The Pandemic Chokehold: Dried Up Revenues and Inevitable Fixed Costs
Are you ready to win your customers' trust back?
By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | July 26, 2020
The Hospitality Business model is a unique one. It is seasonal and business volumes differ from month to month. Hotels strive to keep the revenue graphs on an upward trend as much as possible while battling the phenomenon of fixed costs.
A hotel goes through annual cycles of high, low and moderate volumes of monthly business. Occupancies are barometers of hotel business volumes. A hotel could technically reach occupancies of above 90% (and a full house too on select days) in peak months. Low months are huge challenges for the hotel business. With occupancies dipping below the 40% mark, revenues shrink. An ongoing strategy of most hotels is to drum up more business (at high commission costs often) during the low months so that the overall revenues graph does not dip.
However, occupancies and revenues are only one side of the picture. Hotels have also to deal with the other insidious enemy - fixed costs. These are costs which do not change with business volume. While fixed costs turn into an advantage during high occupancy months (because they are covered many times over by substantially high revenues), they depress bottom lines in months of low occupancies. So, this see-saw battle of high and low month occupancies goes on in the hotel business regularly.
This seasonality makes sustenance of revenues consistently over time a major hurdle to be crossed on a daily basis. It is critical to understand that we are talking only about low occupancy months (which could mean anything from 40% to say 50%) and their effect. At 40% occupancy, the hotel still runs and revenues are earned.
Imagine a worst case scenario where there are no customers coming to the hotel. In other words, occupancy is at zero or close to it. Imagine employees ready to serve customers who just aren't there. Imagine hotel restaurants having prepared food menu items but no one to serve. Aside from the colossal wastage that would happen, the hotel business would be devastated if this situation continued for a month or more.
This is exactly what happens when a pandemic strikes. Life safety takes on a stark, real meaning when the pandemic descends on communities. So, hospitality businesses which thrive on volumes and which are cheerful, busy establishments undergo the mind numbing reality of absence of customers.
Pandemics bring with them a phenomenon which can only be described as a chokehold - on the one hand of dried up revenues while on the other of inevitable fixed costs. Both of these drive a harpoon through the heart of the hotel business and its bottom line.
The Pandemic Chokehold
With the specter of infection weighing heavily on authorities, they have no option but to mandate lockdowns. Lockdowns affect travel globally in a pandemic. Suddenly, aircrafts which were filled to the rafters ferrying people all across the globe become monstrous, idle machines with vacant seats. The Pandemic spreads its tentacles across all industries but the three closely linked industries of tourism, hospitality and travel which often are barometers of the health of an economy are the ones which bear the brunt of the devastation.
The first immediate effect of a pandemic on the hospitality business is of course the disappearance of business volumes. With nobody able to travel, there are no airline bookings and most often linked to that, hotel bookings. With no hotel bookings, revenues dry up.
When revenues dry up, it turns the cash flow faucet off. Suddenly, the hotel is not generating cash flows any more. As a cascading effect, when cash flows stop, loan installments and fixed interest costs on debt cannot be paid. Of course, big hotel chains and companies can and do use cash flows accumulated in the past to pay the installments but in the case of small businesses this luxury is seldom available. They begin defaulting on loan installments and interest payments.
At the same time, with no customers to serve, the hotel which at any point of time has a live workforce running the hotel has to lay off employees (most of them). They have no one to serve. The layoffs help the hotel or other businesses bring down their fixed costs considering that there are no revenues to cover them. Of course, some skeleton staff are needed to keep the premises maintained. Cleaning, washing has to happen if the assets have to be maintained in top condition ready for when the business picks up. A lot of customer contact employees will be let gone as there is no customer to contact.
The macabre situation of employees suddenly having no pay checks is now real. This of course cascades into households not being able to pay their bills. It is a vicious cycle wrought by the pandemic. The pandemic has managed to lay low in one fell swoop two major cogs of an economy's growth wheel - businesses providing products and services and workforce assisting businesses earn their revenues and profits. Indeed, it is a chokehold.
So, what is this chokehold we talked about earlier? Why is it considered a chokehold?
To begin with, revenues vanish causing bottom line or profits to run into negative territory. The phenomenon of monthly operational losses and negative cash flows loom. Although a hotel is a seasonal business and low months produce lower revenues, most times they are still above water, meaning running at small profits. Losses however are a different animal altogether.
Losses mean a business is not breaking even. If it persists, this situation can erode the Net Worth of an organization. Business work hard over decades to acquire a reputation in the market with consistent bottom line performances that build up market capitalization. However, it can all disappear within mere months of regular losses.
When Net Worth gets eroded by regular losses, a company's solvency may be in danger particularly for small businesses which cannot weather such heavy hits to its bottom line. Even for big businesses, erosion of Net Worth results in market capitalizations coming down. In the case of global businesses with stocks listed, stock prices plummet wiping out market capitalizations in billions. It is as if decades of build up is going up in smoke.
On the employee side, the picture is even more grim. Businesses at least have a machinery behind them. When the pandemic forces business to lay off the workforce, households which have been living paycheck to paycheck disintegrate. They then are at the mercy of the elements. But, in these hard times. the collective generosity of the company itself, individuals and charitable institutions rise up to the occasion. Through food and other donations these good Samaritans do everything to alleviate the grim reality.
Token respite is provided by the federal government through its stimulus package mainly to take care of mounting bills of households. Respite is token because it is a one-time payment which can meet only a part of the obligations. Households still have to eke out living considering that a chunk of workforce has lost their means of livelihood.
The Calm After the Storm is Worse
The coronavirus pandemic (we have been using the generic word till now) at the time of this writing has claimed a staggering loss of more than 100,000 lives only in the United States. More than 36 million Americans have filed for unemployment benefits. Trillions of dollars of business valuations have been wiped out in the three months of the coronavirus carnage.
The lockdowns which were enforced during the latter half of March, entire months of April and May are being eased in a lot of the states of the US although infections have been continuing. A few states have been foolhardy in allowing people to congregate in beaches as early as the third week of May and for the large part are paying the price with renewed infections.
They say there is a calm after the storm (apart from before!). While natural calamities like hurricanes, tornadoes cause major damage during their journey through land masses, things return to normal after they have moved away. A pandemic in general and the coronavirus in particular are unlikely to go away. In fact, ironically, the supposed calm after the storm is worse. Not just from a virus perspective but also a business one. Why?
Well, for one, people are now wary of travel. They will hesitate to venture to the far corners of the earth as they used to before for fear of being infected in a alien land. This means businesses will be losing a good chunk of customers who do not travel.
Next, even if a certain chunk did travel (as they eventually will, nobody can wait indefinitely to get on with life!), they will not be the same customers as before. The continued requirement of masks and other precautionary measures will put them off despite them being life saving measures. So, businesses will not see the same volumes as before.
Companies have to think out of the box to attract customers back and generate revenues.
Rampant discounting to attract customers which is already being seen in the coronavirus situation will probably erode bottom lines further.
And what of the workforce who were rudely ejected from their pay check comfort zones. Their mindset would have changed too.
Regaining Trust of Customers Becomes Tough
The foremost goal of your hotel business after the coronavirus situation eases up and you are allowed to resume operation (as of today, this may be around June 8 2020) is to regain the trust of your customers. You also have to deal with a customer who probably is less liberal with his money than before. Hopefully, your company has showed a caring side of your business and has been ethical in all your dealings during the pandemic.
Remember, customers will stay away from those companies which practice price gouging during the pandemic. Price gouging is the act of bumping up prices unreasonably, creating artificial scarcity to bump up prices etc to make money from people's misery. On the other hand. a lot of companies have opened their hearts and corporate wallets to provide free services. For example, Marriott put away $10 Million in free hotel rooms for frontline workers.
More credit lines may have to be offered to gain trust back. Credit itself might have to be extended until, particularly small businesses are able to pay off debts and outstanding balances.
Ethical practices become centerstage - not accepting the stimulus package when smaller businesses have suffered more is critical. Many companies have done this to foster trust and just hold themselves to their creed and mission. All these actions differentiate the great companies from the good ones. Customers will continue to patronize the great ones post pandemic too in the same manner they had done before.
The Way Forward
So, what is the way forward? Is it gloom and doom? Hardly!
Pandemics though less inevitable than natural calamities have been confronted in the past. They have to be accepted and dealt with in a sensible manner. With the hope that the eighteen month target for a viable vaccine is shrunk by scientists and virologists working together, a cure then appears on the scene reducing loss of lives. It has happened in the past with small pox, malaria etc. It will happen to the coronavirus too.
What can, you as a business do for the rebuilding crusade going forward? Here are a few priorities:
- Reach out to and assure your customers that you have done everything to keep your operation free of infections and that they are safe coming back to your hotel.
- Reach out to and assure your employees that you have put in place every protective measure to keep them safe from infection so that they can serve the customer.
- Reach out to and assure your communities that you are vested in them and will take every measure to keep them safe even while rebuilding your business.
- Assure your stakeholders that you are protecting and maintaining their assets (including the human resource one) for future return to normalcy in operation; however, they need to accept that some erosion in their returns on investment is likely to happen over the short term.
As a business with a standing this is the minimum you owe to your customers, employees, partners, communities, stakeholders as well as yourselves. This hopefully, will bring business back and cause the coronavirus pandemic chokehold to ease over time.
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