Business Plan for a Proposed Three Star Category Hotel in Auckland
Business Plan for a Proposed Three Star Category Hotel in Auckland
Executive Summary
The present paper proposes analyses and presents a business venture in the form of a 3 star category 70 room hotel Business. The business is projected as low cost and high value proposition to the mid to upper scale business and leisure clients. It is found that the business is capable of recovering its 5 year working capital costs within a span of 2 years and 2 months thus an early operational breakeven is likely. Annual revenue of $1,609,650 at 70% occupancy and $90 ADR (Average Daily Rate) is projected. The report also finds that Auckland being the leader in the New Zealand hotel industry in terms of growth potential and expected to sustain the lead for next ten years, this is the best time to move in and start a hotel business catering to the mid to upscale market and capitalize on both revenue and profitability growth that is bound to take place in the next few years. The demand supply gap along with the favorable economic and industry parameters is a sure recipe for success for a hotel business that enters the Auckland hotel market in the mid to upscale segment at this particular time.
Introduction
I am a hotel professional with over 12 years’ experience into revenue management aspects of hotel business working with major luxury hotel chains like Hilton and Hyatt. I have now reached a point in my career wherein I can pursue the dream of starting my own business venture. Being from Auckland, I was aware of the potential Auckland has for development of new hotel business, however, I decided to conduct a study for the purpose. The present study proposes a 3 star category hotel offering up to 4 star category services for 3 star prices in the city of Auckland. The study starts off with a thorough analysis of the national and regional hotel market. Based on the analysis, the study fine tunes the target market and achieves a market segmentation strategy. Further, based on the assessment of current resources, competitive situation and the market outlook, the study arrives at an optimum value proposition to achieve a sustainable competitive advantage. The study finally calculates the feasibility and projections for the business to arrive at a viability scenario for the proposed business.
Business Description
Vision
The vision of the proposed hotel business is to be the hotel of choice in Auckland as well as New Zealand by achievement of sustainable competitive advantage by projecting itself as low cost high value hotel and fulfilling the projection by focused vendor management and best in industry revenue management.
Values
Industry sector or Niche
Industry- Hotel and Lodging Industry
Niche- Business and Leisure at midscale (offering 3 star facilities and services)
Geographical Location-Auckland City
Property-A 70 room property located in the CBD of Auckland
Products or Services
Hospitality, Lodging and Food and Beverage services for mid to upscale segment are the intended products or services for the project. The reasons for choosing this Niche are two fold- Firstly, my own experience as hotelier, secondly being from Auckland, I am aware of the hotel market potential of the city.
Intended Source of Competitive Advantage
The intended sources of competitive advantage are (1) Focus on effective vendor relationships and supply change management to achieve time and cost efficiency in supplies. (2) Effective and focused revenue management coupled with low cost and high value rendition and projection of services.
Market Analysis
The Economic and Business Environment
The New Zealand economy has seen an upsurge in general over the second half of 2015. The upsurge has gained a growth trend that has well continued into 2016 and is expected to continue into the future. The business environment is improving as the consumer as well as business confidence in the economy is being boosted. Tourism growth along with population growth and growth in construction activity are predicted to be the drivers of New Zealand’s overall economic growth in New Zealand. In fact Tourism has recently overtaken Dairy products as top earner of export revenue for New Zealand.
Although inflation remained pretty low at just 0.1% which is well below the New Zealand Reserve Bank’s 1-3% target band which is a good sign for the economy. However, the central bank had still cut the interest rate or the official cash rate (OCR) to 2.25% in March 2015, owing to possibility of housing price inflation due to heavy housing activity which is expected to price correct itself in a major way . This had led to a devaluation of the New Zealand Dollar, which has since then rebounded owing to above expectation GDP growth and slowing of increase in U.S. interest rate growth.
Auckland is popularly known as the city of Sails and is New Zealand’s largest and most cosmopolitan city. It is situated between two harbors and is a hub of business activity.
As per a report by RLB intelligence, a review of the construction activity in New Zealand reveals that Construction demand across both residential and non-residential sectors has improved and Auckland is leading the way in Construction Growth. This goes on to show that Commercial activity is on the boom right now.
The Building activity is one of the major economic indicators for the Hotel and Lodging Industry and it continued to strengthen through December 2015. The demand is led by migration-led population growth as well as decreased interest rates.
A relatively strong population growth in Auckland and surrounding region is behind the growth in construction demand and is indicated by the rise in concrete sales in Auckland .
Chart 1: Building Activity Growth in Auckland
Migration figure has crossed a 65000 mark in December 2015 for New Zealand. The majority of the migrants are settling in Auckland itself. There is an increasing demand in services and this is supporting the demand for accommodation, retail, office buildings as well as Hotels in the region. The growth in the construction activity in Auckland is led by the non-residential sector as mentioned above and as shown in the figure below.
Chart 2: Surge in Non Residential Construction in Auckland
The growth in the non-residential construction industry is also likely to translate into tourism-based infrastructure and building activity growth. The same is expected to pick up momentum over the coming decade. The Auckland Airport has recently put forth a plan to expand its terminal capabilities by planning ahead for years to come already and this shows the confidence in the growth potential of the airline activity indicating a potential for growth of tourism.
The increase in overall occupancy rates and decline in vacancy rates for the lodging industry in the tourism hubs of the region is also an indicator of strong growth potential for the development of new mid to upscale hotel property development which has been seen in the development of new four star and five star properties.
As also mentioned above the strong population growth continues to characterize and drive many long term trends such as increasing domestic demand for accommodation over and above the increased overseas tourist arrivals is expected to drive demand for new accommodation across different segments of the hotel industry in New Zealand. Also, quite notably the growth in the non-residential construction has been slow over the years however the coming years are expected to witness strong growth as depicted in the figure below.
Chart 3: Strong potential construction future demand
Major Trends in the Niche and Industry
The industry has witnessed some major trends in the Hotel Industry which provide opportunities for growth in the hotel sector especially the mid-scale market in New Zealand. The summer of 2016 with year ending March has been one of the strongest tourism activities with over 3.26 million international tourist arrivals during the season. New Zealand is a favored destination for foreign visitors as the dollar value is favorable to them and also due to the world view of New Zealand as a safe place to be.
Overall this spurt in International visitors has led to an increase in the occupancy levels to record high of more than 90% in major tourist hubs of the country.
The ‘no vacancy’ signs have been a common sight lately for the hotels in key tourist destinations and this has led to a spillover effect of demand to tier two and three cities in New Zealand. Due to such high occupancy rates, the hotel operators are cashing in on the trend and this has led to substantial increase in room rates as well. This is further translating into an escalation in the profit margins and also a considerable hike in the property values .
Auckland hotel market. Interestingly, the hotel market trends in New Zealand are also been led by Auckland in terms of existing and potential growth as is the case with the general property market growth. The hotel Occupancy rates for Auckland reached 90.2% by year ended March 2016, which have surpassed the previous peak levels achieved during the 2011 Rugby world cup. The limited room supply in the form of room inventory coupled with escalating demand have led to a hike in the Average Daily Rates (ADR) across almost all the hotel segments that is from 3 to 5 star categories. The overall ADR has increased from $153.79 to $168.7 in just one year from 2015 to March 2016 .
The above growth rates at never before levels have resulted in an unprecedented growth in the Revenue per Available rooms (REVPAR) which is the most important performance metric in the hotel industry. The REVAR has seen a growth to $142.22 for the year ended March 2016 from 2015, which is an appreciation of 11.7% from the previous year .
At this juncture, it is important to note that despite the huge growth in demand the new supply has so far been limited in the Auckland hotel market. There has just been an increase of 180 rooms’ inventory by Adina Apartment Hotel Auckland and the Ramada Suites Federal Street during 2015. This augurs well for immediate and future growth of the hotel and lodging property development in Auckland and is an indicator of the strong growth potential .
Chart 4: Hotel Industry year on year outlook for Auckland
Target Market
The target market for the proposed hotel business in Auckland shall be middle to upper middle class business executive and leisure tourists both domestic and International.
Evidently, Auckland being New Zealand’s largest city and the main international gateway, assigns a major advantage to it in terms of attracting domestic as well as international tourists.
The market for 3 to 5 star hotels for Auckland cannot be very clearly delineated owing to huge demand supply gap as mentioned below. Due to this gap, owing to lacking supply, there is a possibility of customer spillage not only from 5 to 3 star category hotels but also from Auckland to nearby towns. The target market geographically shall consist of New Zealand, Australian and Chinese markets in that order.
Market Size and Competition
In the year ending March 2015, Auckland had 29% of market share of New Zealand’s Tourism market. The share of the domestic sector for Auckland was 23.1% while for International Tourists Auckland’s market share was 39% .
As per current market supply and projections Auckland’s hotel sector will remain constrained resulting in high occupancy rates of up to 90%.
Market size = No. of room nights X RevPAR
Current Market size (2015 End) = 2.9 million room nights X $144.2=$418.18 million
However, the Market demand is expected to increase to 4.2 million room nights in next ten years.
Auckland has the largest number of hotels among all the major five tourist hotspots of New Zealand. The number of hotels is 65 with current inventory of 9459 rooms. Around 19% of the hotels are 3 to 3.5 star properties which directly compete with the proposed hotel project. This means that the direct competitive set of the hotel comprises of around 12 hotels. However, as mentioned above, the real and extended competition shall come from 4 to 4. 5 star hotels as well in terms of the services and facilities.
Also, the room inventory required in Auckland by 2025 is 4800 rooms.
Whereas as per current developments the room inventory expected to be added during the same period is predicted to be 2,500 which means a shortfall of 1800 rooms .
This reflects a potential demand supply gap and thus a huge growth potential in Auckland’s Hotel industry.
Thus potential market size over a period of next 10 years assuming current RevPAR which is expected to increase in future owing to the expected shortfall in rooms supply, can be calculated as shown below .
Expected Minimum Market size (by 2025) = 4.2 million room nights X $144.2=$605 million.
Market Positioning and Branding
As a new venture I would like to adopt a low cost approach for the hotel as far as the room rates are concerned and thus a rack rate of $110 is fixed while upon discounts an ADR of $90 is desirable with an average minimum annual occupancy of 70% which seems achievable given the huge boom in demand. At the same time the hotel services offered though shall be projected to be 3 star but would be slightly more upscale in reality, more close to the 4 star category. This shall give an immediate market response and help capture market share in a relatively smaller span of time .
As far as the competition is concerned, the ADR is close to $120, thus a $90 ADR is pretty well placed with better services on offer to capture the market share .
The hotel is supposed to be positioned as a hotel of choice for the business and leisure traveler who is looking for the extra comfort and better service at a fraction of the usual cost and this is what shall translate as the value proposition of the hotel .
The hotel branding shall be a low cost high value business and leisure hotel and shall be branded as a young and energetic hotel ready to give an extra edge of service for less. The four star experience at 3 star cost shall be the branding message that shall be put across the various marketing channels. In order to project this image, the log and design of the hotel brand shall comprise of a combination white and bright yellow and golden colors used such that white conveys peace and transparency and bright yellow the lively and energetic image while at the same time a golden hue shall add a luxurious touch at a low price. The hotel shall be marketed as value for money .
The hotel shall be promoted using both online and offline channels. The hotel room selling portals such as Expedia.com shall be tied up with for guaranteed advance bookings catering to both group as well FIT travellers. On the offline front, the hotel shall promote its banquet and restaurant services to the local and domestic market to supplement the rooms’ revenue. Special discounts for groups as well as weekend discounts to FITs shall be offered while maintaining the ADR at around $90 shall be strategically implemented .
Delivery and Distribution
Other distribution and marketing channels. As already mentioned above, the channels of distribution apart from the hotel property itself shall be the offline and online marketing channels such as offline and online travel agents, hotel room selling portals such as Expedia.com as well as social media platforms such as Facebook, Twitter and Instagram.
Value delivery. The above marketing and distribution channels shall only serve as a connect between the market and the components of the overall product itself which include people in the form of staff and channel partners or business partners, the physical evidence or the rooms, the plant and equipment including the hotel equipment and furniture and fixtures .
The people including the staff and stakeholder shall be oriented to the vision and values of the proposed hotel venture and shall help project an intended brand image. The hotel shall give utmost importance to vendor relations and supply chain management as it will give a competitive edge in terms of providing better services at lower cost and in a timely fashion. An online supplier and vendor management system shall be employed towards this objective. The hotel shall comprise of planned workforce of around 100 including the General Manager, Departmental heads including Rooms Division, Food Production and Service and Accounts and Administration .
Knowledge Management
In order to achieve a sustainable competitive advantage the proposed business will have to develop mechanism to access, manage and capitalize critical market intelligence in terms of the latest customer preferences, the ADR and RevPAR as well as occupancy rates of the direct as well as the indirect competitive set. Based on the same, a strategic revenue management regime shall be maintained. To aid in the same, apart from employing a dedicated revenue manager, the latest revenue management software shall be employed to take timely informed and real time strategic decisions based on the strategic data and information obtained and collated through various internal sources such as the MIS and hotel software as well as from the external sources such as the industry new and reports as well as informal and formal information networks as well as by assigning utmost importance to customer feedbacks at various levels of the value delivery cycle .
Feasibility and Business Projection
In order to assess the feasibility of the proposed business calculation and comparison of estimated cost and revenue data over a span of 3 to five years is done as shown below.
Projected Costs. The cost of development of the hotel can be calculated using a thumb rule formula wherein
Projected ADR= Development Costs/(Number of RoomsX1000)
Thus if projected ADR (based on real market and contemporary information and number of rooms is known, an approximate development cost can be calculated as shown below .
Development costs= Projected ADR X Number of Rooms X 1000
= $90 x 70 X 1000= $6,300,000
If we add an annual working capital requirement of $10,000 per room per year based on conservative estimates, an estimated $700,000 per year is also added to costs. Thus total capital costs for a period of 5 years shall be $6,300,000 + $700,000X5=$ 9,800,000
Projected Revenue. Based on an a target annual occupancy of 70% the number of average room nights for one year = 70% X70 rooms X 365 nights=17,885 room nights. Thus total annual average projected revenue=Total annual room nights X average projected minimum ADR= 17,885 x $90=$1, 609, 650, thus total operating Cost for five years=$3,500,000. Thus the break even time = total costs/ revenue per year=$3,500.000/$1,609,650 per year = 2.17 years. Based on the above analysis, a time of 2 years and 2 months is required to achieve operational break even .
Summary/Conclusion
Based on a careful assessment of above market and feasibility analysis for the proposed hotel, it is found that there is potential demand equivalent to 1800 rooms over the next ten years. The demand for the 3 star and above services and facilities up to 4 and 4.5 star level is likely to be the key revenue driver. The proposed hotel positioned as a high value lower cost hotel is likely to readily cash in on the same. The competitive advantage shall be maintained through low cost and timely procurements achieved through focus on supplier relations as well as best practices in revenue management. The competitive advantage thus gained seems sustainable as the project is likely to achieve a five year revenue target within almost 2 years and is likely to be profitable from the end of the second year itself and by the end of 5th year, is poised to take over as the leader in its competitive set.
References
Colliers International . (2016). New zealand Hotel Market Snapshot. Colliers International , Hotel Research. Colliers.
Colliers International . (2016). Regional Hotel Market Analysis and Forecasting . Colliers .
Hotel Business Review. (2016). Assessing Feasibility: Rules of Thumb and Factors That Influence Them. Retrieved from http://hotelexecutive.com/: http://hotelexecutive.com/business_review/2370/assessing-feasibility-rules-of-thumb-and-factors-that-influence-them
RLB. (2016). Auckland. Retrieved June 20, 2016, from http://rlb.com/: http://rlb.com/en/offices/oceania/new-zealand/auckland/
RLB. (2016). FORECAST REPORT 79 : NEW ZEALAND TRENDS IN PROPERTY AND CONSTRUCTION. RLB.
