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Should the Mix of OTA Room Nights Be…?

What Should the Mix of OTA Room Nights Be…?*

Response to the battle cry “lower the OTA percentage of room night mix” may reduce EBITDA.

Ultimately, improving EBITDA through shifts in channel mix is based on a holistic analysis and execution of total integrated channel mix strategy over time. The shift must be augmented with sales and marketing actions and associated costs to achieve it and sustain EBITDA. To illustrate this point, we developed a simple EBITDA impact model for OTA and non-OTA channel mix shifts. The model is based on a 200-room, limited-service property with 70% occupancy and aggregate ADR of $100.

A simplistic (and potentially misleading) evaluation of decreased OTA room night mix impact is a reduction in OTA room nights (e.g., 1/3) replaced with non-OTA room nights.  This evaluation predicts a substantial (e.g., a 10%) increase in EBITDA.  Missing from the evaluation is how much it may cost to replace foregone OTA room nights with non-OTA room nights to sustain occupancy.  And, can the shift be achieved with positive EBITDA improvement, given increases in marketing and sales expense to achieve it?  In effect, some or all foregone OTA bookings must be replaced and there is some EBITDA neutral upper threshold sales and marketing expense level (e.g., 17%) to achieve it.

The answer to that question is complicated in general and even more complex for any one property.  It is also complicated by the interplay of property-level billboard and dilution effects.

The billboard effect is the impact display in OTA sites has on driving incremental transactions through hotel direct channels such as the reservation center and the brand website by being displayed, but not booked, in OTA websites.   In effect, the prominent presence in OTA display acts like a search engine, where the consumer views the OTA site but ultimately books directly with the property.  There is ample published research to suggest that there is such an effect**. The dilution effect is the diversion of transactions from a property that would have been booked through hotel direct channels but instead are booked in OTA channels.

We developed an EBITDA model to evaluate the interplay of various possible billboard and dilution levels effects to illustrate how those impacts change the results for various levels of increase and decrease in the mix of OTA transactions. To illustrate this point, we developed a simple EBITDA impact model for OTA and non-OTA channel mix shifts. The model is based on a 200-room, limited-service property with 70% occupancy and aggregate ADR of $100.

See the table below for impacts of a 1/3 reduction and increase of OTA room night mix on EBITA, sales and marketing expenses and chain costs, (i.e., to achieve EBITA neutrality) when various billboard and dilution effects where present.  For example, the model showed that:

  • The number and percentage increase in non-OTA room nights can be much greater with, for example, a 33% reduction in OTA room nights when a property-level billboard effect is substantial (e.g., one non-OTA booking for every two OTA bookings foregone) and even greater with a relatively low dilution effect (e.g., 10% increase in non-OTA diluted room nights for each foregone OTA room night). Depending on values for these effects, a required level of non-OTA room night replacement can be substantial (e.g., nearly 40% greater).  As well, the EBITDA neutral threshold percentage level for increased marketing and sales expense growth can be much lower (e.g., 4.5% versus 8.5%) before EBITDA gains would be fully offset.
  • A major EBITDA loss risks exist if there is a substantial billboard effect relative to a dilution effect and foregone OTA room nights are not replaced. In this case, the impact on EBITDA can be substantial and negative (e.g., an 8% percent reduction).
  • Alternatively, that same 33% reduction in OTA room nights could be achieved with a slightly larger increase in non-OTA bookings (e.g., 13.5% versus 19.7%) and with a much higher EBITDA neutral threshold for a marketing and sales expense (e.g., 9.0% versus 4.5%), if the billboard effect was slight (e.g., one non-OTA booking lost for 4 OTA bookings foregone) and the dilution effect was significant (e.g., a 30%increase in bookings made direct for each OTA booking foregone).

Interestingly, that same analysis could be applied to evaluate the EBITDA effect of increasing the mix of OTA room nights.  For example, in the appendix, we show that if there were no billboard or dilution effects, increasing the mix of OTA bookings could increase EBITDA by 2.9%.

For chain properties, there is another dimension of this type of analysis.  Are there additional costs, direct or opportunity for chain-level efforts to reduce OTA room night mix? And, do these costs offset potential EBITDA gains for the property? The direct cost might include chain imposed assessments for that purpose.  Opportunity costs might include the shift of chain expenditures and/or investments to support the shift that might have had a more effective impact on property level EBITDA.  These might include, for example, the diversion of general promotional advertising and marketing expenditures to spending a mix change (book direct) campaign.

There can, of course, be a whole series of potential values for billboard and dilution effects (and the means to measure them) for a property and for specific circumstances such as quality classification, occupancy, ADR, channel mix, seasonality and so forth.  So, measuring them can be difficult and further complicated by the fact that the impact magnitudes are likely non-linear based on the OTA room night contribution percentages and changes thereto.  (NOTE: The model does allow sensitivity testing of such values on EBITDA. We selected a few values for illustration purposes.) Despite the difficulty, the impacts of these effects on EBITDA are significant. Therefore, owners and managers would be wise to evaluate the possible outcomes of their efforts to change the distribution of OTA room nights even if they employ some sensitivity testing of their values.

The practical implications are that changing the mix of OTA room nights requires a plan to replace them with non-OTA room nights and a need to know (or estimate) EBITDA-neutral threshold levels for sales and marketing costs needed to achieve the mix change. Moreover, including an analysis of the potential interplay of possible billboard and dilution impacts would be advised.

A dilemma for owners and managers is how to measure (or accurately estimate) property-specific billboard and dilution effects.  One approach is to do sensitivity testing for such values (as illustrated in the model) and cautiously change channel mix over time while observing impacts on OTA and non-OTA mix, EBITDA and marketing and sales expenses.  Another is to perform some A/B testing of increases and decreases in OTA participation to observe impacts on non-OTA bookings and EBITDA.

As well, asset managers might implement some operational means to observe over time patterns in guest channel booking behavior related to OTA participation, for example:

  • When checking in guests, ask if they have stayed at the property before and their primary channel source(s) for choosing the property. Do the same if they have not. If possible capture their email address. In all cases, track guests’ booking channels (or do so by relating rate codes used to channels). If they used an OTA channel, ask if they would be likely to use it again or book direct. Then track over time.
  • During guests’ stays solicit feedback on satisfaction and possible actions to improve their experiences. Better yet, use past stay experiences (e.g., through a customer relationship management system (CRM)), to take actions likely to improve guest satisfaction. At a minimum, resolve guest issues ideally in real time. Finally, celebrate successes and resolve mistakes over time; better yet, ask guests to do so as well, ideally via social media.
  • At check out and post stay solicit information about stay satisfaction and ask if they would be likely to book directly in the future. Better yet, capture their e-mail address in exchange for some future value for the next stay(s).

If all this sounds like effective asset management, it is.  Many successful property managers and owners are already doing this and have discovered many other ways to improve guest satisfaction and financial performance. What is different is the discipline to connect such actions (and guest reactions) with channel choices and guest stay frequency. Capturing this supports the assignment of economic values to reduced channel costs and/or increased guest stay frequency. The bottom line is for asset managers to practice effective CRM, measure its impact, celebrate its success, address its failures and encourage guests to do the same via social media.

Owners need to estimate the value of such actions on EBITDA as a guide to resource allocation for asset value growth.

* This model was developed and presented at the Cornell Center for Hospitality Research Summit, October   2017. Contact the authors Bill Carroll, Ph.D. wjc28@cornell.edu and Trevor Stuart-Hill trevor@revenuematters.com for more information about the model and the presentation.

** See CK Anderson, “The Billboard Effect: Online Travel Agent Impact on Non-OTA Reservation Volume,”

Cornell Center for Hospitality Research Report, 2009; CK Anderson, “Search, OTAs, and Online Booking: An

Expanded Analysis of the Billboard Effect,” Cornell Center for Hospitality Research Report, 2011.

ESTIMATED IMPACT ON REPLACEMENT (AND NON-REPLACEMENT) OF OTA ROOM NIGHTS ON EBITDA GIVEN MARKETING SPEND AND CHAIN COSTS

Cayuga Hospitality Consultants Announces Custom Solutions Division

Cayuga Hospitality Consultants Announces New Services Division

Cayuga Hospitality Consultants is pleased to announce the formation of “Cayuga Custom Solutions.” This new offering of hospitality consulting services is in response to the industry’s need for assistance in managing unique and complex business challenges.

Division chairman, Chuck Kelley says, “Clients have been requesting support in reconciling broad-based challenges. The need for a team approach is becoming more common as a means to meet client needs. By creating collaborative teams of hospitality consultants from within the Cayuga network, each with unique areas of expertise, we have been able to achieve expedient, constructive and effective results.”

As market and economic pressures drive owners, operators, and financial institutions to resolve issues quickly, and with expert-driven actionable and measurable results, the Cayuga Custom Solutions groups have stepped in and solved even some of the most seemingly impossible challenges.

The first example of a team offering is the “Preparing your Asset for Sale” task force.  This group has found a common thread in working with clients acquiring and disposing of assets – there are simply no two alike.  To respond, Cayuga Hospitality Consultants has developed individualized teams to assist with negotiating the processes of preparing for a sale, maximizing the value of the asset and strategic planning for a purchase.  Because any transaction can take on myriad objectives and realities, diversity in the team of advisors assisting can result in highest and best ownership objectives being achieved.

Kelley says some of the key questions his Cayuga Custom Solutions task forces focus on when owners are considering an asset sale are, “What are the ‘Top 5 Things’ you should be doing now to maximize value?  Where should your focus be – top line revenue, bottom line profitability, operations and customer satisfaction, condition of the physical asset, re-positioning to adapt to market changes?  All of the above?  And what resources might an owner need to prepare the asset for sale, and how would ROI on this resource allocation be calculated?”

From engineering and CapEx review to structural assessment, financial analysis, operations efficiency, customer satisfaction, real estate and asset valuations, all facets of a sale require varied expertise and skills.  With more than 50 professional consultants all with deep competency in their unique services domains, Cayuga Custom Solutions allows for each assignment to be managed by a distinctively assembled team of experts.

Another common assignment request to Cayuga Hospitality Consultants is to field a team of experts, thus the “Task Force and Interim Staffing” coalition.  An open position for whatever reason can and will be a challenge for a business – lost sales, poor customer response, lack of leadership direction and/or declining profits.  With over 50 consultants available, Cayuga Custom Solutions helps owners and operators maintain business momentum.

“Whether a staffing need is during a larger event such as brand transition, property sale or acquisition, pre-opening or disaster recovery, or simply a short-term need as a result of medical/family leave or gap between hires, Cayuga Custom Solutions finds individual experts or teams of hospitality consultants able to meet virtually any project requirements,” division chair Kelley said.  “Our experts in hotels and resorts, spas and clubs, restaurants, commercial foodservice and casinos can meet virtually any task force or interim staffing need.”

For more information on Cayuga Custom Solutions or to present your complex challenge requiring an expert hospitality consultant or team of professionals, contact Chuck Kelley HERE or call 866.386.4020.

The Nine Circles of CapEx Spreadsheet Hell

The Nine Circles of CapEx Spreadsheet Hell

Most hotel owners will be receiving 2018 CapEx plans from their hotels in the next few weeks.  Most of those CapEx plans will be submitted on Excel spreadsheets.

This is a perfect time (maximum pain levels) to consider The Nine Circles of CapEx Spreadsheet Hell, and develop strategies for a move to CapEx Planning Paradise.

  • What is wrong with using CapEx planning spreadsheets?
  • What are the alternatives?
  • What specific steps should owners and operators take?

Avoid CapEx Spreadsheet Hell!

Introduction

Hotel owners spend an average of 7% of gross revenues on CapEx, every year; a very significant reinvestment of scarce owner’s capital. Most management contracts require the hotel operator to deliver a CapEx plan to the owner sometime between August and the end of the year. The description of this “CapEx plan” is usually vague; anything will do to meet the requirement. These CapEx plans are often prepared and delivered in the form of an Excel spreadsheet.

If your properties are still using spreadsheets to manage CapEx planning and administration for a single property, or thousands of projects for a large portfolio, you have needlessly set yourself up for a trip to CapEx Spreadsheet Hell!

hotel capex hell

The Nine Circles of CapEx Spreadsheet Hell

Using spreadsheets to manage CapEx will eventually lead owners and operators into each of the following Nine Circles of CapEx Spreadsheet Hell: 

Inefficiency

Regenerating CapEx plans every year as a stand-alone process requires hours of dedicated time. Management at the property, regional, and corporate level must identify, describe, scope, price, and prioritize each project at each property.

Hotel owners are faced with individual spreadsheets from each property and/or multiple management companies which must all be compiled into a common format for portfolio level review and analysis.

Inconsistency

Inconsistency in project titles, scopes, and budget estimates make it extremely difficult to estimate CapEx costs across the portfolio, compare costs between similar properties, and aggregate purchasing and contracting across the portfolio to drive the lowest pricing from suppliers and contractors.

In a recent CapEx submission for a portfolio of 180 hotels, “PTAC” replacement projects were listed (and “speled”) in 26 different ways. Some of the PTAC projects included tax, freight, installation, and disposal; some only the purchase price of the PTAC unit. Some project costs were based on national account pricing; some on last year’s purchase costs; some on local supplier estimates.

Inaccuracy

Spreadsheet numbers entered as text, formulas overwritten or corrupted, and errors in column ranges can cause errors in individual projects, as well as property and portfolio totals. Checking thousands of projects for spelling, math, and spreadsheet entry errors is both mind-numbing and time consuming.

Inattention

CapEx planning often conflicts with the preparation of annual operating budgets, and is usually considered a lower priority for management time. CapEx plans are often hastily assembled at the last possible moment.

This time conflict is exacerbated by the stand-alone nature of spreadsheet based CapEx planning.

Integration

Spreadsheets typically cannot be integrated with other systems that are used to purchase, administer, manage, and maintain capital assets.

  • Asset age and condition data from the Maintenance Management System (computerized or manual), must be transcribed into the CapEx planning spreadsheets.
  • Fixed asset accounting system records are typically not available at the property level where CapEx planning is taking place.
  • Reflecting CapEx approvals, funding, and procurement processes in hotel accounting systems becomes a manual transcription process.
  • Project management systems typically cannot be simply updated from approved CapEx plan spreadsheets.

Updating fixed asset and maintenance records when assets are replaced does not flow smoothly from a spreadsheet based CapEx planning process.

Integrity

Capital equipment data (age, useful life, maintenance history, cost, etc.) must be transcribed from equipment records into the CapEx planning spreadsheet. It is nearly impossible to maintain this integrity as it is transcribed from each individual equipment record to each individual CapEx project.

Often, properties resort to guessing or making up this data rather than finding and re-typing multiple data points for each project.

Data Entry and Reporting

CapEx planning data and reports need to be formatted differently at each stage of the process. Property level planning requires input fields that control consistency and automatically correct errors. Portfolio level review requires less individual project detail, but accuracy and consistency on project names, scope, costs, and timing.

Collaboration and Coordination

Good CapEx planning requires an iterative process that fosters collaboration between management staff at the property, regional, and corporate levels, subject matter experts, and Ownership. It is very difficult to keep track of the status of review, requests for information, plan revisions, approval, and execution when the plan is on a spreadsheet that must be edited and redistributed with each change, and at each step of the process.

Indecision

Spreadsheet based CapEx planning makes it difficult to confidently estimate CapEx expense, cash flow, and project timing. This lack of confidence leads directly to indecision at the Ownership level, delayed approvals, and difficulties executing CapEx in a timely and efficient manner.

Finding CapEx Paradise or “isn’t there an App for this?”

You wouldn’t consider using a spreadsheet to manage your contact list; manage depreciation schedules for fixed assets, or manage your guestroom inventory; you probably use software applications specifically designed for each of those functions.

Cost effective CapEx planning and administration technologies are available as standalone systems, as part of an existing system (accounting, maintenance management, etc.), or agile integrated systems that can connect across multiple systems, organizations, and levels.

Additionally, “Big Data” technology has enabled leveraging existing property level systems and process to provide a strong foundation for portfolio level CapEx planning, administration, and execution. Increasingly, data can be shared across systems seamlessly, eliminating redundant data entry, and providing for greater accuracy, reliability, and efficiency in CapEx planning, administration, and execution.

Here are the seven steps to find CapEx Planning Paradise:

Systems Based Continuous Process

Implement an integrated CapEx planning and administration technology that supports continuous planning.

Commit to developing and maintaining a ten year forward looking CapEx plan for each of your hotel properties, and put processes in place to ensure that projects are entered and discussed on a regular basis throughout the year.

Planning Consistency

Support your continuous process with standards that help bring consistency to your planning. Define what is considered CapEx, and which non-CapEx expenditures you would also like to include in the planning process (e.g. large periodic maintenance expenses).

Develop a dictionary of project categories, areas, names, and scope descriptions that supports consistent planning from year to year and hotel to hotel. Decide how budgets should be presented, and how budget add-ons should be calculated (e.g. design, tax, freight, fees, etc.).

Data Integrity

Design your system so that data resides in the appropriate system, and is available to the CapEx planning system as needed. That is, avoid replicating fixed asset data in the CapEx system if it is available in the maintenance management system or accounting system.

Transparency

Choose a system and process that provides transparency across linked systems and parties to the process. Management staff at the property, regional, and corporate office should have access to the same information as Ownership, asset managers, auditors, etc.

Transparency is critical to any collaborative planning process.

Long Term View

Ensure that the system captures all large and/or recurring CapEx projects; for example renovations, fire alarms, chillers, boilers, roofs, exterior paint, etc. Scheduling these projects out ten years provides a strategic long term view of the properties capital needs, and supports effective portfolio planning by Ownership.

Focused Review Process

Set up the CapEx system to support the review and approval process required by Ownership, as well as providing for incremental review of individual projects, and focused review of “classes” of projects. Rooms renovations require in depth review and planning; PTAC replacements do not.

CapEx approvals and administration should mirror this focused review. Senior management needs to review the scope of every renovation, but does not need to approve every replacement PTAC.

Portfolio Planning

The CapEx system and process should support portfolio level planning by both the Management Company and Ownership, and should allow aggregation of purchasing and contracting across the portfolio.

Summary

Having a strong CapEx planning system and process in place will help ensure that capital funds are only invested at their highest and best use, and that you will never again need to visit The Nine Circles of CapEx Spreadsheet Hell.

Take action:

  • Implement integrated systems.
  • Adopt a continuous planning process.
  • Insist on data accuracy, consistency, and efficiency.
  • Require a transparent process.
  • Take the long view.
  • Focus CapEx review and administration.
  • Negotiate best value through portfolio purchasing.

About the Author:

Thomas Riegelman offers an extraordinary range of expertise in facility and asset management, with over 30 years enterprise level executive experience managing multi-unit hotel, resort, and military housing operations.

His 19 years with Hyatt Hotels Corporation as VP of Technical Services and VP of Engineering provided him with broad experience in all phases of hotel and resort planning, CapEx management, construction, engineering, and facility operations. Tom also served as the General Manager for The Prudential Realty Group’s northeast hotel portfolio, giving him a strong owner’s perspective on real estate development and asset management.

After graduating from the Cornell University School of Hotel Administration with a concentration in hotel planning and design, he earned an MBA in Finance from the University of Chicago Booth School of Business. Tom also attended the Ecole Cordon Bleu in Paris.

Tom is the principal in charge, and personally supervises all consulting engagements by RA Associates.

R-A Associates provides management consulting services focused on creating and sustaining the long term value of hospitality real estate assets.

  • Property Planning and Design,
  • Facilities Operations, and
  • CAPEX.