Prepare for the next downturn while you can
29 SEPTEMBER 2015 6:28 AM
Savvy owners, now is the time to get in the driver’s seat and control your destiny by preparing for the more challenging times ahead.
It’s not exactly breaking news that times are good in the hotel industry. I recently returned from a sold-out Hotel Data Conference and the mood was unsurprisingly positive almost across the board. But being a contrarian (not to mention a cautious, prepared planner) by nature, I can’t help but think about the not-so-distant past.
It was only a few years ago when even the most popular and high-profile industry conferences and special events were rarely more than half full. It is an important reminder that we are in a cyclical industry—and for owners who want to control their destiny, being prepared for the inevitable correction should be a priority.
Increasing revenues often can hide a multitude of sins, leading to expense creep and reduced operational efficiency. Be vigilant and closely monitor the financial health of your hotel. When things turn in a year or two, will you be prepared? With that question in mind, here are some concrete steps that owners and operators can be doing now to position themselves for success.
Keep one eye on the future
Plan ahead and keep a strict watch on your profit-and-loss statements. Is your management company being vigilant in scrutinizing operations and communicating with vendors? Continuous auditing of processes, like e-commerce, will help prevent potential lapses and surprises. Vendors often can experience the same cost creep, so keeping them competitive while strengthening your relationships with multiple vendors will ensure a level playing field. It’s important to establish an understanding that if you are going to be down cycling, your vendors and contractors will need to come with you.
To prepare for the future, it often helps to understand the past; do you have a thorough understanding of data from the last downturn? Good managers can help owners distill their hotel’s data down to its essentials and glean key insights. You might want to change your staffing mix and put more dollars toward marketing and targeting toward those segments you relied on in the last downturn.
Also, know your competition and understand who sits one scale above you. Remember that they might be coming for your business in leaner times. Know your competition and what accounts are most vulnerable due to product or service issues. When the market tightens, surely those that are the best prepared will succeed.
Develop an ‘emergency’ business plan
Consider developing a comprehensive plan that addresses operational and revenue-generating initiatives to deploy when the need occurs.
Different market conditions demand a different business strategy, and it pays to be flexible. An experienced manager should be able to quickly implement expense and payroll reduction, with the key being to execute with the least possible impact on product and service delivery. Often, this is an opportunity for managers to take a more active role in key guest touchpoints to assure the delivery of a quality customer experience.
To effectively maintain or gain revenue share, you must understand your market data and strategically deploy your resources—both from a personnel and financial perspective. Study what happened in the last downturn. Review data from 2008 or 2009 to figure out what worked and what didn’t. Does your tactical research reflect a change in your segment production? Who is producing and who is not?
The sales team needs to be proactive to refocus their efforts on opportunities with the highest return. Likewise, the revenue management team initiatives should include careful analysis of trends in booking channels. Understand where to allocate resources. For example, you might want to move some dollars from pay-per-click on corporate group to GDS banner.
Finally, don’t be too quick to drop rate. As an industry we can be our own worst enemy by hastily reducing rates in a downturn. If your product and service are up to par, there should not be a need to play by price alone. It can be difficult to recover lost average daily rate.
Stay up to date on renovations and maintenance
Prepare your building for tighter margins and reduced capital budgets, making sure that your equipment and infrastructure are up to date and in great shape.
Where are you in your renovation cycle? Would it behoove you to get your property in better shape now while cash flow is strong? Think about the quality of your product—you want to be in the strongest competitive position possible in a down cycle. Also, it might sound trivial, but be sure to take great imagery for your marketing materials and your website now, when your property is in its best shape.
Beware the domino effect
If your hotel is brand affiliated, there are often loan covenants in place that can be triggered in the event of a default of the franchise agreement. Preserving strong brand relationships and being a good brand citizen begins and ends with adhering to established standards regarding product quality and service delivery. The best way to maintain control of your own destiny is to perform in the top half of the brand metrics and continue passing property brand inspections. Inevitably, this will keep you in the driver’s seat.
Be cognizant of your franchise license term. If your license is up in the next two to three years, you might want to consider an early renewal while cash flow is strong and the lending market is less restrictive. Not only will you be on stronger terms to negotiate now, but you also will be in an excellent position to withstand the cycle with a superior product, putting you in control.
Put your financial house in order
It is easy to get starry-eyed when your ADRs are up and you are having record months, but it is always important to consider what the revenue curve might look like 18 months from now.
Remember the lessons of the last recession; many of those who got slammed were those who had their loans come due in the middle of a downturn. And, if financing was restrictive then, imagine what it might be like next time, with more regulations in place and a stricter lending environment.
In our current favorable lending environment, there might be an opportunity to strengthen your financial position for the future, or it could be a chance to divest some non-strategic assets in your portfolio. Regardless of your situation, being proactive will help provide a more secure outlook.
There is a certain energy in the marketplace, and when that momentum is positive it is often easy to get caught up in the excitement. This is by no means a doomsday manifesto—and it is admittedly speculative, but that speculation is supported by a well-documented history of cyclical ups and downs. It is, however, a call to action for savvy owners to get in the driver’s seat and control their own destiny by preparing now for the eventual more challenging times ahead.
W. Chris Green adds more than 23 years of successful operations experience to Chesapeake's corporate team, including nearly a decade in the field at various Chesapeake-managed properties. In 2008, he led the team at the Crowne Plaza Houston Downtown to the Quality Excellence Award for outstanding performance from Intercontinental Hotels Group. Prior to joining the company, Green held a variety of key operational positions with three national hospitality chains. He also has a strong F&B background, including supervision of more than 40 restaurants with RMS Restaurants, S&A Restaurant Corporation and Brinker International. Green attended Florida State College at Jacksonville with a concentration in management. He holds the Certified Hotel Administrator designation, and has served as president and board member for various CVB, Tourism development, and Hotel & Motel associations in the markets he has worked.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.