The Hotel General Manager and Director of Sales could and should provide help with this, but the asset manager’s secret is that their input needs to be taken with many grains of salt and the final plan should reflect an addition of a bit of the owner’s “pepper.” Strengths need to be real, and should represent a clear advantage that a property has compared to its competitors. The ‘Brand X’ reputation, its web presence, its reservation system or its frequent traveler program are not necessarily strengths if there is a well-performing competitor of a comparable brand nearby that is going after the same customer with equally-strong systems and programs. A “tired restaurant,” for which the Brand Manager may have lost enthusiasm or that may have gone unrenovated longer than called for in the management company master guideline, may not be a weakness at all unless it is being compared to a competitor who has a “fresh” restaurant that is doing good business and attracting hotel guests.
Weaknesses need to be property and market specific. Lack of funds for renovation, for example, is only a weakness if competitors are already in better condition, or are on track for upgrading that will provide them with a competitive advantage. New supply is almost always a threat, even if it is not directly competitive. Depending on location and market positioning, the new property may only be a 20% threat or a 50% one. Potential new supply is a threat only when there is confidence the property will get built. There is much fallout between planning for projects and their opening, even in the best of times.
Potential changes in a demand generator are major threats and if a single customer accounts for a substantial percentage (anything over [say] 10%) of the hotel’s total business, the astute strategic planner will assure that the potential loss of that account or substantial curtailment of business from it are automatically included as threats. Companies get taken over; plants and offices close and executives change. The hotel should have a contingency plan in place to react to the loss of a key customer.
Done properly, the analysis needs to consider SWOT’s by market segment; minimally business, leisure and group. Great meeting space has little effect on choice or stay experience by a leisure customer. But inadequate second ballroom or exhibition space could be a major detriment to attracting or serving the group market well. If a market segment is large, the SWOT’s may be further subdivided; they may be different for corporate meetings and SMERFS groups; for tour operators, weekend package customers and FIT’s. Some brands apply point scales to various rating factors to decide if a hotel is pricing its product properly.
Once SWOT’s have been identified, a strategic plan needs to be developed from which action plans can be put into place. How can the strengths be used, or priced to greater advantage? Can the weaknesses be overcome, and does it make economic sense to do so? If not, is it possible to add or create features or service elements to create new strengths that will offset them? The same kind of thinking needs to be applied to opportunities and threats: does it make economic sense to try to exploit them (adding rooms or function space, converting areas to other use, and so forth)? Should actions be planned, or at least contingency plans developed, to deal with expected threats? Perhaps the planned disposition date should be moved up. Maybe the property is not positioned to best advantage and its target markets, its feel, its pricing and perhaps even its brand should be changed.
Under normal conditions, the strategic plan also needs to consider the life cycle of the property in its market. Various terms are available to describe the quadrants, but essentially they may be one of four:
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 greatest rewards, at least on a percentage basis, are to be had for investments made in the emerging or growth parts of the cycle. If the property is mature, one needs to think about and plan for how soon it could be and what it will take for the asset to slip into decline. Capital expenses need to be examined with greater scrutiny here. If property needs are going to require more than the normal FF&E reserve, the investment yield will be cut. Here again, it may be necessary to revisit the exit strategy.If the market and the location are expected to remain viable and physical or brand deficiencies can be fixed, it may be possible to put a mature or declining property back into a growth mode. A major renovation, addition to or reconfiguration of facilities, and/or a different brand may lead to new vitality. It is then a question of the investment required to get these done, and whether it is likely to produce the desired investment return. If a property is declining and further deterioration is expected, the strategic planner needs to look at alternative uses for the building. These all depend on location and demand, but perhaps all or part of the hotel can be converted to retail shops or offices. Seniors assisted living housing is another prospect, and more than one fading hotel has been converted to university housing. Two properties I have been to [as a guest] have been converted all or in-part to temporary detention prisons.
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,” may be useful. The grid appears below:
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. Greatest potential opportunity is found in the upper right: an inferior facility in a strong and growing market. The position of the hotel in the grid is the major factor in deciding the strategy. The goal, for an asset that is not already there, is to move to the left in the grid. A hotel that plots in the upper right is the classic repositioning candidate; if the location is good and the rest can be fixed at a cost that makes sense, a new star is born. A property that plots in the lower right is one you do not want to spend a lot of money for, or put much into, but that does not necessarily mean that all is lost or that conversion to a different use is required. If you can buy it at a deep discount and/or put a bit of capital into high-impact renovations, perhaps you can transform the asset into the best facility in the area. Then plan to increase market share, and possibly gain a bit of extra room rate, to provide the desired return.
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; a build-up period for the effect of the initiatives to be realized, and a period of 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 until the goal is in sight. Keep in mind a strategic planning guru’s maxim that says: “The best plan is only as strong as its weakest assumption.” 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. But do not fool yourself. If these are unlikely to occur, so is the projected rate of return.
One of the “tweaks” I see in strategic plans is to cut the amount of the replacement reserve during the early years of a new project. After all, a big investment has just been made; everything is new, and there will be little need for replacements – right? Unfortunately, it doesn’t work that way in real life. From a cash flow standpoint, the assumption may be fine, as the immediate replacement outgo will be less. But guest occupancy, staff traffic, competition changes, new customer expectations and time tend to create the need to catch up. And when major changes need to be made, they need to conform to current higher-cost building codes. The typical year addition of 4-5% to the reserve is likely to produce a shortfall when major renovations are needed.
The International Society of Hotel Consultants (ISHC) “CapEx 2007” study that was made with the sponsorship and assistance of the Hospitality Asset Managers Association (HAMA) reported CapEx spending was down from the levels in prior studies due to the overhang of the events of September 11, 2001. It 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 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:
o Brand
o Service levels
o Pricing and occupancy and ADR penetration goals
o Marketing, sales and public relations strategies
• Renovation and major capital projects by year
• Pre opening or “reopening” activities and budgets
• Eventual sale
An old proverb says: “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.
