Hoteliers should take time to assess how they go about enhancing guest offerings and implementing new standards, with an eye toward improving the process and sharing the burdens and benefits.
It’s always wise to review and assess the trends of the past.
As business owners, it is critical to study the trends of the capital invested to implement brand standards. Only then can we evaluate a return on such investment. While the hospitality ownership and investor community tends to look at the supply-demand cycles marked by milestones of turns in the economy, we might also consider lifecycle cost of standards that affect hotel profitability.
Consider that the franchise model is inherently a challenge, in which a brand’s success is defined by top-line revenue and an owner’s success is defined by the bottom line.
What if hotel owners assessed the modern periods marked by the proliferation of brands and the emerging and evolving requirements of brand standards to drive consumer preference? We would realize that as brands compete with one another by implementing new standards to drive market share, the hotel owners of multiple brands suddenly find themselves as spectators watching a “cold war” that they are funding on both sides. The reality is that hotel owners are underwriting the costs of implementing new standards until the incremental revenue is produced from said investment.
This, compounded with brands’ continuous pressure to grow top-line revenue by adding richer amenities, exposes a problem for hotel owners.
It is plausible that brands can go too far and require a cumulative set of standards in a given year in which the cost to implement such standards per room, per year, can outpace revenue-per-available- room growth.
Additionally, realize that for every $1 added on the cost side, hotels require $3 of new revenue to break even (33% flow through). To illustrate this point, consider revenue management for hire (RMH) programs that most brands offer. The average cost of RMH for a 100-room select-service brand is $1,500 per month, or $18,000 annually. To afford this P&L expense, a hotel needs to add $54,000 (three times cost) to the top line, an easy target for high RevPAR markets but harder for low RevPAR markets. Therefore, fixed cost standards, such as RMH, are not advantageous to hotels in smaller, low RevPAR markets.
But, as we all know, we cannot stop innovating. As we continue to enhance guest offerings and implement new standards, we must ask:
- Can we identify and eliminate an old standard first?
- Is there a strong business case to implement a new standard that not only satisfies consumers but also links to RevPAR growth?
- Can a standard be designed to flex dynamically between small towns and urban locations?
- Is a brand’s procurement process accountable, not only for offering the best pricing models, but also for negotiating lower prices each year as volume increases?
- And the most important factor: Will brands develop a process to revisit the original business case at an appropriate time and modify or eliminate standards that fail to deliver stated goals?
Adhering to these simple principles will not only produce top-line revenue, but will also drive an owner’s bottom line and the preference to build and grow business with these brands.
As we continue to receive the annual franchisee budget memo informing us to prepare for the continued standard implementation, let’s analyze the return on those previous investments and determine which accrued investments are no longer fundamental, necessary or worthwhile.
This is an era for hotel owners to dissect and truly understand the P&L to slow margin erosion. The analytical and simple mathematical approach to assessing the brand and the need for an internal audit of standards will only strengthen ROI and the brand-owner relationship.
Evaluating the trends of the past will always be insightful. Lessons learned and changes made will be productive for the future.
Deepesh Kholwadwala is the President & CEO of Sun Capital Hotels, owning and managing multiple brands, with specialization in in hotel feasibility, planning, financing, construction, and operations. Deepesh serves as the 2018 Chair of the IHG Owners Association and can be contacted at email@example.com.
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