hotelmatters - Issue no 8 - March 2009

© The Hotel Solutions Partnership Ltd 2009

Welcome to the first 2009 edition of our newsletter. As always, we hope you'll find some useful insights into dealing with the opportunities and challenges thrown up by the current economic downturn.

Despite the vast amounts of doom and gloom currently circulating, we believe in the 'audacity of hope' and remain positive about the future. As Winston Churchill said: "This is no time for ease and comfort. It is the time to dare and endure."

In this newsletter, we look at:

• how the right HR policies contribute to building a better company for tomorrow whilst ensuring survival today;
• why this might be a good time to consider the merits of growth through M&A and, if so, what actions should be taken now;
• how successful hotel brands evolve to meet changing customer expectations and needs in the year that sees the 200th anniversary of the birth of Charles Darwin;
• how to grow the business by actively listening to customers.

Unlike some hotel consultancies, our team continues to evolve so that now we are better able to serve clients in North America - and in doing so, we are continuing to add to our areas of expertise.

Those of you attending the Berlin Investment Conference (9 - 11 March) should look out for lead associate Katrina Craig; she would be pleased to meet with you.

In recent months, we've been asked both by returning and new clients to assist them in unlocking the strategic advantage in their businesses. Some of what we’ve learnt from these assignments, we pass on in the articles linked to this newsletter.

We hope you enjoy them and we look forward to working with you and your teams in the near future.

Good luck and best wishes

Everyone @ Hotel Solutions Partnership

Contents

Riding out the storm
Bucking the trend
Evolution not revolution
Know your guest

Riding out the storm

Contributed by associate Larry Bowman

Hotel companies that radically reduce their staff numbers are likely to survive this recession in the short-term.

The long-term survivors are more likely to be those hotel companies that make sure they have the right executive team, the right management team, the right technical experts and the right service delivery teams in place.

These two HR strategies are, however, not mutually exclusive but, without care, ill-advised action on the first will jeopardise the latter.

Cautionary tale

The last time ABC Hotels Ltd culled its management team (as the economy took a downturn after 9/11), it was bonanza day for the many small management companies. As a result of an ill-considered 'right sizing' programme, scarce talent was unexpectedly available in what was a buyers market.

Not only was the labour market awash with highly employable people but educated savvy middle managers joined the new free-wheeling upstart companies determined in part to get their own back on stuffy old reliable ABC Hotels Ltd. They were doing all the things they'd learnt to do but, this time, as competitors. ABC Hotels Ltd had certainly shot itself in the foot.

It took most of 2001-2008 for ABC Hotels Ltd to right its wrongs and now here it is again facing another downturn.

So is ABC Hotels Ltd. doing anything differently?

Seeking advice from its retained consultancy, the hotel group's HR director was advised to:-

• reduce labour costs without shedding jobs - through salary caps and cuts, reduced hours and enforced vacations
• avoid voluntary redundancy programmes that put power in the hand of the employee not the employer
• cull the lowest performers - probably not more than 10% and all against previously documented appraisals
• make the most of flexibility provisions in the labour law of each jurisdiction
• motivate the stayers to stay
• provide skills training, particularly government funded training
• design the bonusing system so that people understand that there is no payout unless the company hits a certain level of long-term profitability. Additional criteria can be the team's success and the individual's success.
• hire talent from outside to fill knowledge gaps for tomorrow's market

Top recruiting tips

Once you have a candidate, conduct behavioural and technical tests first and then do a telephone screening before bringing them in for a face-to-face interview - not the other way around

All interviews should be structured and specific. This gives the candidate the opportunity to show you their skills more effectively and gives you the opportunity to be more objective in your final selection. Often the most-liked candidate is offered the job, rather than the more technically capable candidate. The wrong decision costs a lot of money, time and upset. Far better to get it right in the first place.

The moment an organisation employs a new team member is the time to ensure that he/she is properly introduced to the company, given the necessary induction, allocated the resources to undertake their role effectively and given a clear description of their role and KPIs.

Employees also need to feel valued. Formal and informal performance reviews should be carried out and, from that process, relevant training opportunities should be on offer to help staff maximise their potential and develop their careers.

Building for tomorrow

If you are building your business for tomorrow, the core goal from the human resources perspective is to ensure that the organisation has the best people - not just the best 'available' people. The best 'available' people, whether inside or outside your organisation, may be 'available' simply because nobody can figure out what to do with them. You need to be rigorous in your approach and fill each position with the best person.

Bucking the trend

Contributed by lead associate Katrina Craig

At a first glance, this looks like an awful time to even think about growing your business.

All around us, we can see lower revenues, lower profits and lower prospects. Customers are much more cautious spending on hotels and restaurants, either for business or for pleasure. Exchange rates are volatile, balance sheets are dangerously exposed and bank credit is tight or non-existent.

For the strategic hotel investor, however, this is a great time to be looking at deals. Land prices and construction costs are falling; and valuations on operating assets are softening. For investors with an appetite, several steps can be taken now.

• Stalk those hotel properties that could fail - you might know of those who have not used branded channels of distribution well, have weak revenue management processes, are owned by a private equity company exposed to aggressive gearing, or where the hotel's management company is exposed to inadequate coverage for lease costs.

You, your team and your advisors should identify which of your competitors are exposed. You should take a view on which business models are ill-suited to these times and likely to fail. Now is the time to formally identify which assets and businesses would add value to your existing business if acquired.

• Anticipate the effect of consolidation - it's reasonable to assume that some of the major players and some of the smaller players too will come unstuck. Household names in this industry may not carry on forever. If there was to be consolidation and a portfolio of hotels or brands changed ownership, which parts the estate would your business be interested in acquiring?
• Act fast - the buying opportunities we are beginning to see - and will witness perhaps for the next year - are once-in-a-cycle opportunities. Your company needs to be able to undertake due diligence to quickly target the main issues, recognising that there will be risk left unknown and perhaps unknowable. Is your team ready - does it have the capacity, the tools and the knowledge? Are your retained professional advisors ready, able and willing? Can you put together a coalition of interested parties to address an opportunity when it presents itself?
• Be ready - you'll need to prepare your investors, your lenders, your executive team and maybe even some of your business partners. And certainly your balance sheet. You need to build consensus now that these opportunities are the right ones. You need to have agreement that you can do this and that you can do it without prejudice to the existing business. You need to set realistic goals for future profits as well as for future cash needs, particularly from equity providers.

If you are ready, if you have the skills and resources on tap to act fast, if you have anticipated the future shape of the industry as it affects your part of it and if you are stalking your competitors, you stand a good chance of benefiting from the M&A opportunities that will surely arise in the next weeks and months.

Happy hunting.

Evolution not revolution

Contributed by principal Ian Graham

A well-run hotel business must invest in innovation throughout the economic cycle - and investments of this nature will contribute to the evolution of the hotel industry and the brands that make it up.

Like me, you may have been surprised to read that, as the world slides into recession, the Hilton family of brands has been expanded. It now includes Home2Suites, an entrant in the extended-stay market.

At first sight, this move at a time like this seems like folly - as it may yet prove to be. When you own and control one of the world's great brands, why expose the business to additional risk by launching into the relatively unknown at a time like this?

Struggle for existence

Clearly a hotel brand is not a member of the natural world, but perhaps it shares some of the characteristics of animals and plants. Since Darwin's birth 200 years ago, mankind's understanding of the natural world has changed almost beyond recognition. Most of us accept the idea of evolution by natural selection. The struggle for existence, often referred to as the survival of the fittest, is made up of four key assumptions.

1. Organisms vary one from another, even within a species
2. New variations can arise from time to time
3. Some of these variations are passed on from parent to offspring
4. More individuals are born than can exist in the available space or can be sustained by the available resources

Can we relate these assumptions to drivers of change in the hotel industry?

Well, there are different types of hotel (urban vs. resort, convention versus boutique, five star versus one star) which reflects Darwin's thesis that organisms vary one from another even within one species. The recent introduction of the limited service hotel, the extended stay hotel and now the 'lifestyle' hotel all suggest that new variations do arise from time to time.

We know that some elements of limited service, extended stay or 'lifestyle' will be reflected back into the mainstream so that the variations these segments utilise do get taken forward.

Some hotel brands have been around for decades; the successful evolvers include Hilton, Holiday Inn and Sheraton. Yet others have only come into existence in the last decade; these include Aloft, Cambria, Hyatt Place and now Home2Suites. Will they too last for half a century or more? They will if they learn how to evolve.

And brands are also occasionally withdrawn from the market; in recent years, these have included Amerisuites, Folio Hotels and Holiday Inn Garden Court. These withdrawals reflect the fact that the brands can no longer be sustained - usually because of evolving customer and/or investor needs.

Changing needs

Looking back is helpful but it doesn't help us anticipate the future or put in place the business processes to ensure the long-term survival of our hotel business, our hotel brand. To understand this, let's remember that business economics and psychology are merging. The concept of 'rational' consumer behaviour is being rejected with a move to understanding how customers/guests actually behave. Deep evolutionary influences mean we are more reluctant to act as 'rational' consumers than the classical economist would assume. For example:

• Over the years, the herd mentality has been generally shown to be useful. It will be relatively safe for me to take the family on holiday to Costa del Sol because my neighbour has been there with his family and they not only survived but also enjoyed the experience. Copying what other hotels do successfully means our hotel is also more successful. Copying how successful retailers such as IKEA sell can help hotels be more successful in selling. Avoiding major price differentials between us and our competitors ensures that both we and our competitors trade successfully. There are, of course, limitations and sometimes the master-stroke is to make a truly independent assessment of the market rather than follow-my-leader.
• It's now widely accepted that the 'endowment effect' means we (as well as at least three other primates) value objects we own higher than similar objects we have never owned. Hoteliers do well to remember that their target guests will almost always prefer to stay at home than in a hotel or at friends.

  How often has head office complained that a hotel general manager has become too proprietorial about the hotel and can't see the competitive threats because he is basking in his in-house achievements? How often have we seen hotel owners valuing their hotel at a multiple of X times EBITDA but turning a blind eye to the fact the one down the road was sold at a multiple of less than X?

The evolutionary path

You can help your hotel business develop further by understanding the path it has taken in its evolution and by recognising the mechanisms and rules by which its future successes will be achieved.

Remember - evolution has no fixed direction; that evolution does not always imply progress. A creature can evolve to be more complex or simpler. It all depends. But there are only so many ways that things work; evolution will be channelled into these ways.

Know your guest

Contributed by lead associate Rosemary Jackson

We talk a lot about listening to customers but it doesn't stop us thinking we know what they want.

When the hotel management team considers 'the guest' at each Monday morning meeting, there is a strong tendency to talk in stereotypes, e.g. 'FIT', 'Loyalty Programme Guest', 'Road Warrior'.

The trouble is that this type of discussion is diminishing and tends to result in the hotel delivering less than the customer needs.

As experts in their own lives, our guests will always know more about their needs than any stereotype can capture. So when an entrepreneur recognises that there is a gap between the industry's perception of a stereotype's needs and their actual needs, a new hotel offer is successful put into the market. Maybe that's what Yotel and EasyHotel are.

Seeing the customer as more complex, more interesting, more sophisticated and more willing to buy new and differentiated services is the way in which innovation teams enable hotel brands and hotel operators to create the successful evolution of their company's products and services.

Extras

It turns out that our customers and guests are willing to pay for things we did not suspect.

Travelodge in the UK is priced below Premier Inn. The guest has a choice of paying for the extra space and amenities that Premier Inn brings. Some do and some don't.

EasyJet has proved that some customers will chose to pay to be at the head of a queue. Ryanair has proved that some customers will choose to pay to be checked in by a human being rather than at a kiosk.

Most airlines have now proved that many travellers will pay to check in baggage. Not everyone. Not all of the time. But enough of the time and a big enough segment of customers to make the accepted offer a significant contributor to profits. EasyHotel is giving the guest the option of paying for use of the flat screen.

If the standard offer is clean sheets and towels every three days, some guests will pay extra for daily laundry. If the standard offer is any room, many guests from western Europe will pay extra in the Middle East for a non-smoking room. Guests are used to paying extra to pay by credit card online but, when they come to check out at reception, most hotels don't yet differentiate between cash, debit or credit cards. I don't know about you but I would pay quite a lot for an idiot's guide to the controls for the shower in my next hotel bedroom, or to be booked in a quiet room.

New approach

The creative souls that lead the 'fine dining' business have in recent years analysed and reassembled dishes, tastes, foods. People like Heston Blumenthal and Ferran Adrià have found new audiences for new taste experiences.

Listening really hard to what our customers are actually saying should be at the forefront of what we do. Perhaps the time has come for those in hotel sales and hotel operations to take each and every guest experience apart and reassemble them in ways that allows the customer to pay for the desired elements in different ways.

In the world of mandatory three-day packages, shouldn't there be an opportunity for the guest to personalise the experience by buying additional optional elements? In the world of limited disposable spend, shouldn't there be an opportunity for loyal guests to buy just those elements of the branded hotel's services that he or she currently needs?