By Saurabh Gupta
Hotel openings are an elaborate affair that seek focused inputs from the ownership at a pre-opening stage. While the hotel management company and operations team are largely responsible for the pre-opening preparation, the owner also has his/her tasks cut out. Here’s a look at the very basic set of expectations from an owner of a managed-hotel at this stage:
- Approve pre-opening budgets
- Approve annual business plans along with revenue and expense budgets
- Approve the recruitment of key personnel like the GM
- Approve capital expenditure and FF&E spends
- Objectively assess the readiness of the operations team
- Ensure that the asset gets support from the brand/regional office
- Take calls on matters that may have larger implications, like capital structuring
- All legal and non-hospitality matters of the asset
The fact is that most owners are unaware of the enormity of the task in hand and are, therefore, woefully unprepared. Many learn on-the-job and most do so after making unwarranted mistakes. In the initial years of operations, a new hotel, coupled with an inexperienced owner, is a double whammy! So, what goes in the run-up to the launch of a successful hotel that is to be operated by a management company?
Pre-Opening Stage – Typically, construction activity intensifies when the hotel is around 6-9 months away from completion. In this stage, hotel owners are generally short on time, funds and ideas. Moreover, being simultaneously pulled in different directions often results in compromised decision-making. Hotelivate routinely witnesses owners overspending to the tune of 25% to 35% of the budgeted amount during the pre-opening stage. Careful analysis of the business plan, an assessment of the actual requirements of the hotel and a critical examination of the go-to market strategy are the three key tasks at hand in this stage. These can’t be left squarely with the operators, because their inputs come from multiple sources working in isolation. There is a need for a unifying thread that keeps the investment objectives of the owners in mind while being attentive of the operating requirements. Asset Managers can serve this purpose and provide the following critical inputs in the pre-opening phase of a hotel:
- Organize a pre-opening master schedule
- Review and monitor the pre-opening expense budget
- Review and monitor the operating supplies & equipment budget
- Review the sales & marketing plans and strategies
- Review the operating budget of the first year
- Conduct vendor selections and negotiations
- Exercise the owner’s hiring approval rights
- Optimize organization chart and staffing ratios
- Work with teams to identify potential operational bottlenecks
- Perform cost-benefit analysis of outsourcing certain services
- Identify a relevant competition set for benchmarking activities
- Analyze and mitigate risks for what-if scenarios like delays, cost overruns
- Analyze and optimize working capital requirements
- Manage communication between the owner and the operator effectively
In essence, during the pre-opening stage, a good asset manager can end up saving millions in costs in addition to reinforcing critical decision making for the ownership company. In the formative years, while the business is gaining traction, presence of such ‘adult supervision’ to guide and mentor the hotel team can shorten the time it takes for the property to stabilize in the market.
Post-Opening Stage – Re-orientation of the team for the transformation of a ‘site’ to a live ‘hotel’ needs some precocious conditioning. In the post-opening phase, unforeseen challenges are inevitable and require some deft maneuvering by skilled hoteliers and asset managers. The first year is especially important because it sets the product and price positioning of the hotel – an activity that has a lasting impression in the market. The ownership is also regularly caught in maintaining a balance between short-term cash flow needs and long-term business objectives. Having a well-thought out strategy eliminates abortive steps later.
In the first year, hotel assets demand high attention from the owners who often rely on in-house finance teams or professional asset management companies for working up solutions. Asset Managers can provide the following critical inputs in the post-opening phase of a hotel:
- Coach the hotel manager and executive team
- Identify opportunities to increase revenue potential from rooms, F&B, spa, rents, services
- Establish rates across distribution channels
- Convert (even partially) variable revenue to fixed revenues
- Convert (even partially) fixed costs to variable costs
- Keep a laser sharp focus on achieving targeted market segmentation
- Actively monitor the performance of the team against budgets
- Ensure compliance of tenets listed in the hotel management agreement
- Perform impact assessment of extraneous factors like economy, elections, calamities etc.
Hotels are a complicated asset class; the service industry play is interlocked with the capital outlay of a real estate business. Unlike other commercial real-estate asset classes like offices or malls, a hotel asset demands focused effort, time and skills on an ongoing basis from its ownership. The owner is expected to carry out myriad functions even if it is managed by a brand or an operator. Hotel Asset Managers can especially strengthen the ownership team of such young hotels. Well-opened hotels penetrate their markets faster, which in turn reduces their ramp-up time. Meticulous planning, coupled with spirited execution, puts the hotel on a solid path to profitability. Hotel owners should, thus, consider surrounding themselves with capable hotel asset managers to protect their interests in the pre-opening and post-opening phases.