after the rain comes the sun

In the last year we’ve been able to continue some of our asset management mandates, despite Covid and the fact that for many hotels, certainly in Europe, business all but disappeared .

In some countries, the government was able to assist the hotels with various schemes, these included :

-       Assistance with paying the salaries, such as less direct social costs or less contribution to the various costs or employment taxes an employer would bear

-       Some salaries being taken over altogether, as if the person was unemployed.

-       Revenues being subsidized to a certain degree so as to be able to pay fixed costs

-       Deferral of rent

-       Reduction of VAT for some months

Other schemes in some countries also included free loans with deferred reimbursement.

For many hotels around the globe however, there was no such luxury.

Hotels and restaurants have suffered dearly and the situation will only gradually improve.

When we look at the hotel industry we see that most Hotel Companies (Marriott, Accor, …) are announcing reasonable numbers. Off course most of these companies work with management contracts or franchise contracts and the biggest financial risks are to the hotel owners.

Hotel companies have suffered because reservation fees and management fees went down, but the franchise fees mostly kept coming.

Hotel owners on the other hand have had to continue paying the rent and the fixed costs.

One of the first decisions taken by hotel owners was and will be to reduce employment.

In the tourism industry, an estimated 50 million jobs may be lost before this crisis is over says the WTO. Only in those countries with government support schemes have we noticed less job losses.

The effects on the P&L of those hotels we have studied are severe.

Obviously, situations differ from hotel to hotel but companies with large cash reserves are able to weather this storm. GOP’s have plummeted, net profits have disappeared and reserves have dwindled. 

One of our clients decided to stay open, to keep as much staff as possible but the result of that was that thousands of euros cash were burnt every month. Luckily, the hotel was in good condition, had large cash reserves and didn’t need immediate investments.

Another client decided to review the whole process and do inhouse everything that was done out of house, keeping as much cash to himself as possible.

And this is what, at the moment, is making these property survive as well as anticipating the future with some degree of confidence.

Cash is king. We’ve been told this in management school, yet the past years, the model has shifted.

Because of cheap money, borrowing was high and today, companies that have borrowed heavy, need to go back to their lenders and ask again. With the Corona effects on the hospitality trade, desire to invest by the banks and investments companies is low.

The dangers we see looming are many : some hotels are going cheap, some are going back to promising large allotments or some even hand over inventory control.

The ongoing discussion about reservation commission seems to have disappeared.

The same parties who, at some point decided willingly to go in a partnership and complain bitterly of the fineprint after signature, now seem to throw all of that overboard and are courting the intermediaries again. Hotel associations in most countries have gone silent on this subject, concentrating on getting demand to the destination.

I want to mention here an initiative that I picked up last week in a European capital. The hotel association struck a deal with the hotels to create “caring bubbles”. One could book a room in selected hotels, just with their individual Covid bubble, and enjoy a stay in the hotel for 1/3rd of the listed price. Many hotels also offered inroom food service (sometimes through a catring partner) and were able to promise “almost normal” to their guests. I spoke to some customers that longed to get out of their daily routine and get the experience of someone (caterer or hotelier) taking care of them.

It was a huge success with most hotels claiming to be almost fully booked and many hotels within the country imitating the initiative. This initiative was supported because of Valentine and the start of spring holidays for most countries.

Despite this, many seem to have forgotten the lessons of 2008 and previous crisis and are willing to make the same mistakes, but cash is king….

So the temptation is there to try the well-tested recipes again : discounts, price reductions, high allotments.

Books, articles and opinion papers have been written after each and every crisis about these measures : they do not add to the demand, they simply do not work on the long term and are detrimental to a swift recovery.

The only objective these measures will deliver on, is bringing some cash to the property, but at what cost?

So what can you do at this point?

• You can concentrate on being ready for when Covid measures are going to be lifted.
• What about your marketing, your electronic marketing? Have you targeted the right segments, the right regions?
• If you are in Europe, you should concentrate on regional tourism. Leisure will come first, business travel will come second. If you are Maldives and Seychelles, you concentrate on those countries that have free travel : UAE, CIS, China and Aspac regional tourism.
• What activities have you planned on your social media and on review sites?
• If you have to give discounts, make sure they are limited in time. Package your rates and discounts so that you can have a different pricing possibility when you want, not when your clients decide. Can you offer upgrades or additional services instead of discounting?
• Have all your customers paid? Can you get pre-payments from some customers?
• Avoid handing over inventory control ; it may seem a good idea, but trust us on this, it doesn’t.
• Have you discussed terms with your suppliers? They need you just as you need them.
• Have you discussed flexibility, job adaptations with your team members?
• Do you keep the full scope of services, or can you concentrate first on the services that yield the most, avoiding cash going out? Keep as many services internally with the available staff? Can you gradually re-open?
• How many months (weeks) of cash reserves do you have?
• Can you postpone investments?
• Can you renegotiate certain improvement programmes or certain maintenance programmes?
• What decisions can be postponed?

This is the ideal time to do a blank budgeting process, looking at your numbers as if this was year 0 and that you needed to open the hotel as a new property, on new markets with new customers, a new offering and new activities.

Plse have a look at https://industry.ehl.edu/hotel-performance-analysis

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