new 150 room 3-star hotel is being built with a planned opening date of mid -2014. If you have ever wondered just how that hotel was created, you may have wondered about some or all of the following questions:
Who will manage the hotel once it opens?
How long does the process take from idea to grand opening day?
What type of guest (consumer) will be attracted to this hotel?
Why are there 150 rooms and not 250?
How did someone select that particular vacant lot?
What is meant by 3-star?
Who selects the architect and the interior designer and the role each play?
Who manages the myriad details that go into the development of a new hotel?
Who can help maximise the returns?
Who manages the information?
No hotel owner, investor, developer or operator can claim to be an expert in every phase of hotel development and operation. However, in the hotel industry lack of knowledge by the owner/investor can sink the bottom line in terms of lost income, diminishing market share or be continuously plagued by long term under-performance of the hotel asset. A do-it-your-self owner typically does not hire a professional project consultant or a design-build team until it is very late. The reason he believes, the consultant will be cost prohibitive. In reality that would be the wisest money spent regardless of how intangible it may seem at the moment. It may perhaps save you from purchasing the land or signing a lease agreement and prematurely start the meter on the mortgage or rental payment. On the other hand, the entrepreneur may be rushed into signing a lease, hiring an architectural and engineering consultant to provide drawing and permitting services without first getting a wingman to help him. In such a scenario, the project lacks a single point-of-contact person with substantial background in design, development and operational knowledge and a keen sense of translating the owners vision in to reality. All other technical consultants that are hired will only provide what their limited contracts state. The end result is a hodgepodge with escalating budgets and out of control project timeline. *(The traditional military definition of a “Wingman” refers to the pattern in which fighter jets fly. There is always a lead aircraft and another which flies off the right wing of and behind the lead. This second pilot is called the “Wingman” because he primarily protects the lead plane by “watching his back.”)
A savvy entrepreneur, who has done his homework, will familiarize himself with all the steps and conclude that going with a project consultant or a Design-build team is a logical step. This is especially true in the hospitality industry. This does not mean that professional project consultant or a design-build team cannot make mistakes. They do. In the 1930’s and ‘40s, the Coconut Grove in Boston was the most happening nightclub and anybody who was anybody went there. The club accommodated as many people in there as possible, well over double the allowed capacity of 460. In those days they didn’t have warning labels and safety features plastered all over the place and they got along just fine - until 1942, when a fire killed 492 people. A busboy had been groping around for an electrical socket, so he stuck a match to see what he was doing. It accidentally lit some of the gaudy tropical decorations, which were ridiculously flammable, and quickly engulfed the club in smoke and flames.
Of the many safety violations, including overcapacity and decorating the nightclub with dry pine needles, there was one fatal flaw that you wouldn’t even think of: Namely, that the exit doors all swung inward. The main entrance was a revolving door that quickly became jammed with people trying to get out, so they flocked to other entrances and were pressed against the doors so hard that they couldn’t open. The fire department estimated that if the doors had swung out, over 300 people could have survived. Unfortunately, this was not the first time (nor the last) that having inward-opening doors killed people. The mass fire-related deaths at the DuPont Plaza Hotel is another example because the doors swung the wrong way. If you think you’re paranoid for checking which way the nearest exit door swings, don’t worry – I check this out, too. Whether you want to build a hotel or simply enhance the performance of your existing operation, you now have a broad spectrum of choices when it comes to finding partners to help accomplish your mission. Working with industry partners is essential for success in today’s global hotel market. Your guests, like your competition may come from your locality or the other side of the world – or from both. Knowledge of the needs and expectations of this global market broadens the hotel’s reach and helps bridge the inevitable peaks and troughs of the economic and in some instances the seasonal cycles. Predominantly, market demand is what drives development now, and it is also the major factor in determining the style, scope and services a hotel must offer to build its business and profit base. No owner or investor, however savy, can tap this market potential without seeking help. But how does one find the right partners to do consulting, design a hotel, equip it, operate and market it? How much will it cost to buy a share of this expertise? How much help- is really required? And how does this benefit trickle down to the bottom line? More and more, owners and operators are turning to consultants to assess new markets or discover cost efficiencies. Some of the most frequently used consulting services are:
Help in finding an operator
Hospitality consulting services provide the expertise needed to drive a successful hotel project. Objective, professional consultants give owners and investors the necessary tools to prevent costly mistakes, eliminate waste and identify untapped areas of profit.
Who will manage hotel once opened?
Management options include (apart from the owner/investor wishing to entirely run his own operation), both branded and third-party management companies. Determine who the operator will be. Management companies have certain standards that must be met. It is therefore advisable to bring in the operator during the ‘building’ stage. When the operator is brought in late in the development, the resulting changes in specifications may lead to increased costs and delays. This is particularly problematic since these costs cannot be supported by the projected income streams.
Branded management companies bring the strength of their brands, focused expertise in their market segments and strong, name-brand central reservation systems. The reputed brands bring an established business base for hotels that carry their flag. They provide operational experience and a growing list of support services ranging from market research, training, technical assistance, product development and legal support. Another option where owners can share in the power of the brand without giving up operational control is via the vehicle of franchising, also called licensing. In its most basic sense, a franchising or licensing agreement allows the franchisee/licensee the right to use a certain brand name within a certain territory. The franchisee/licensee is required to pay certain fees, participate in certain programmes and maintain clearly defined standards of operation. Third-party management companies bring management expertise without branding. Owners typically hire third-party management companies to operate independent properties. These independent companies work within no operational specifications other than the owner’s. As with branded companies, third-party management companies are broadening their list of technical and operational services for hotels and support services for owners. Although they lack the power of a brand, they do bring the flexibility of independence.
Who can help maximize returns?
The operator one selects should avoid trying to match the hotel to a brand. Instead, they should collaborate with the owner to find the brand that best fits the hotel. The point is to make money for the owner, not merely create an image. Owners need to consider the operators ability to deliver profit. Profitability has two key components: controlling costs and increasing revenues. On the cost side, does the management company have programmes for managing costs? Not simply cutting costs at any cost! Does this include identifying and implementing cost efficiencies, effective control of labour costs, and smart use of technology to reduce costs without compromising service standards? Some costs saving measures are fairly standard: central purchasing, volume driven cost efficiencies, elimination of redundant expenditures and the use of staffing models to ‘right size’ hotel staff cadres.
Skilled management partners can go further by helping owners realise savings in overlooked areas ranging from insurance, outsourcing and asset reduction. Growing revenue is the second key component in the profit making equation. Owners should look beyond a flag to discover which operator outperforms the field in terms of rate and occupancy. Factors that can be measured easily include the management companies REVPAR, the gross operating profits it delivers to comparable properties, and for branded companies, the size and delivery power of the central reservation systems, global distribution system connections and marketing programmes. How effective is its yield management strategies in maximizing both rate and occupancy? It is equally important to look at operations in the same niche. Success in a city market may not necessarily qualify a company to manage a resort, not even one n the same category. Cash flow is different, as are length of stay. Even seasonality can influence the design and maintenance costs including and operational considerations.
(Shafeek Wahab has an extensive background in Hospitality Management spanning over 30 years. He has held key managerial responsibilities in internationally renowned hotel chains, both locally and abroad, including his last held position as Head of Branding for a leading Hotel Group in Sri Lanka. He can be contacted on firstname.lastname@example.org)