Clustered assets, closer relationships to aid recovery
Clustered assets, closer relationships to aid recovery
01 OCTOBER 2020 9:28 AM

Owners and operators share best practices for finding middle ground and working together to keep costs controlled and hotels running efficiently. 

DUBAI, United Arab Emirates—It might be exceedingly difficult, if not impossible, for owners and operators to be 100% aligned, but that is the plea from many on both sides, as hoteliers need to understand each other’s pain and think further outside the box, according to sources.

Speaking at a panel titled “The industry perspective on the new normal” at the online Arabian Hotel Investment Conference’s On the Road event, Turab Saleem, head of hospitality for Al Rajhi Investments, said owners often are frustrated they’re not rewarded for what they put into their hotels.

Khalifa bin Braik, managing director of Majid Al Futtaim, said the two sides must work together in a more transparent and open fashion concerning operator fees and charges.

“Yes, you do have your percentage points on revenue, your adjusted (gross operating profit), but all in all, if an owner is paying anywhere from 6% to 8% of total revenue, that’s average,” he said. “If you are paying less than that then you are a very good negotiator, and if you are paying above that you need to try to find a way to renegotiate.

He believes the fee structure needs to be more straightforward.

“The top-line and bottom-line fees are clear, but you do have all these finances, licencing, HR systems, IT systems, and if you go through line by line you end up combining all those fees you are actually paying not your typical 1%, 1.5%, on that top line, but 4%, 5%. I think we must have more flexibility as to what it is fair for the operator to charge, keeping in mind, too, that operators have been hit hard, too,” he said.

Kevork Deldelian, CEO, Middle East and Africa, Millennium Hotels & Resorts, said the traditional, close marriage of the two sides, based on long-term contracts and agreements must shift.

“I think operators have to diversify their perspective, especially in the next few years, to really put themselves into the shoes of an owner, because however much operators are saying they are putting themselves into the shoes of owners, they are not,” he said.

Operators must fully understand the responsibilities of owners, not just be concerned with enhancing the quality of products and experiences, however important that might be, he added.

Sensible savings
Flexibility will enhance great relationships, especially if owners can find compromises, panelists said.

Omar Issa, director of strategy for ownership firm Dur Hospitality, said his company has done exactly that. It’s helped that Dur also operates in-house brands, he said.

The Middle Eastern hotel industry is “already coming out of a few tough years going back as far as 2015, so during these years we’ve worked very diligently with our operators, and with those we operate under our own brand, in how we cluster services within our portfolios,” he said.

Issa said if top and bottom lines are under pressure hoteliers can relieve them by concentrating on savings in the middle.

“The most sure way to navigate, to tread the waters, is to manage costs and optimize them very diligently,” he said.

He said Dur focuses on savings in back-office functions and how those can be optimized across clusters and portfolios.

“The hybrid-lease model we have has allowed us to have better synergies and cost-cutting solutions,” he said.

Bin Braik said he sees savings, efficiencies and increased working capital stem from Majid Al Futtaim’s role as both a conglomerate and a developer across various asset classes.

“We’re integrating other asset classes within our hotels. For example, we’ve been looking at co-working for some months now and how to optimize some of the unused banquet space. It will be very difficult for F&B to be profitable over the next two years, so how do we utilize dark kitchens, (facilities) in which substantial capital has already gone into?”

Bin Braik said ideas range from catering for other brands, leveraging procurement from his firm’s supermarkets and further analyzing data and analytics to understand customers better.

Saleem said larger hotel chains also are leveraging laundry services for third parties.

From a brand perspective, Bin Braik said adding assets for scale can aid the process.

“Our Makarem brand was only in Mecca, but a substantial pipeline in Medina will be in operation soon, and it is an obvious step to cluster services for both cities,” he said.

Cluster model
Clustering assets as well as services will lead to savings, panelists said.

Deldelian said his company started that process well before the current crisis started.

“We actually took over some of our own hotels and made a decision to operate them a little bit differently, out of the norm, and so by 2018 we could present to our owners a model based on operating our own hotels that could deliver to them higher returns,” he said.

He said these efforts are already seeing some success.

“Three hotels we own in Abu Dhabi, in 2016-2017 were running with approximately 450 staff, but by eliminating some of the traditional roles and processes we were able to operate at the same occupancy with only 259 staff,” he added.

He said the firm looked at every role and dug deeply to see what every individual could bring to the table.

“We had some financial people, some accounting roles, whose efficiencies we calculated to be only three hours a day, so we either started looking for a new colleague or to see if that colleague had another talent. This was applied across the board, all the way up to the GM,” Deldelian said.

Owners who’ve bought into the model are seeing benefits through the downturn, he added.

“Whenever we are able to get owners to buy into our cluster (model) it proved to be a success and mitigated some of the potential losses owners would have expected over the past year. Now, coming to the pandemic, we had less people to actually lay off, and our owners needed less cash flow to support staff. A lot of all of this came from owners stepping in and saying, okay, what is it that I can do?” he said.

Panelists said now is the time to look at costs around software and licences to see what is really needed, while not cutting too deep as to bring down standards.

“It is about being able to deliver, but at a lower cost,” Deldelian said.

Issa said focusing on cost savings elevates quality, for the most part.

“I take comfort in the fact that in our industry the basic guest requirement of having a good night’s sleep and a great shower … is here to stay,” Bin Braik said. “(That) cannot be disrupted, it cannot be digitized, so the industry that has existed for centuries is here to stay. Yes, the way guests and consumers buy into brands change, the method in how they will book will possibly change, but the industry is here to stay.”

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