Extended Stay America focuses on operations
08 MAY 2014 7:27 AM
Company officials are executing business-building and expense-saving initiatives in operations, marketing, distribution and product development.
CHARLOTTE, North Carolina—Since taking Extended Stay America public last November, company executives have been working to transform the midscale extended-stay hotel chain through a number of operational, product, distribution and marketing initiatives.
During a first-quarter earnings call on Wednesday, CEO Jim Donald updated analysts on the company’s progress in five areas:
In February, the company began diverting reservation calls made directly to properties to a central reservations office. Donald said the program, which is in effect at 500 hotels, improves customer service and increases the number of reservations booked.
“Since making the change, our responsiveness in answering calls has improved by more than 50%, and calls handled in the center are converted into bookings 30% more frequently than when handled at the hotel level,” Donald said.
The remainder of the company’s hotels will migrate to the new reservations protocol in the third quarter, he said.
Company officials are introducing new housekeeping and maintenance procedures that Donald said will improve efficiencies and save money.
The new cleaning methods focus on reducing the steps and movements needed to accomplish the job.
“Through the process, thousands of steps have been reduced in housekeeping and maintenance,” Donald said. “And as a result of this and other process improvements, we expect to reduce energy and water consumption through the elimination of approximately 50,000 wash cycles per year in our laundry process. This means a 30% deduction in chemical usage and a 27% reduction in kilowatt hours, while improving our quality.”
In June, Extended Stay America will debut new television and online video advertising that will run through July. Thomas Seddon, chief marketing officer, said the campaign is designed to build awareness for the chain and help attract more higher-rated business travelers and short-term guests.
Donald said the chain’s average length of stay in 2012 was 30 days; it dropped to 28 days last year and is now 24 days.
“While we love our extended-stay stability, we continue to see high single-digit growth in our segment of guests who stay six days or less,” Donald said.
Donald called the company’s ongoing property renovation plan “the engine room of our company.” In the past two years, approximately 50% of the company’s 684 hotels have been renovated, including 90 during the first quarter of 2014.
While the work creates occupancy disruptions at properties under renovation, company officials said hotels with completed projects produce higher occupancies and rates. Donald said one set of hotels in which renovations were completed at least 12 months previously generated growth in revenue per available room of 17.3% compared to pre-renovation results.
During the rest of 2014, 60 properties will undergo renovations with 40 more to follow next year.
5. Revenue management
The company has selected a vendor and expects to launch a chain-wide revenue-management system this fall. Seddon said the new system will be introduced in phases with implementation completed in the fourth quarter or in early 2015.
“We’re mindful of how we manage the risk with this project,” he said. “One way to avoid disruption is to roll it out to groups of properties and see how it works and to turn on pieces of functionality to make sure we’re helping, not hurting our hotels.”
The chain’s ongoing renovation program and the effects of severe winter weather in many parts of the United States had an effect on the company’s first-quarter performance.
Net income rose 15.5% to $16.1 million on a 5.3% increase in revenues to $270.3 million. Despite a slight decrease in occupancy attributed to renovation displacement, RevPAR increased 4.9% driven by a 5.7% rise in average daily rate.
Shares of Extended Stay America rose 2.8% in trading on Wednesday and are down 14.7% year to date. The R.W. Baird/STR Hotel Stock Index is up 6.6% year to date.
Hotel operating margin decreased nearly two percentage points to 48.2%. Executives said the drop was due to higher costs related to severe winter weather at many of the company’s locations.
Weather had a $3.5-million impact on expenses caused primarily by a 13% increase in utility costs, a 91% rise in snow removal costs and higher-than-expected costs for repairs and maintenance.
Donald and other company executives are confident that business will improve for the rest of the year. For the full year, executives forecast revenues to increase 7% to 10%.
“Our revenue momentum is building, and each month since January we’ve seen a sequential uptick in year-over-year RevPAR growth and believe we will continue to see RevPAR improvement throughout the year,” Donald said, adding revenue in April was up 7.5%, despite a negative impact related to the shift in the Easter holiday.
Donald looked back on his former career as CEO of Starbucks Corporation to express his optimism for the company.
“Looking back as an old retailer, I remember the excitement that ripped through retail stores and peaked between Thanksgiving and Christmas,” he said. “Right now, (Extended Stay America) is at Thanksgiving eve getting ready to enter a very robust spring and summer selling season.”