Operational Efficiency: The Next Big Game

My good friend, Thomas Power, once said, “The winner of the game is the one with all the names.” This certainly rings true for companies like Meta, X, and TikTok, who have built their empires by collecting user data and monetising it through advertising. But the “Name Game” is over, and it’s time to move on.

The new game is Operational Efficiency. While it may sound less exciting than data-driven advertising, I believe we’re standing on the edge of something transformational.

Why Operational Efficiency Matters

Throughout my career, I’ve had the privilege of working with many operationally focused businesses, from Travelodge and Virgin Holiday to Avis Budget and Get Living. Each has its own challenges, but one thing remains constant: Operationally efficient businesses are simply more valuable than inefficient ones.

Take a quick look at the real estate sector, particularly Build-to-Rent (BTR). The value of an asset, or Net Asset Value (NAV), is driven by Net Operating Income (NOI) and Capitalisation Rate.

Here’s a simple formula:

NAV = NOI / Capitalisation Rate

For example, with an NOI of ￡100 and a capitalisation rate of 5%, you get:

￡2,000 = ￡100 / 5%

This means every ￡1 saved through operational efficiency can lead to a ￡20 increase in NAV. Now imagine scaling that across an entire organization—it adds up quickly.

The Two Levers: Income vs. Expense

To improve NOI, you have two main levers:

1. Increase rental income (which is constrained by demand and potential regulation like rent controls)

2. Decrease operating expenses (where operational efficiency comes into play)

With rental income under pressure, operational expense management becomes the key to unlocking significant value.

Real-World Example: Travelodge

Let’s break this down with some real numbers. Travelodge has around 45,000 rooms, with an average occupancy of 80%. That means about 36,000 rooms are cleaned daily. If cleaning each room takes 30 minutes, that amounts to 18,000 hours of cleaning each day.

At the UK minimum wage of ￡10.44, that’s over ￡66 million per year spent just on room cleaning.

Now, imagine reducing the cleaning time from 30 minutes to 20 minutes. This could save ￡22.3 million annually, translating to a ￡446 million increase in shareholder value (thanks to the multiplier effect from our earlier formula). That’s a significant boost in value from just one operational improvement.

AI and Automation: The Future of Efficiency

Operational efficiency is about to take a giant leap forward thanks to AI and automation. AI can augment human workers, making tasks faster and more efficient. For example, I wrote this article as a stream of consciousness and plan to use ChatGPT to refine it for LinkedIn—what would have taken me hours, AI does in seconds.

But AI isn’t just about augmentation; it’s about replacement. Simple tasks, like writing property descriptions or generating legal templates, can now be handled by AI. The future is “Human+”—humans working alongside AI to boost productivity.

The Bigger Picture: AGI and Robots

While current AI is primarily focused on enhancing human tasks, Artificial General Intelligence (AGI) will take this further, enabling businesses to automate entire knowledge-based processes without human intervention.

Imagine the impact on a company like Travelodge, where 80% of head office staff could potentially be replaced by AGI, saving ￡40 million per year—resulting in a ￡800 million increase in shareholder value. And this is just the beginning.

In the future, robots could handle more analogue tasks, from cleaning hotel rooms to performing other manual jobs. If Travelodge reduced its hotel workforce by 80%, it could unlock nearly ￡3.8 billion in shareholder value.

Conclusion: The AI Race Is On

The tools to deliver massive improvements in operational efficiency are just around the corner. Nvidia’s and OpenAI’s soaring valuations reflect AI and automation's transformative potential. If a single company like Travelodge can unlock double-digit billions in shareholder value through AI and automation, imagine what’s possible across all industries.

The game has changed. The winner of the game is now the one with all the AI.

Please note that all the financials in this article are public domain and sourced via ChatGPT. Despite my previous involvement with Travelodge and the BTR sector, these thoughts are all my own and ChatGPT's. There is no confidential information in this article. Feel free to disagree.