Executive Summary
Sheraton Hotel also referred under the name Le Centre Sheraton is a well-established hotel chain located in downtown Montreal. Sheraton hotel, as of 1987, had received a ‘Four Diamond Award’ and subsequently given a ‘Four Staraccolade’ by Mobil Travel Guide and thus its four star status to date. Sheraton hotel boasts of its prestigious 824 rooms that also entail the Sheraton Towers, an acclaimed five-story hotel, independent check-in facilities, special amenities and lounge, 131 rooms that included 16 suites. Of these rooms, there was a balance between king, queen as well as double beds,in addition to 24 suites and6 rooms,designed to accommodate persons with disabilities. This excludes the services of the hotel itself and rooms for service and functions. Sheraton faces the reality of increased competition with 10 other hotels offering similar services at almost the same rates. Another issue that is evident is the fact that Sheraton is promised of a steady and yearlongoccupation of forty rooms on condition that they are pricedat a meager $ 42, which in essence is less than half of what an ordinary room goes for. It is further noted that there was an enormous daily allowance demanded and thus constant cash flow is inevitable. It is also clear that the past financial year saw the Hotel make titanic losses. Based on the feasibility of the proposal, it is clear that Sheraton should go ahead and take up the opportunity provided as a stepping-stone for future cooperation.
Introduction
Sheraton Hotel, an establishment that has gained popularity for its exquisite rooms and splendid services is faced with dilemmas that need pondering with pensive consideration of financial consideration and underlying prospects of the proposal presented. According to the proposal presented by Alitalia, they would like to give Sheraton Hotel the privilege to let them occupy 40 rooms within their prestigious precinct on condition that they would be charged a baseline of $ 42 per night. The offer is quite enticing, especially, because there will be a steady flow of income throughout the year, an element that will aid the Hotel to cover its daily cash-related transactions like daily compulsory allowances that account for a staggering $ 25,000 (per day according to the case study details).
It is also given that, for the last financial year, Sheraton has 115 nights sold out. This means that, on average, there were 16 rooms that remained unoccupied for the whole year (assuming that the 115 nights mean every night for 365 days).The impending question in this case study is, what are the odds in this case?
Identification of Issues, Problems or Alternatives
Issue # 1: Additional Revenue
It is quite advantageous for Sheraton to have such an opportunity to house such a proposal. To start with, Sheraton did not go seeking this opportunity, but rather Alitalia dropped the proposal on Sheraton. This means that Sheraton, possess an excellent opportunity to increase their revenue base. According to Scarlata et al. (782), the assurance of a company to have recurrent supply of customer should propel such a company to consider their corporate pricing strategy for a sustainable future. From the case study, it is not clear whether, of the 115-booked nights, they were regular or individuals who came on different occasions. Assume on an ordinary case where a customer books for one or just a couple of nights and then checks out, provision of an assured daily accommodation year-through is much of a relief instead of the unwarranted expectation of booking in by a stranger.
However, whatever the case, taking up the proposal will help increase revenue as well as provide an assurance of a sustainable future since Sheraton will be the better provider after exquisite services all year long and thus ease of contract renew under new terms. This is where that old adage that posits ‘keep what you kill’ comes into play.
Issue # 2: Opportunity cost-revenue foregone
The cost of accepting the open opportunity is multifaceted. On the one hand, the opportunity poses the likelihood to cover a multitude of other expenses while,on the other hand, yielding scanty revenue as compared to full boarding packages. The proposed pricing per night is little given the fact that it is less by $ 63, an income that Sheraton will have to choose to forego every single night for the successive one year. However, in so doing, Sheraton will be enjoying positive brand image from its Alitalia corporate customers, an element that finds a lot of support in the works of Theotokis, Pramatari and Tsiros (72). According to Theotokis, Pramatari and Tsiros (72), customers have an inherent tendency to conform brand quality to their psychological contract and thus a likelihood of returning to the same brand providers in the future. Hormbyet al. (47) connotate that price-elasticity model is an enticing group pricing optimization technique.
Acceptance of this introductory offer will eventually pave the way for better bargaining power in succeeding years. This will eventually work towards revenue optimization from this clientele base.
Issue # 3: Other Additional Costs
It is expected that there will be other costs that will be associated with this opportunity. For example, Welsch (22) vehemently advocates for belligerent marketing stratagem for current customers. It is usually said in business that ‘it is four times easier to keep a current customer than to attain a new one’. Marketing demands investment on various fronts including exquisite services, constructive interaction with clients and offering discounts among other things.
For example, it is expected that while Alitalia draws a contract with Sheraton other room-related services, like housekeeping, utilities, laundry, linen, and amenities will continue being provided without lapse in comparison with their full rack rate paying fellow customers. This means that whatever is paid for the rooms is also meant to cover for those services; another constraint to Sheraton although for just a while before they can shift the ballgame to their advantage in twelve months’ time or so.
Issue # 4: incremental income/ loss
Based on the calculations (see appendix and assumptions), it is evident that, despite the initial perception that this might lead to losses, the contrary is true. Alitalia contract will provide a steady supply of cash flow on a weekly basis based on the terms of the contract as excepted in the case study. White (64) in a research posits that, in the hotel industry, it is imperative that the management has to find ways to maintain revenue at whatever cost necessary. In so doing, it is expected that any opportunity that arises should be aggressively assimilated especially if such opportunities pose the likelihood of increase in available capacity.
For example, given the challenge of few accommodations in rising demands, it may be prudent for Sheraton to solicit alternative accommodation spaces possibly by purchasing buildings and converting them to accommodation rooms with different pricing for increased daily revenue. Compare this case scenario with an individual who sells groceries around some corner. What keeps such a person in business is not a one-time buyer who purchases the whole stock and goes for several months but rather the frequent small purchases, which ensure there is a steady cash flow that propels the business.
Koch and Calder (104) posit that many large multinationals and large corporations have an increased predilection towards acting like others with the ‘everybody does it’ fallacy. Anderson(49) continue to caution that increase in pricing flexibility when considering corporate customers causes maintenance cost and thus escalate the diminishing revenue base.
Analysis of Issues, with Numbers referenced to appendices
If Sheraton takes up the offer, it then becomes imperative that they will make $ 1,680 per night on the forty rooms that translates to $ 11,760 per week. Per month, this will accumulate to $ 50,400 and annually make a whopping $613,200 from that group only, something that the Hotel will be assured. In addition to this, there is an increased proclivity that there will be provision for food and other beverages. Food per night will be $ 680 and beverages per night $ 520, which when annualized accounts for $ 248,200 on food and $ 189,800.
There are, however, impending expenses like food and beverage expenses account for $ 89,352 and $ 60,736 respectively. Additionally, on a daily basis, there is an obligation $ 25,000 as daily allowances that have to be supplied by any means necessary. This means that, per annum, allowances account for a stunning $ 9,125,000. In this regard, the total revenue from this proposal cannot come anywhere close to fulfilling the daily dose of allowances required and thus a significant constraint on the Hotel’s expected revenue base. Remember also the fact that, in the previous year, the company made mammoth losses, in addition to an outstanding, $ 50 million loan and $ 4.2 million annual municipal tax obligation.
What will be foregone, assuming the same case as the previous year of 115 rooms, is $ 12,075.When this is compared with the earnings per annum; this would yield a difference of $ 601,125, a substantial income that should compel Sheraton to consider the contract.
Other expenses related to this venture include Food cost that account for $ 89,352 and beverage costs that account for $ 60,736 for the 40 rooms when annualized.
Recommendations
Based on the analysis of Sheraton hotel above, it is clear that the proposal be Alitalia holds ground especially given the fact that it will assure the hotel constant cash flow throughout the year. For this reason, it is recommended that Sheraton adopt the proposal. It is further recommended that given the evidence of high expenses like in allowances, the hotel should seek ways to reduce expenses since they seem to weigh down the company's revenue stance. It is also advocated that given the financial tax obligations and loan repayment demands, it is imperative that the company should extensively look to reduce its expenditure through analysis of the impeding issue that might raise the risks and lead to high compensations. In line with this, it is also prudent, as supported in the works of Andersen (49) that a review of the insurance policy that covers these occupants and the employees be reviewed. This is because any loophole, where expenses can be minimized, should be sought with enough vigour.
Conclusion
Sheraton Hotel also referred under the name Le Centre Sheraton is a well-established hotel chain located in downtown Montreal. Currently, Sheraton Hotel faces the reality of increased competition with 10 other hotels offering similar services at almost the same rates. It is also given that, for the last financial year, Sheraton has 115 nights sold out that resulted to mammoth losses. It is quite advantageous for Sheraton to have such an opportunity to house such a proposal. To start with, Sheraton did not go seeking this opportunity, but rather Alitalia dropped the proposal on Sheraton. This means that Sheraton, possess a fantastic opportunity to increase their revenue base. Alitalia contract will provide a steady supply of cash flow on a weekly basis based on the terms of the contract as expected in the case study. Given the challenge of few accommodations in rising demands, it may be prudent for Sheraton to solicit alternative accommodation spaces possibly by purchasing buildings and converting them to accommodation rooms with different pricing for increased daily revenue. However, increase in pricing flexibility when considering corporate customers causes maintenance cost and thus escalate the diminishing revenue base.
Works Cited:
Hormby, Sharon, et al. "Marriott International Increases Revenue by Implementing a Group Pricing Optimizer." Interfaces 40.1 (2010): 47, 57,93-97. ABI/INFORM Complete. Web. 28 May 2012.
Koch, Marc, and DyannBartus Calder."4 Decisions that can Affect Your Anesthesia Subsidy."Healthcare Financial Management 65.4 (2011): 104-8. ABI/INFORM Complete. Web. 28 May 2012.
Scarlata, Audrey N., et al. "The O*NET: A Challenging, Useful Resource for Investigating Auditing and Accounting Work." Accounting Horizons 25.4 (2011): 781-809. ABI/INFORM Complete. Web. 28 May 2012.
Theotokis, Aristeidis, KaterinaPramatari, and Michael Tsiros."Effects of Expiration Date-Based Pricing on Brand Image Perceptions."Journal of Retailing 88.1 (2012): 72-87. ABI/INFORM Complete. Web. 28 May 2012.
Torben, Juul Andersen. "The Risk Implications of Multinational Enterprise."International Journal of Organizational Analysis 19.1 (2011): 49-70. ABI/INFORM Complete. Web. 28 May 2012.
Welsch, Butch. "Go Over Your End-of-Year Checklist." Air Conditioning, Heating & Refrigeration News 244.16 (2011): 22-. ABI/INFORM Complete. Web. 28 May 2012.
White, Roy. "Yield at any Cost." Solid State Technology 2008: 64-. ABI/INFORM Complete. Web. 28 May 2012 .
Appendix
Assumption
It is assumed that the 115 nights sold out are annualized
It is also assumed that the customers who occupied these rooms did so on irregular basis.
It is also assumed that each client is covered by insurance.
Sheraton Hotel
Income Statement For The Year Ended 30 April 1994
RM
Revenue
20,051,200
Cost of sales
-73,730
Gross profit
19,977,470
Other operating income
Interest income
6,265
Distribution, administrative and other expenses
Advertising and promotions
-10,450
Water and electricity
-6,512
Telephone and faxes
-6,413
Salaries, allowances and overtime
-10,480,000
Printing and stationery
-2,453
Insurance
-7,541
Depreciation of property, plant and equipment
-12,420
-10,525,789
Finance costs
Interest on borrowings
-2,000,000
Net profit for the year
7,457,946
