Hotels and Their Financial Challenge
Hotels and Their Financial Challenge
When you consider buying a BMW, you know you’re buying a premium brand with a name, a reputation and world renowned German engineering. It is the sum of its parts with each of them contributing to the final product, specially crafted and engineered in order to deliver on its promises. And, naturally, this comes at a cost. If you aren’t into the holistic offering a deal like this delivers, your choices of a lesser car are plentiful. It’s the same when it comes to where you or the business you work for chooses to put your money when you’re staying away from home.
It’s not news that companies are being challenged by their financial departments to cut corners. Budgets, deadlines and allowances are tighter and travel is no longer something lavish that can be written off to a swollen marketing budget. There is always someone who reports to someone else who is checked by someone else that needs to compare the bottom line. It’s still about value for money, but with so many more hotels vying for your business, the line between fair competition and bad economics can be a fine one.
Consider the challenges these businesses face however: competition, grading, prices, and a building full of furnished rooms (at quite the cost) that need to be filled. When you look at what goes into costing for a room rate, just like South African Hotels did, you may start to consider things a little more clearly.
Think about the costs involved in order for a tourist-attractive hotel in a hub like Cape Town to deliver a world-class service to its guests. This requires qualified employees, adequate cleaning facilities for rooms and linen, a qualified team of chefs and a fully equipped kitchen for catering, fine furnishings in rooms, and meeting rooms that contribute to a memorable and highly-rated experience. And when the hotel stands at less than half full? The margins speak for themselves. On a relatively small, five star hotel, these are just some of the costs:
• A capital investment of ±R21.5million is needed to build and furnish rooms – this doesn’t include a spa
• Keeping the lights on cost a hotel like this just less than R2million per annum
• Housekeeping services average on R3.3million per annum
“These statistics show the constant balance that hotels are trying to meet,” says Sally Gray, General Manager of Sales at Red Carnation Hotel Collection, SA. “Over and above the ongoing business challenges are staffing issues. To keep up with the ever-increasing cost of living, staff expect salary increases. This adds additional pressure to our existing business model.”
When you look at figures like these, it may make the cost you are quoted make a little more sense. There are many factors to consider when booking the accommodation for your travels – whether it is for business or leisure. What are you expecting when it comes to furnishings, facilities – laundry, gym etc. – location, safety, security and insurance? So when you look at the quote for your accommodation – although it may look completely exorbitant – there’s a lot to take into account.
A hotel’s potential to make a decent Return on Investment is dependent on its potential to book rooms to capacity – although this is rare. Premium hotels in Cape Town for example work on a 60% annual occupancy, so you can see the threat of some very tight margins. And when this is the case, if a hotel is selling a room at a nightly rate of R2 500.00, how much are they ever really making when the hotel is never entirely full – a likely reality when you look at these averages of annual occupancy:
- January – 62%
- February – 83%
- March – 72%
- April – 58%
- May – 49%
- June – 48%
- July – 48%
- August – 50%
- September – 69%
- October – 62%
- November – 68%
- December – 74%
These figures show the very definite risky reality that hotels face. Even at its highest of 83% occupancy in February, this is still not full.
Andy Nold of the Newmark Hotel Group says: “In high occupancy hotels I think the only answer is achieving higher revenue per available room year-on-year which must run ahead of inflation and maintenance costs.”
So, still feel like you’re paying for the whole room?
“You don’t buy the room–” says Anna Thatcher, owner of Fairlawns Hotel & Spa in Sandton, “…but you buy a portion of electricity, water, rates and taxes, suppliers, maintenance costs, equipment purchase and replacement costs, vehicle costs, BEE costs, recruitment costs, salary costs and off course the initial investment in the property.”
While hotels do their best to remain competitive in terms of pricing, it is important to remember that we’re talking about an experience-based facility that garners its customers through a certain level of comfort and accustom. If patrons ruthlessly and relentlessly expect lower rates, hotels will be forced to start considering a lower level of service delivery. This may impact the frequency of your linen changes, whether or not there is internet or if you have to take your own 3G card, or even whether they offer the convenience of a credit card machine.
“Unfortunately a lot of expense increases are out of your control,” says Thatcher. “The line between cutting expenses and impacting service levels is a fine one. One can only try and get as efficient and productive as possible, which is difficult when you are dealing with a moving target. Occupancies are not always nice and even.”
Outside of how the cost for a room is determined, considerations have to be made for the lower seasons where the hotel may be booked at anything below 50% capacity (as explored above). The loss of earnings against these months has to be recovered or avoided which makes the line between reducing costs and losing quality a fine one to negotiate. Deciding which extras to keep and which ones to let go – while still maintaining five-star status – remains a careful balancing act. Added to that the stiff competition hotels in the world’s top tourist destinations face, and it gets even trickier.
“You also have to consider that utility increases must then be countered by lower than Consumer Price Index increases in other expense lines,” says Nold. “And when labour goes up – as a total package – you have to bearing in mind that the whole workforce will not be on the same length of service amongst many other factors influencing labour cost.”
The trick is to stay in business while not pricing yourself out of the bracket altogether and facing the very real possibility of having no customers altogether. Both local and international travellers need to trust the price being quoted, believe that it is fair and competitive and that it ultimately delivers a good Return on Investment.
Hotels are speaking to an audience that understands both international standards and how far the Rand, Dollar, Pound or Euro can go. Travellers are sensitive to both exchange rates and international levels of delivery. It is important that hotels take this into account and that their pricing structure makes sense to their own nationals and international travellers – within the bracket that they are pitching their offering at.
What it comes down to is a simple matter of value for money. If guests feel they’re getting bang for their buck in a budget-conscious world, they will keep coming back for more. “We have been making a concerted effort to save in areas that don’t affect the guest experience,” says Gray. “For example, we have heated towel rails, but rather than keep these on indefinitely, we advise guests that this is available to them should they wish to use it. Overall, these cost-cutting exercises are difficult when operating a 5 star hotel as there is a definite expectation in terms of what clients want. Experience is key, so any cost-saving efforts cannot impact on the guest experience at all.” So the challenge is for these hotels to cut costs and save money behind the scenes – in areas that do not directly affect the guest’s experience but so that the establishment remains competitive. This helps to leverage return business which translates from happy clients and which, in turn, makes your business happy too.
There’s a lot to consider when choosing a hotel. Is it a fly-by-night establishment where you can’t leave your passport in the room, or is it one with a great reputation based on good reviews and that comes at a competitive price, and in a good location? What you have to ask yourself is how you balance quality and costs. There are establishments that will meet you on both of these but how and where you choose to allocate your budget comes down to your unique set of leisure and/or business needs. Expenses are not about an irresponsible allocation of funds but rather a responsible allocation of funds where you can see and measure your Return on Investment, and what you have to ultimately determine is whether you want the BMW or the alternative.
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