Keeping the Profit Graph Steady: New Versus Existing Hotels
By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | April 07, 2013
How do you keep your group profit graph steady?
Growth in portfolio is a panacea for all hotel chains. As new hotels are added to a hotel group it starts getting into the big league. Nothing warms the cockles of the heart of a CEO than a burgeoning hotel portfolio. However, it is not all a dream run. The additions are likely to be different in a number of critical criteria, which may become cause for worry. What do we mean by that?
Light Versus Heavy Weight
A hotel group normally has in its portfolio diverse properties. These range from the upper end of high RevPAR and profit delivering properties to the lower end of modest RevPAR and profit producing properties. Then there are those moderate ones which feature mid-way between the upper and lower end. When the consolidation of performance results is done for the hotel group, group RevPAR and profit indices emerge. This looks very different from the performance indices of the individual hotel properties. Moreover, the weight, each of the individual properties pull also varies significantly. Thus, a consolidation of group results will merge the performances of group hotels at varying efficiencies.
Hotel Projects have gestation periods from the start of the project construction to the time the hotel is operationally ready to open its doors and earn revenues. This period is dependent on the size of the project and in some cases of multi-use development can run into a number of years. During this time, the project incurs expenses, has cash outflows but no inflows due to lack of revenues. This requires some adroit management of funds. Moreover, even after the hotel has become operational there is another settling in period where the hotel operation tends to stabilize and the revenue and profit flows become better. All these factors have an impact on group revenues and profitability. Finally, a year in which a hotel opens mid way, revenues are earned for less than twelve months which tends to pull down group averages (See Balancing the Equation section later in this article for the effect of this).