News for the Hospitality Executive
CANADIAN LODGING OUTLOOK
The Canadian Lodging Outlook is a joint monthly publication
of Smith Travel Research and HVS International,
Vancouver and Toronto, Canada
|By Tracy Heebner - HVS Canada
Adding a waterpark to a hotel can be a lucrative investment, but the costs involved are great, and consequently there are risks involved in adding this amenity that must be carefully considered. This article first defines what constitutes a waterpark in the Canadian market and then identifies the costs, risks, and potential benefits of adding this feature as well as the market conditions necessary for the addition to be feasible.
The Canadian Hotel Waterpark
What actually constitutes a hotel waterpark is different in Canada than it is in the United States. In the US, a waterpark is classified as a facility that is over 10,000 square feet with a pool, a slide, and water toys. A different scale is in operation in Canada, where a waterpark facility is typically smaller than 5,000 square feet; here it is defined as an indoor pool that is enhanced with a slide as well as toys.1
Adding a waterpark can make a hotel more profitable. Being a year-round attraction, a waterpark can diminish the impact of seasonal demand, and, being indoors, it can actually draw leisure travellers to the property during bad weather. A waterpark can thus increase a hotel’s occupancy, and, given favourable market conditions, it can also enable a hotel to command a higher average room rate.
According to a study conducted by U.S. Realty Consultants Inc., hotels with waterparks have a higher occupancy spread of 5% to 30% over hotels that lack such facilities. A waterpark attraction also allows hotels to charge higher rates. According to the same study, hotels with waterparks attained rates that were $20 to $150 higher.2 These statistics reflect the performance of US hotels, which have substantially larger waterparks than hotels in Canada and include higher class hotels, not just economy; it is unlikely that the rate differential between Canadian economy hotels with and without waterparks would be nearly so great. These statistics nonetheless show a general trend that is likely in effect in the Canadian market, if only on a smaller scale.
The potential to increase occupancy and rate can be enticing, but the resulting increases in revenues must be sufficient to justify the costs incurred in constructing the waterpark. So how much does it cost to construct a waterpark?
In Canada, most hotels with waterparks are economy hotels with less
than 100 guestrooms, and the waterpark is usually less than 5,000
For an economy hotel, the standard cost for a waterpark is $167 per square foot.5 Given the average squarefootage for a waterpark at a Canadian economy hotel (±2,918 square feet), the cost of the average waterpark is $487,306, or roundly $500,000.
A waterpark can help a hotel command a higher average room rate, but the crux of the matter is that the hotel must attain a higher average room rate to cover the costs incurred in constructing the facility. The rule of thumb is that the cost per room to build a hotel divided by 1,000 equals the average rate that the hotel needs to achieve to make the hotel feasible (at a 60 to 70 percent occupancy). The cost of a waterpark is an additional financial burden that the average rate must cover.
For example, if it cost $6.9-million to build a 69-room hotel, or $100,000 per room, the property would need to attain an average room rate of $100 and run between 60% and 70% occupancy to be feasible. The average waterpark would add $7,246 per room to the cost to build the hotel ($500,000/69 = $7,246). Dividing this amount by 1,000 means that an additional $7.25 must be added to the $100.00 average rate for the hotel development to be feasible. To justify the cost of the waterpark, the hotel in question would need to attain an average room rate of at least $107.25.
Risks and Market Conditions
On average, hotels with waterparks do achieve higher rates than hotels that lack such facilities, but if the market is unable to support the higher rate required, the waterpark becomes an economic burden on the hotel operation. In other words, there is a degree of risk involved in adding a waterpark to a hotel. According to David Sangree, MAI, a hotel with “an indoor waterpark is more sensitive to fluctuations in the leisure market, the economy, and the demographic composition of a market area.”6
Several market factors must be considered carefully when contemplating the addition of a waterpark. For starters, the population of the market must be sufficient for a waterpark to be viable. Generally, a waterpark will attract people within an 80-kilometre radius. Within this radius, the best type of market is one with a strong leisure component and a bluecollar economy with young families that have children.
Highway locations are excellent choices, as vacationing families from outside the market area will favour a hotel with a waterpark over other properties of the same calibre,7 even if they have to pay a higher rate. Imagine for a moment driving for long hours with young children in the car and it is easy to see why a waterpark can be a competitive advantage for a hotel in a suitable highway location.
A waterpark is particularly advantageous for hotels in cold or intemperate climates, as the waterpark can draw demand to the property in the off season.
Being the hotel with the first waterpark in the market is also a way to differentiate the property from competitors. It is important to realize that this competitive advantage is temporal, as competitors will try to compete by copying the facility and being bigger and thus more attractive to the target market.8 For this reason, it is important that the waterpark be built as big as is feasible, to help the hotel prolong this first-mover advantage.
One must weigh the potential benefits against the costs and the risks when deciding whether or not to add a waterpark to one’s hotel. Most hotels with waterparks do achieve a higher occupancy and a higher average room rate, but the construction costs are substantial, and the market must be able to support the rate increases necessary to offset the costs. If the costs are deemed reasonable and the market and the location are appropriate, build the waterpark.
1 Jeff Coy and Bill Haralson. Hotel Water Park Report
2005, pg. 21. Taken on Oct. 5, 2007, from www.hotelonline.com.
HVS INTERNATIONAL - CANADA
August 2007 YTD
© Smith Travel Research, 2005. Reproduction or quotation in whole or in part without permission is forbidden. *INS - Insufficient Data
|Also See:||Boost ADR & occupancy by adding a waterpark feature! Hear HotelWaterParks.com CEO Bruce Dalen describe how it's done / September 2007|