Maximizing hotel development to avoid the ‘big miss’
 
Maximizing hotel development to avoid the ‘big miss’
22 MAY 2019 7:20 AM

Here’s a look at the steps and procedures hoteliers take to ensure the hotel development process goes smoothly.

Tiger Woods’ fifth Masters title and 15th Major victory at age 43 has reverberated around the globe and has the golf industry jumping for joy as fans look forward to what the New York Times calls a “Tiger boom 2.0.” But what was very interesting and not much publicized about Woods’ monumental triumph was the difference in stats compared to his previous Masters and Major victories.

First it was the only time Woods had come from behind in the final round to win a Major tournament. Second, but more importantly, Woods, who routinely outdrove opponents 30-40 yards and forced many a golf courses to “Tiger proof” their holes by lengthening them, did not even rank among the top 40 players in driving distance, according to ESPN. Instead, relying on his course knowledge and iron play he was No. 1 in greens in regulation and ranked top 15 in putting.

Woods’ success is due to his age and experience, but I recently read legendary golf instructor Hank Haney’s memoir on his time with Woods and was struck by the book’s title, “The Big Miss” and how those three words not only apply to Woods’ latest victory, but also to the hospitality industry.

One quote in Haney’s book from Hall of Fame professional golfer/instructor John Jacobs especially caught my eye: “In competitive golf, it’s not so much where the good ones go. It’s where the bad ones go. You’ve got to build a swing that will eliminate the big miss.”

Woods very much followed that to the tee, keeping his balls on the green even as his closest competitors disintegrated on the back nine.

In very similar fashion, whether it’s ground-up development for one of Dream Hotel Group’s four iconic brands or acquiring an existing hotel for conversion, smart hoteliers implement steps and create procedures to eliminate that big miss.

On average, 90% of investments will not deviate more than 5% to 10% from the investment thesis, unless there is a “Black Swan” event like the 2008 meltdown or a faulty investment thesis. It’s that other 10% that keeps us up at night because that’s where the big miss may be lurking.

Here are some measures we use at Dream to track and trend to maximize a development opportunity, or drive cash flow through revenue enhancement and expense control initiatives to help avoid that big miss. Please keep in mind that I am speaking in generalities.

Hotel market

  • What is the strength of the local market? What are the demand generators and what has their growth been historically?
  • What is the current demand segmentation and which direction is it tracking? How did this demand track during the last three downturns and how fast did it bounce back?
  • The ability of the local market to generate demand through various sources (e.g. tax breaks, convention center, etc.) has a trickle-down effect on everything else.
  • What is demographic with regards to dining out? How can we cater to the local market and not just hotel guests? Who are the current players in food and beverage in the market and what is working for them?
  • What are the in-season and shoulder periods in the market and how much do they deviate from the mean?
  • What are the barriers to entry into this market in our segment?
  • What is the cost of construction in the market and how does it compare to other MSAs?
  • What is the impact of unions in the market, both from a development and operations perspective?
  • What presence do vacation rentals such as Airbnb and ride share companies such as Uber have in the market?
  • What is the airport connectivity like to our top markets and also to other Dream properties?

Competitive set

  • Which properties compete with us on product?
  • What is the current condition of the competitive set? What are their renovation plans and how will that fit into when we open?
  • How has new supply trended in this market? Is it a market that peaks in new supply in the beginning, middle or end of the lodging cycle?
  • Which of our competitors are already in the market? Which ones are not and more importantly why?
  • What will be the ramp period in this market for rooms and F&B?

RevPAR index growth

  • 100% revenue-per-available-room index growth sounds good, but what is the true potential of the property compared to its competitive set?
  • Even if the property is well above 100% RevPAR index, what was the growth in its RevPAR index?

Guest satisfaction scores and QA

  • What are the guests saying about the property?
  • What are the employees saying about the property?
  • How does the property present from a quality assurance perspective?

Flex/flow

  • Which one is better, a revenue increase of $50,000 but a house profit increase of $15,000 or a revenue increase of $40,000 but a house profit increase of $20,000?
  • Most flex/flow calculations are done versus the budget but what about last year?

Revenue and expense forecasts

  • How is the hotel trending to budget but more importantly, how is it trending to the last forecast?

E-commerce and revenue management

  • Is the hotel being represented appropriately on all channels?
  • What is the cost of booking via each channel and how is that being revenue managed?

As I mentioned in a previous article, expect to see an uptick in supply distribution for lifestyle hotels in secondary markets, as the product is increasingly introduced at a lower price point to reach a new target audience joining the lifestyle boutique trend. But venturing into these secondary markets also creates an increased risk for a big miss if the market and lodging cycle dynamics are not right. By carefully tracking these measures, I think one can at least minimize the possibility of falling victim to the big miss.

Karan Narang is the Vice President for Acquisitions and Development Analysis at Dream Hotel Group, playing an integral role in the continued growth strategy and expansion of group. Karan holds a Master of Management with specialization in Hospitality Real Estate Finance & Investments, from Cornell University; Bachelor of Science in Hotel Restaurant & Institutional Management, from the University of Delaware and a Higher Diploma in Hospitality Management, from the Swiss School of Tourism & Hospitality, Switzerland.

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