Posted by ray@lcorn on August 17, 2006 at 10:58:34:
William,
Hotels are indeed cyclical, and performance downturns typically lead the general economic numbers. Currently hotels are doing very well, though the recent pressures on the aviation transportation system will certainly have a negative effect. The current outlook for hotels is bullish through 2007. Beyond that the assumptions get too large to rely on with any degree of accuracy.
Hotels are also seasonal, which is a different matter altogether, and actually more important. They are also highly subject to local market supply and demand. Few markets are over-built right now, but that could change quickly if the performance numbers get too strong. If you?re going to build a new hotel, my advice is to do thorough research and planning before the first shovel of dirt is moved.
The most common mistake I see from hotel developers is a too rosy assumption of the time needed to reach break-even. Very few new projects cash flow the first year. If you build a realistic pro forma month-by-month for the first year (rather than annual) you’ll see what I mean.
You can?t realistically project first year performance without knowing the schedule for the opening date. A significant factor in first-year profitability if what month the hotel opens in relation to the seasonal pattern in the local market, and the execution of the local marketing plan. More on that in a moment.
For example, say the market’s high season is May through September, with shoulder seasons for two months on each side. If the hotel opens in June you may well produce impressive revenue those first few months, perhaps even into the fall shoulder. However, when you get the P&L?s you may get a rude surprise. That high revenue often doesn?t flow through to the bottom line.
The first six to eight weeks are heavy in labor expenses because of hiring and training expenses. It takes time to work the kinks out of a new hotel and staff. While you sell a lot of rooms, they could be dissatisfied customers because of the problems inherent in opening any new business. Refunds will be high. That hurts later, and is hard to overcome.
While I wouldn?t even consider a hotel without a franchise, having a flag does not eliminate the need for local marketing. Too many operators think the franchisor marketing program is all that is needed, not realizing those programs have a lead time of at least six months. Those early months may give the operator a false sense of security in those early months, and the don?t do the routine things like local sales calls and business-building promotions in the local market because, one there isn?t time, and two it doesn’t seem to be needed. Another mistake.
When the season winds down to the winter months, revenue will plunge due to a lack of identity in the market. The hotel is now on its own, without the support of high demand, and the true market picture comes to the fore. Lack of identity with travel agents and the GDS, and ramp-up time needed for the reservation system will be the focus. Developing repeat business is a critical component in building the revenue base for hotels, and a well-coordinated local marketing effort focused on customer development and retention are the key to getting through that first low season, as well as the long-term health of the business.
Knowing those things, experienced operators will time the construction of the hotel to open in the spring shoulder, say in March, to avoid the heavy rush of business they will not be able to serve, yet take advantage of the rising seasonal trend. That allows time to fine-tune the operation before the heavy business arrives. When the demand peaks, the staff and facility is ready for it, and can use the exposure to build repeat business relationships rather than fighting fires.
They will also begin local marketing and PR efforts about three months prior to the hard opening date. (It is typical to do a soft opening a week or so earlier in order to move staff training to real time.) The first year marketing plan should be detailed and comprehensive, outlined by week, with specific tasks assigned to specific staff members. There should be regular follow-up with the GM, with objective measurement and accountability for results. Understand that this cannot happen overnight. It takes time, money, a plan, and execution.
Hotels are first and foremost a business, requiring thorough planning and execution at every level of the organization.
ray