Hotels as an investment engine are easily considered one of the most, if not the most, complicated real estate classes because revenue levels can be unpredictable and are especially vulnerable to changes in the economy and external factors such as market conditions and weather.
As opposed to long-term office or retail leases, hotel leases typically only last days, and pricing is highly correlated with demand, similar to the airline industry. As a result, operators must be nimble and able to pivot strategically at the first sign of change.
Although there is no foolproof method to avoiding some impacts of economic downturns, there are several ways in which owners and operators can work together to better weather an economic storm. A few obvious tactics include cutting costs, increasing automation, focusing on customer service and guest retention, and increasing revenue through special rate packages and discounts. However, in this article, we will discuss the single best method for optimizing hotel operations, whether an economic downturn is imminent or not: a hotel performance analysis.
Usually conducted by a third party, a hotel performance analysis examines all aspects of a hotel’s operation, including financial performance, revenue management, sales and marketing, guest satisfaction, facilities management, and third-party contracts, among other factors. The hotel performance analysis concludes with recommendations for how to rectify existing issues and sets forth a strategic plan for achieving goals that are easily tracked and implemented by owners and managers, aimed at overall efficiency and greater profitability.
How Do You Know if Your Hotel Could Benefit from a Hotel Performance Analysis?
Rarely are hotel performance analyses completed prophylactically; rather, they are usually solicited once a property’s performance has declined considerably and efforts to restore operational integrity have failed. One primary issue that could indicate a need for a hotel performance analysis is the hotel falling short of its financial goals from both revenue and profitability perspectives. Unexplained revenue and income losses can be the result of a multitude of factors, all of which a hotel performance analysis will analyze.
Other signs that your property may not be operationally optimized include high employee turnover and low morale, persistently low guest satisfaction scores, market share declines, and deferred maintenance and high capital improvement costs. Newly opened hotels that are struggling to stabilize in a market or hotels that are not professionally managed are also excellent candidates for a hotel performance analysis.
Hotel Performance Analysis Breakdown
Typically, there are seven major components to a well-developed hotel performance analysis:
- Subject property and competitive property tours
- Management interviews
- Review of the sales and marketing department, including banquets & catering and guest satisfaction scores
- Document reviews, including standard operating procedures, third-party agreements, and financial reporting
- Department-by-department operational reviews as compared with industry best practices
- Reviews of both the front- and back-of-house for the food and beverage (F&B) spaces (if applicable)
- Recommendations
Subject Property and Competitive Hotel Tours
Walking the subject property provides the first opportunity to experience the hotel from a guest’s perspective. What is the arrival experience? Is it easily accessible and is signage well-placed? What is the condition of the landscaping? What is the condition of the furniture and fixtures? Are the guestrooms clean? An especially prudent consultant will hire a secret shopper to stay overnight at the hotel and report on their findings.
Aside from understanding the guest-facing experience, a property inspection informs the consultant of the potential for operational efficiencies. For example, where are the housekeeping carts stored relative to elevators? Are banquet closets organized for maximum efficiency? Or could energy savings be created by investing in human-sensing technology? A clean and organized back-of-house is typically an indication of a clean front-of-house operation. An in-depth property inspection will reveal areas of opportunity.
The other critical component to understand the positioning of the subject property in the marketplace is how it competes relative to its competitive set. Authors of a hotel performance analysis should tour every competitive hotel in the market to gain important information, such as their locations relative to local demand generators, their condition and cleanliness compared to the subject hotel, and interactive experiences with their staff.
Management Interviews
A key component of the hotel performance analysis is interviews with the management team and review of its operational methods; corporate culture; and reward, review, and feedback systems. This investigative process reveals the job descriptions and roles of each manager, how members of the management team interact with each other, and how the organization functions as a whole. Is the hotel experiencing high turnover? Is there a strong team culture, or is the staff plagued by low morale? Do employees feel empowered and trusted? Are the staffing levels appropriate for this size of hotel? Are staffing levels flexible based on fluctuations in demand? Are team members cross-trained and skillful in multi-tasking? Are compensation levels competitive and enticing? These are incredibly important aspects of a successful hotel operation that have a direct impact on guest experience and overall hotel performance. The long-term success of any hotel begins with the health of the team culture.
Sales and Marketing Reviews
The hotel sales and marketing department has evolved tremendously over the past decade, with countless new avenues emerging through which to promote a business. In addition to an effective sales and marketing plan, a third party with specialized expertise in this arena can evaluate the health of the sales and marketing department within a hotel performance analysis. Factors such as social media presence, search engine optimization, distribution channel analysis, and targeted marketing campaigns need to be reviewed to ensure that the financial and labor-intensive efforts are generating the desired results.
Understanding market share loss usually begins with an analysis of guest satisfaction scores. How does the property appear online? Are reviews consistently negative, or are there items that guests frequently complain about? Do guests perceive value in the amenities and services provided? Has property management addressed the negative reviews on the respective review platforms or attempted to rectify problems? Do sales managers have goals, and are they held accountable to them? A well-developed hotel performance analysis will identify areas where guest expectations are not being met.
Document and Operational Reviews
The next stage of a hotel performance analysis involves a third-party review of items such as vendor agreements, internal standard operating procedures, existing management and franchise agreements (if applicable), and lease agreements, among others. An external review of these items ensures that vendor pricing is competitive for the product received; management and franchise agreements are upholding obligations set forth in their contracts; and standard operating procedures promote efficiency, compliance, consistency, and reliability. Well-developed standard operating procedures help enshrine operational knowledge and protect business flow during times of change.
To determine many recommendations, a full and in-depth review of the hotel’s detailed profit and loss statements is necessary. This process entails a line-by-line review of the revenue and expense categories in each department. By analyzing certain metrics, such as occupancy rate, average daily rate, revenue per available room, and operational expenses, areas where your hotel may be underperforming or incurring unnecessary costs can be identified.
A review of a hotel’s pricing strategy and historical market trends can help recognize where pricing need to be modified, which ultimately can lead to an optimal balance between occupancy and average rates. Some hotel performance analyses will even provide a comparison of the subject hotel’s operations to industry norms for hotels in the same geographical area as the property.
Any good hotel performance analysis will place strong emphasis on the document review process given the inefficiency and financial impact that could result from neglect or lack of attention in this area. Thus, this is one of the most critical components of the entire study.
F&B Review
Another element of the hotel performance analysis is the review of a hotel’s food and beverage operations, including food safety and handling protocols, supply ordering procedures, menu offerings and pricing, space design, and even restaurant branding, among many others.
The food and beverage department can be critical to the competitive positioning of the hotel, its profitability, its reputation, and the overall guest experience. If not operated with extreme discipline, consistency, attention to detail, and quality, the department has the potential to affect many other aspects of the hotel. Conversely, when run well, the hotel’s restaurant and banquet operations can contribute to the differentiation of the asset in the market, drawing demand to the hotel in its own right.
Recommendations
You’ve gleaned a wealth of knowledge so far from your hotel performance analysis, but what do you do with it now? The final component of a hotel performance analysis is recommendations for every single component of the hotel operations observed. Recommendations could be broad in nature, suggesting wide-ranging changes in staffing, marketing, vendor selection, and deferred maintenance/life safety programing, or even a change in management companies.
A hotel performance analysis may advise that owners invest in technology that can automate manual tasks, improve team and guest communication, and enhance guest experience. Conversely, the recommendations can be granular in nature, such as changing restaurant menu offerings and pricing, replacing guestroom clothing irons with hand-held steamers, or updating website photography, to name just a few.
Finally, scenario planning will help owners and operators better prepare for a variety of economic scenarios, with contingency plans in place to mitigate operational risks. Most importantly, a hotel performance analysis will outline recommendations clearly, and the consultant will work with ownership to develop a strategic plan to implement change based on factors such as urgency, ease of change, and/or capital requirements.
The amount of information contained within a hotel performance analysis can be overwhelming. However, it should be considered an invaluable tool that can equip owners and operators with the mechanics needed to maximize efficiency and profitability, as well as develop strategies that better prepare the asset for micro- or macro-economic changes. It can also help buyers and sellers of hotels maximize their return on investment. Acting proactively ensures minimal disruption to operations, revenue maximization, higher guest satisfaction, and, ultimately, greater investment returns.
Reprinted from the Hotel Business Review with permission from http://www.hotelexecutive.com/.
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