Diamond Hotel - Performance and Financial Analysis - Case Study Example

Running Head: DIAMOND HOTEL REPORT Name Course Lecturer Date Executive summary Diamond Hotel is a three star hotel in its third year of operations; the hotel is in the second year of transition from two star hotels to three star hotels. It is located on a serene and secure environment across the coastal vacations and off seas breaks. There has been increasing growth in this area due to accessibility provided by an international airport, good rail network and good roads. Diamond Hotel will offer customers one bedroom, two bedroom, three bedroom, family lounge, executive lounge and penthouse suite. The hotel has ample parking, plenty laundry facilities, fully equipped kitchens as well as stone fireplaces. Diamond Hotel will also offer front desk service, poolside beverage service, a common outdoor hot tub, on site lounge, grill, and morning continental breakfast bar as well as on site store. The hotel receives more than 200,000 nature lovers, business persons, leisure, adventure and executive visitors every year. Typically, the visitors spend an average of $12 million annually for food, lodging and recreational activities in this hotel. Diamond Hotel is experiencing increasing growth, the hotel seeks to increase its market share and turn one off customers to loyal customers. This will enable the customers to make Diamond Hotel their preferred destination. The hotels management pursues to increase the number of customers through a combination of networkings, marketing campaigns and seminars to reach and introduce the hotel to the yet to be reached segments of the market. This will enable the hotel to develop new business and increase customer base by increasing the market share, it would be an opportunity to give back to the community as well through sponsoring various community based programs. The mission of Diamond Hotel is to provide unique and comprehensive hotel services and products for its customers. The hotel exists to attract, retain and maintain customers. Diamond Hotel seeks to exceed the expectations of its customers through offering quality services and products as well as experiences. Table of Contents 1.0 Introduction 1 2.0 Performance and Financial Analysis 2 2.1 Total Hotel Revenue and Total Hotel Net Income 2 2.2 Rooms Department Revenue and Rooms Net Income 3 2.3 Food & Beverage Departments’ Revenue and Food & Beverage Net Income 4 2.4 Return on Capital Employed (ROCE) 5 2.5 Occupancy, Average Daily Rate (ADR), and REVPAR 6 2.6 Refurbishment Spending and Extra Facilities Built 7 2.7 Short Term and Long Term Stability Ratios 8 2.8 Staff Turnover 10 2.9 Marketing Spend and Activities 10 2.10 EMS Spend and Activities 11 3.0 Business Plan for Year 4 12 3.1.0 SWOT analysis 12 3.1.1 Strengths 12 3.1.2 Weaknesses 13 3.1.3 Opportunities 14 3.1.4 Threats 15 3.2 Objectives 16 3.3.0 Strategies 17 3.3.1 Corporate/weekday Market 17 3.3.2 Leisure/weekend Market 17 3.3.3 Conference Market 18 3.3.4 Food and Beverage 18 3.3.5 Staffing and Service Quality 19 3.3.6 Physical Property Condition 20 3.3.7 Environmental Management System (EMS) 20 4.0 References 21 5.0 Appendix 23 5.1 Current Balance Sheet 23 5.2 Statement of Income for Year 3 24 5.3 Monthly indicator report for Year 3 25 1.0 Introduction This report addresses the past three years performance and financial analysis of Diamond Hotel. The report also provides a detailed business plan for year 4 of the business. The report focuses on the hotels growth strategy, suggesting ways it can concentrate on customer relationships as well as development of new services and products for different market niches. The purpose of this report is to evaluate the hotels performance for the past three years in order to be able to strategically plan for the next period. Diamond Hotel is a three star hotel. Diamond Hotel performed well over the tree years, although it started by making net loss in year 1, it recovered very well in year 2 and 3 to generate impressive net income and good returns on capital. The operational part of the business also increased, the revenue increased considerably indicating that there was efficiency in operations. The hotel recorded increasing growth in year 2 and 3, this increased financial stability. The marketing campaigns were very effective as they led to increase in sales and consequently total revenue and net income. Essentially, the hotel performed very well over the last three years. 2.0 Performance and Financial Analysis 2.1 Total Hotel Revenue and Total Hotel Net Income The total revenue and net income for the hotel indicate that the hotel was registering growth for the first year of operations. The total revenue for the first year was $4,323,590, the first years twelve months of operations indicate that the hotel made revenue on an increasing basis. It was able to register increasing revenue every month for the twelve months. This is very positive for hotel as it indicates that it was acquire customers and retaining them. The revenue increased from $284,211 in January in year 1 to $520,815 in December the same year. The hotel made a total net loss on the first year of operations; the total loss was ($30,424). On monthly basis, the hotel made losses five times and income seven times. However, the losses outweigh the income and therefore it made a total loss for year 1. For year 2, the hotel made total revenue of $7,653,060 and a net income of $2,179,801. This is a very great improve1ment from the year 1 as it made net loss but it was able to generate net income of more than two million. This indicates efficiency in operations as well as increase in business activities. The hotel made total revenue of $8,845,417 and net income of $3,126,124 for year 3 again indicating an increase in revenue and net income. This is very encouraging for the hotel. Effective marketing and creating awareness of the hotel were the main factors that contributed to the increase in total revenue and net income as indicated above. 2.2 Rooms Department Revenue and Rooms Net Income The rooms department is one of the consistent and reliable revenue and income sources of the hotel. The total revenue for year 1 was $1,838,239 while the net income was $1,127,281. For year 2, the total revenue was $3,569,623 while the net income was $2,266,888. The third year of operations registered the highest revenue and income of $4,363,616 and $2,956,785 respectively. There is little difference in the total revenue and net income amounts; this is an indication that there were les expenses and expenditures in the rooms department unlike in the other departments. The hotel offered affordable, quality and comfy rooms to customers, this were the major contributors of the stable and increasing revenue and net income from the rooms department. 2.3 Food & Beverage Departments’ Revenue and Food & Beverage Net Income This department made total revenue of $2,347,899 and net income of $1,009,901 in year 1, in year 2 the total revenue was $3,887,193 while net income was $2,034,841. This represents an increase in both total revenue and net income and therefore a sign of growth in revenue collection. Total revenue and net income for year 3 were $4,273,962 and $2,410,565 respectively. This is also an increase as well. This department did not record any unusual expenditures or trends and instead in reported a sustained and increasing growth in both revenue and net income. 2.4 Return on Capital Employed (ROCE) The return on capital employed represents the amount of investment return to the equity providers or shareholders. The hotel registered a net loss for the first year of operations. This means that the hotels expenditures exceeded the revenue and thus the loss; the expenses were more than the company was able to generate revenue. This is a normal occurrence for new start up business and it was expected for this business. This translates that there was no returns to the equity providers because the business did not make profit. Year 1 ROCE was -12.5% and this was a loss and therefore no returns to the capital providers. Nevertheless, the hotel recovered and was able to record net income for year 2. In fact, it indicates that it made a strong case for revenue generation to record a massive 10.7% return on capital. It indicates that the ROCE increased from -12.5% to 10.7%, this is a very big growth Margin. The ROCE increased from 10.7% to 18.5% in year 3. This is a good return on capital employed to the .providers of capital. The analysis of the revenue and net income for the three years indicates that the hotel will be able to sustain the growth in the following five years. 2.5 Occupancy, Average Daily Rate (ADR), and REVPAR The occupancy indicates an increasing trend from January to December of year 1; this continues for year 2 and year 3. The ADR records a mixture of increase and decrease across the three years of operations, the results are average. The REVPAR indicates an average performance as well for all the three years. The occupancy, ADR and REVPAR indicate a difficult year 1 of operations but an increasing performance in year 2 and year 3. The occupancy played a very big role in boosting the total revenues of the hotel for year 1 when the business was making net loss; this department does not have much expenditure and therefore contributes the biggest percentage of the hotels income. 2.6 Refurbishment Spending and Extra Facilities Built The total refurbishment costs for year 1 were $867,177. The biggest part of these costs was for building new facilities as the hotel was just established. For tear 2, the costs were $220, 871, this is a very big drop from year 1 and it underscores the above evidence of building new facilities. There was a slight increase in year 3 as the costs were $257,128. The increase from year 2 is because of the refurbishment of facilities and equipments such as the catering equipment and facilities which are exposed to constant heat throughout the day for a whole year. Such equipments and facilities ware out very fast and hence require maintenance as well as refurbishment. 2.7 Short Term and Long Term Stability Ratios The short term stability ratio for year 1 indicates that the business was not stable and therefore weak, it was at 1.3. The stability was strong in year 2 and year 3. The stability levels for were 3.3 and 3.8 respectively for year 2 and 3. The short term stability ratios indicate an increasing performance from year 1 to year 3, as such; the short term stability of the business continues to be strong. This is an indication that the business has enough current assets to settle any current obligations. The long term stability is relatively stable. The long term stability ratios for the three years are 17.7%, 15.7% and 17.1%. The ratio dropped for year 2, this is because of losses made in year 1. In essence, the short term and long term stability ratios indicate relatively stable business with potential for growth in the next five years. 2.8 Staff Turnover The first year of operations had less staff turnover. The third month of year 1 had the highest staff turnover of 121.88%. This is very high staff turnover considering that it is the first year of operations. Year 2 and year 3 had very high staff turnover. One of the reasons for the high staff turnover is a lot of activities and operations due to the increasing growth. The hotel is experiencing growth; it needs to increase the number of staff in order to avoid overworking. This will enable them to have time off as lack of time is contributing significantly to the turnover. 2.9 Marketing Spend and Activities The total hotel spent $320,608 on marketing in year 1. There is an increasing spending on marketing from January to December of year in year 1. The total marketing costs for year 2 was $560,672.this represents an increase from year 1. Marketing contributed to the increase of the net income from a ROCE of -12.5% to ROCE of 10.7%. The business was created awareness to effective marketing campaigns and thus made a record increase in net income. There was a slight increase to $646,592 for year 3. The increase in marketing spending for the tree years indicates the management’s commitment to marketing the hotel locally, regionally and internationally. There is direct relationship to increase in net income and the increase in marketing spending. 2.10 EMS Spend and Activities There was no spending for EMS and activities for the three years of operations. It is important that the hotel spend on EMS so as to increase the awareness of the hotels activities. 3.0 Business Plan for Year 4 3.1.0 SWOT analysis 3.1.1 Strengths Strategic brand positioning – Diamond Hotel concentrates on developing lifestyle brands at a leisure value point being reinforced by innovative and inventive marketing campaigns in order to make passionate connection with the customers. For example the marketing spend and activities are increasing for each from $320,608 in year 1 to $646,592 in year three indicating the hotels strength and determination in marketing the strategic brand in the market. Moreover, the hotel is pursuing strong infrastructure development; this hotel has an aggressive strategy of pursuing growth in order to further the pressure in the market both locally and internationally (Pegg Patterson & Gariddo, 2012). This is evidenced by the growth of total revenue in the three year period. The revenue increased from $4,323,590 in year 1 to $7,653,060 in year 3, this is an indication of the increased facilities to cater for more customers. In addition, the occupancy level increased from $25.41 in January of year 1 to $71.04 in December of year three, this is an impressive growth and it indicates the hotels capacity to hold more customers. This is because of pursuing strong infrastructure development. This will enable the hotel to capitalise on the booming tourism and travel industries especially in the emerging markets. The hotel is in a very strong financial position; the availability of capital is enabling the management to expand operations such as increasing infrastructure. The hotel is spending heavily on refurbishment and building facilities at a cost of $1,345,176 for the tree years of operations. In addition, the marketing spending is on an increasing scale from the first month in year 1 to the last month of year 3. The hotel spent a total of $1,527,872 in the tree years on marketing. Despite making a net loss of ($30,424), it was able to finance its operations produce a 100% increase in net profit. This indicates that the hotel is in a good financial position to carry out and execute operations. This hotel offers individuated experience; the marketing team has discovered that there is growing consumer demand for individuated travel experience (Chon, 2013). As such, the management decided to pursue individuated customer experience in order to tap the demand. This is evidenced in the stable and increasing revenue from the rooms department of $9,771,478 for the tree years. This is providing the hotel with the capacity to generate potential for developing unique brands, services and products for the customers. This offers opportunities in the market as well. 3.1.2 Weaknesses Focus on domestic market, before the management of the hotel decided to focus on the international expansion (in the third year), it primarily focused on the local market. This makes the hotel to rely heavily on the local market thereby making it very sensitive to the changing fortunes in the local market (Brotherton, 2012). The presence of luxury brands in the market by the upscale hotels leaves Diamond Hotel susceptible to possible global economic recessions and downturns. This is at a time when the travel and accommodation are achieving improved penetration in main destination markets around the world. There is very high staff turnover, the figures from the hotel operations indicate that there is 121.88% staff turnover in one of the months (third month of year 1). Year 2 and 3 record a staff turnover in every month and this is affecting the operations of the hotel in terms of generating revenue. There should be a zero staff turnover, the management of the hotel should ensure that it compensates the staffs well and provides good working conditions to the employees. This is essential in retaining the staffs. 3.1.3 Opportunities Dynamic growth in the local and international markets, there are developing infrastructure, improving economic conditions, improving middle class and growing tourism and travel. These are aspects that drive the dynamic growth of this hotel. The net income of the hotel increased from a net loss of ($30,424) in year 1 to net income of $3,126,124 in year 3. This represents more than 100% growth and therefore an indication of the dynamic growth. There has been an increasing customer levels from both the local and international customers. The company is now focusing on the emerging markets in Asia – pacific and in in India. Another opportunity is diverse target markets for its products and services. Although this is a high end hotel, it offers services and products such as casinos, restaurant, bar, café, conference and events such as weddings to all customers. The individualised products of the hotel mean that it has facilities and equipments to provide products and services at different price levels to the customers. The hotel is at its growth stage after introduction to the market, however, it is facing fierce competition in key local markets and this is an opportunity in disguise as it is now focusing on the wider market perspective of international markets. This provides the hotel with an opportunity to diversify in different markets but offering the same products and services, this also diversifies the consumer base beyond the sleep in customers to business, leisure, educational travellers as well as other wide range of travellers. The hotel offers accessible luxury to its customers. This is in addition to the special programs dedicated to families. Even with the unpredictable and unstable economic environments, the hotel aloft brands presents it with viable opportunities to offer accessible unique luxury to its wide range of customers. 3.1.4 Threats There is a decrease in consumer confidence in the local market; this is because of the general business and economic. These factors significantly affect the income levels of customers; even the strong local markets have indicated decrease in consumer confidence due to harsh business conditions. This is evidenced in the hotels operations, the long term stability dropped from 17.7% in year 1 to 15.7% and 17.1% in year 3. There is significant decrease in the luxury spending; this is the flagship brands of this hotel. This indicates that the stability of the hotel is slowing due to lack of consumer confidence; this has made the hotels management to focus on the emerging markets in order to boost the stability of the hotel as well as income levels. Another threat is credit crunch, there is fear of business slowdown in the international travels and the consumers prefer to spend little and to travel less in the short term (Kim, 2005). Consumers fear that the credit crunch in the travel industry will affect them and therefore opt to travel less. Moreover, the ever increasing costs of doing business are affecting customers by reducing amount of funds at their disposal (Munoz-Baell et al., 2011). There are rising fuel prices, terrorist threats, environmental concerns and bureaucratic regulatory mechanism increase the cost of doing business by the customers. This decreases their purchasing power and therefore decreases the number of customers vising and spending in this hotel. There are lower cost competitors and strong luxurious brands in the market and they provide stiff competition to this hotel. Another threat is that much of the hotel net income comes from one department, the rooms department. This department contributes 49% of the hotels net income. this makes the hotel to be vulnerable to this specific segment, it can loss 49% of the net income if the rooms segment is closed indefinitely due to unavoidable reasons such as terrorism attack, earthquake or any other disaster. 3.2 Objectives The objectives of this hotel are straightforward; the hotels management seeks to ensure that Diamond Hotel is run in a professionally, ethically and profitably while building relationships with the customers, investors, suppliers and developing business as a whole. This business hotel needs objectives to work to achieve as well as have aims in order to survive. The objectives will facilitate this hotel to generate revenue. The objectives also give a sense of purpose as well as direction; they provide a framework around which the hotel will create strategies and targets. The objectives of Diamond Hotel are; To attain a revenue growth of 20% for each of the next five years To achieve a 99% excellent customer service every month in order to meet customer expectations. To reduce average operational costs by 20% in the next year of operations To increase revenue growth by 15% in each of the next five years To attain a 35% return on capital employed in each of the five years. To achieve a net income of 25% in each of the nest five years 3.3.0 Strategies 3.3.1 Corporate/weekday Market For this market, the hotel will use specialisation strategy. As such, the hotel will renovate the product to suite the market. This will provide custom made product to the market. These strategies will help the hotel to set itself apart from the competitors. It will provide unique product and this will enable the introduction of competitive pricing, expertise and service in the market. The hotel will provide discount of 5% to the first 10 corporates to purchase the products every day. Diamond Hotel will use advertising (both print and media) and sales promotion for promoting and sales. This will enable the hotel to reach out to all potential customers in all markets. Diamond Hotel will use market segmentation pricing strategy; as a result, the hotel will price products and services according to the type of market. This will ensure it accommodates all customers in all market segments. To reduce distribution costs, the hotel will produce products and provide services to its facilities in the different markets. This will save the hotel distribution costs as well as time. 3.3.2 Leisure/weekend Market This is one of the productive market segments for Diamond Hotel. The hotel will provide with discounts in order to encourage customers to purchase. This will not only attract customers but it will be an opportunity for the hotel to market in order to make loyal customers (Helms & Nixon, 2010). The hotel will use public relations and intensive advertising to market the product in this market, this will increase sales as well. In addition, the hotel will include special programs such as family special programs to encourage customers as groups. Competitive discount pricing strategy will be used in this market; this will provide value to customers. 3.3.3 Conference Market This is one of the markets that Diamond Hotel is looking to develop in order to take advantage of the increasing demand for conference facilities and sites. The hotel will provide specialty conference facilities for a wide range of users such as corporates, government conferences, schools events, music and drama, cinema production and meetings (Pan & Laws, 2013). There will be fixed price on these products because of their nature, however, the prices will be competitive. Social media is a very important promotional tool and therefore this hotel will use the social media such as Facebook, twitter, instagram and Whatsapp to communicate and reach out to customers. The products will be based in the hotels facilities and therefore will be provided at the business premises. In order to attract more customers, the hotel will provide spacious conference facilities that will be able to accommodate more than 1000 persons. These facilities will be equipped with the latest technology, communication devices, maximum security and other necessary equipment and devices. There will be free internet connections for the customers in order to enable them communicate freely. 3.3.4 Food and Beverage These are the primary products that Diamond Hotel provides for sale to the customers. Diamond Hotel started with offering food and beverages to customers and it has grown to offer new products and services such as accommodation, conference services, casinos, leisure, seminars in addition to food and beverages. The hotel provides a wide range of food and drinks in order to satisfy the taste and preferences of the different customers (Yang, 2010). This is essential as the hotel has customers from all parts of the world and they have diverse preferences for foods and drinks. Foods and drinks are ready made and also customers can reduce for special orders to be prepared like what happens during conferences and events. The foods and drinks include local and worldwide types of foods and drinks. This provides customers with a wide variety of foods and drinks to choose from. Food will be prepared by experienced and professionally trained staffs quality and value for money products. Drinks will be supplied by certified and professional producers and distributers in order to ensure quality of the drinks. 3.3.5 Staffing and Service Quality There have been high staff turnover for year 3, to reduce staff turnover, the hotel will pay competitive pay packages to all staff members. This will ensure that the hotel retains its employees. To ensure that employees are up to date with the most current services and products in the market, there will be continuous training of staffs. The management will design training programs for the employees; the training will be on a monthly basis in order to keep abreast with the emerging services and products in the market (Stringam, 2010). This will ensure that employees provide quality services and products to the customers. The hotel is experiencing an increasing growth, as such; more staff will be hired in order to ensure match in number of activities and the staff availability. The hotel will hire additional 40 staffs. The staffs will be provided with all equipments and devices for offering services; this will ensure that they provide quality services. They will ensure the use of etiquette, be polite and observe cleanliness while offering services. These will ensure quality. 3.3.6 Physical Property Condition The physical property are in good condition, there is no property that needs a major overhaul and therefore all physical properties are in good working conditions. The hotel incurs considerable amount of funds in refurbishing the facilities in order to ensure that they are in good working conditions both in quality production and safety of the users. There are major renovations planned from year 4, the innovations will affect the food and beverage properties. The purpose of the renovations will be to expand them in order to accommodate more persons. The hotel will continue with the infrastructure development in year 4. This is in reference to the increasing growth that the hotel is expanding; the infrastructure represents capital investment as well. The infrastructures include conference facilities and accommodation facilities. The hotel is building the infrastructures in an attractive unique design that will attract customers (Munoz-Baell et al., 2011). 3.3.7 Environmental Management System (EMS) Diamond Hotel will use ISO 14001, this will enable the hotel to reduce environmental impacts as well as increase operational efficiency. This will include a set of practices and processes to achieve environmental goals by consistently controlling the operations. The ISO 14001 EMS will help the hotel to continuously increase its environmental performance (Karadakis, Kaplanidou & Karlis, 2010). 4.0 References Brotherton, B. (Ed.). (2012). International Hospitality Industry. Routledge. Chon, K. S. (2013). Tourism in Southeast Asia: A new direction. Routledge. Helms, M. M., & Nixon, J. (2010). Exploring SWOT analysis–where are we now?: A review of academic research from the last decade. Journal of Strategy and Management, 3(3), 215-251. Karadakis, K., Kaplanidou, K., & Karlis, G. (2010). Event leveraging of mega sport events: a SWOT analysis approach. International Journal of Event and Festival Management, 1(3), 170-185. Kim, G. J. (2005). A SWOT analysis of the field of virtual reality rehabilitation and therapy. Presence: Tele-operators and Virtual Environments, 14(2), 119-146. Munoz-Baell, I. M., Alvarez-Dardet, C., Ruiz-Cantero, M., Ferreiro-Lago, E., & Aroca-Fernandez, E. (2011). Understanding deaf bilingual education from the inside: a SWOT analysis. International Journal of Inclusive Education, 15(9), 865-889. Pan, G. W., & Laws, E. (2003). Tourism development of Australia as a sustained preferred destination for Chinese tourists. Asia Pacific Journal of Tourism Research, 8(1), 37-47. Pegg, S., Patterson, I., & Gariddo, P. V. (2012). The impact of seasonality on tourism and hospitality operations in the alpine region of New South Wales, Australia. International Journal of Hospitality Management, 31(3), 659-666. Stringam, B. B. (2010). Timeshare and vacation ownership executives’ analysis of the industry and the future. Journal of Retail & Leisure Property, 9(1), 37-54. Yang, J. T. (2010). Antecedents and consequences of job satisfaction in the hotel industry. International Journal of Hospitality Management, 29(4), 609-619. 5.0 Appendix 5.1 Current Balance Sheet 5.2 Statement of Income for Year 3 5.3 Monthly indicator report for Year 3 Read More