Dramatic changes in availability and cost of financing and the economic slowdown brought about by the financial market crisis have extended the holding period, and postponed exit plans, for most hotel owners who have staying power. Analysts are forecasting RevPAR declines through 2009 and no growth at all in 2010.
These conditions make essential the development, or updating, of a strategic plan. The plan starts with a thorough SWOT analysis, realistically covering the property’s STRENGTHS, WEAKNESSES, OPPORTUNITIES and THREATS. Although property level management provides baseline input, the asset manager’s role is to ensure the accuracy and validity of the overall results.
Strengths must be real, and represent a clear advantage compared to competitors. The affected property reputation; its web presence, its reservation system or its frequent traveler program cannot be presented as being superior if there is a well-performing competitor of a comparable brand nearby that is seeking the same customer with equally-strong systems and programs.
Weaknesses need to be specific to both the property and the market. Lack of funds for renovation, for example, is only a weakness if competitors are already in better condition, or are upgrading to a level sufficient to provide a competitive advantage. New supply, if there is assurance it will be built, is almost always a threat. Even if not directly competitive, the new property may represent a significant threat.
Opportunities may be either revenue-increasing or cost-reducing, and may not necessarily require additional capital investment. One of the quickest and easiest is rate changes based on a fresh competitive review to capture money being left on the table. Upgrading energy conservation or yield management efforts to make them more effective may involve little added expense. Installation of labor management or food purchasing systems – or more effective systems – would require cash outlay, but could show a viable return. A change in the number of suites or meeting space or conversion of an existing area to an alternative use might involve new investment but still provide an attractive return on investment.
Threats, such as potential changes in a demand by a major customer that accounts for a substantial percentage of total current business, must be enumerated and evaluated by the strategic planner. Companies are acquired; plants and offices close and executives change. The hotel should have a contingency plan in place to react to the loss of such a key customer.
SWOT analysis should be conducted across all market segments in consideration of their usage patterns. Great meeting space has little effect on a leisure customer, but an inadequate second ballroom or exhibition space could be a major detriment to the group market. If a market segment is large, the SWOT analysis may be further subdivided; they may be different for corporate meetings and SMERFS groups; for tour operators, weekend package customers and FITs.
Following the development of a full scale SWOT analysis a strategic plan should be crafted from which clear action plans can be designed and deployed.
In the 1970s, the Boston Consulting Group created and popularized the “growth-share matrix” to assist large corporations in deciding how to allocate cash among business units. The corporation would categorize its business units as “Stars”, “Cash Cows”, “Question Marks”, and “Dogs”, and allocate cash accordingly, moving money from “cash cows” toward “stars” and “question marks” that had higher market growth rates, and hence higher upside potential. The matrix has been adapted by hotel consultants to appropriately position hotel properties.
Current conditions within the overall economy have created a climate in which most hotels are now in the “declining” quadrant. The challenge of making a strategic assessment and plan is to determine the position in which a property is likely to be when recovery is under way. Are there actions that can be taken to put it back into the “Emerging” category, or can the hotel at least be expected to get back into the “Growth” mode? The largest percentage returns are to be had for investments made in the emerging or growth parts of the cycle. If the property is mature, the plan must consider the timing and conditions that will likely result in decline. If the market and the location are expected to remain viable and physical or brand deficiencies can be fixed, it may be possible to return a mature or declining property to a growth mode. A major renovation, addition to, or reconfiguration of facilities, and/or a different brand may lead to new vitality. Thus, the critical question becomes that of estimating the investment required to achieve the desired results, as well as a measure of the ROI. If a property is declining and further deterioration is expected, the strategic planner needs to look at alternative uses for the asset. Alternatives uses for the hotel property depend on location and demand, but perhaps all or part of the unit can be converted to retail shops or offices. Assisted living facilities (ALF) is another prospect, and more than one fading hotel has been converted to university housing – or even temporary detention centers.
The strategic planner should also consider the position of the hotel asset against the dynamics of the market. A tool, known at one time as the “L & H Grid” and used by the consulting arm of the former Laventhal & Horwath accounting firm, may be useful.
The grid is used to plot the competitive position of a hotel against strength of its market. The position that every hotel owner would like to be in is in the upper left: strong competitive position in a strong and growing market. Conversely, the least desirable place to be is the lower right: weak position in a weak or declining market. The greatest potential opportunity is found in the upper right: an inferior facility in a strong and growing market.
Since there is little the individual asset manager can do to affect the market, the goal is to improve the hotel’s competitive position and move it to the left in the grid. A hotel in the upper right (weak competitor in a strong market) is the classic repositioning candidate. A property in the lower right (weak competitor in a weak market) deserves little added investment, but if it can be acquired at a deep discount and/or little capital can create high-impact renovations, it might be able to be transformed allowing an increased market share and possibly increased RevPar.
The strategic plan is not finished until a financial model has been developed that sets forth assumptions in some detail and forecasts annual occupancy and average rate during the planned holding period; the investment and reinvestment expected; and the period required for stabilization. If the projected rate of return meets or exceeds the desired hurdle rate, the project can move forward. If it does not, the planning assumptions need to be revised. The late Maurice Mascarenhas, a strategic planning guru, opined that: “Your strategic program is only as good as the weakest assumption on which it is based.” It is easy to make an underwriting model look good by increasing the occupancy and/or rate penetration; by shaving marketing, capital replacements or maintenance costs or even increasing the estimated rate of inflation. These are self-defeating measures. Their failure to occur is directly correlated to the projected rate of return.
One of the inappropriate measures often used in strategic plans is to reduce the amount of the replacement reserve during the early years of a new project. A recent study (ISHC’s CapEX 2007), indicated capital expense spending was down from the levels in prior studies, but still averaged 5.7% of total revenue. Add repairs and maintenance, and the combined cost average ranged from 8.5 to 9.8%. When the hotel transaction market was active, most press releases on major hotel acquisitions included a paragraph about the major renovations that were planned. A savvy buyer will typically try to subtract the cost of “deferred maintenance” from the purchase price.
When the strategic plan is finished, tactical plans need to be developed and executed to realize it. These will include:
- Property positioning:
- Service levels
- Pricing and occupancy and ADR penetration goals
- Marketing, sales and public relations strategies
- Renovation and major capital projects by year
- Pre opening or “reopening” activities and budgets
- Eventual sale
Lewis Carroll wrote: “If you don’t know where you are going, any road will take you there.” Development of a comprehensive, well thought-out strategic plan will provide the best choice of destinations and greatly increase the likelihood that you will get to where you wish to go, and arrive there on, or close to schedule, and within budget. For the hotel owner, that translates into the best possible return on investment.
About the Author
Jim Burr is a former member of Cayuga Hospitality Consultants.