Feasibility Study of Hotel in Melbourne CBD - Essay Example

Feasibility study of Hotel in Melbourne CBD Introduction The pre-requisite to start any business is to have the knowledge about the business. To start a hotel, it is essential to know the basics of the hotel business. The primary thing to understand before starting up a hotel business is hospitality. In simpler terms, hospitality can be defined as the generous reception and gracious entertainment of strangers or guests; the disposition to extend friendly treatment to guests. Besides hospitality factor, the other important factors which are to be considered in setting up a hotel includes business philosophies - strategic positioning and strategic alliances , licenses, historic analysis (market position, income statement historic, balance sheet historic) marketing operations , organizational structure, hotel operations (hotel identity, hotel location, hotel layout), financial plan and risk management. A step by step insight to each of these factors would give a detailed description about the entire business set up. Business Formation : As mentioned earlier, the primary activity would be to gather information about the entire business. The more data and information collected, the better it would result in planning and setting up a profitable business. Like any other Hotel, the main aim of the business is to provide customer satisfaction. This would in turn result in attracting new customers and retaining existing customers. Executive Summary : The main aim of the project is to set up a new five star hotel in Melbourne's central business district. The purpose of this study is to determine the existing and potential market demand along with the financial layout and risk factors involved in setting up a new five star hotel. The set up planning and implementation is to be done keeping in view large vision - tenure of at least next five years. Based on the information collected from primary and secondary research on the location of place, market and demand analysis, facilities and benefits provided by the competitors, and the target customers it is highly recommended to start up the hotel with the following features : 75 - room, full service hotel 50 - 75 standard guest units; inclusive of 4 suites Approximately 1,200 square feet of divisible banquet space A full service restaurant serving three meals 24 hour room service 24 hour concierge 24 hour reception Laundry and dry cleaning facilities Currency exchange Medical services Limousine rent Babysitting service Quantum Fitness and Health center : The Quantum Fitness houses heated indoor pool, comfortable relaxation area, dry sauna, steam bath, spacious Roman bath, a digital gym and weight room, solarium, heath bar, beauty parlor and hair dressing salon. Business Facilities: These are utmost important and plays a pivotal role on attracting a mass of customers at an instance. The business facilities should include one main conference hall seating 100 - 150 people, 5 conference halls with the capacity ranging from 20 - 55 people. Besides, providing all the necessary equipments like projectors, microphones, screens, internet access, fax connection, photocopying facilities, printing and laminating facilities and many more. The primary segments generating hotel demand in the subject market area include commercial individual (corporate), tour and travel, and group. The proposed hotel should be well positioned to capture its fair share of the leisure, corporate and group markets. Due to the proposed market orientation of the full - service hotel, it is likely to compete to some degree, for corporate business currently accommodated by default in some of the existing hotels located outside of the immediate subject market area. The process involved in performing the market study for establishing a hotel can be categorized into various sub - heads. However, the major categories would include the following three : - Market Study Forecast of Revenue and Expense and Financial Valuation Historic Analysis : Area Review : Melbourne is the largest city in the Australian state of Victoria with a population of over one million people. It is essential to identify the market areas which are major demand generators ( such as larger employers, commercial/residential developments and tourism firms). Besides, the growth rate can also be determined by using few economic indicators such as population, retail sales, eating and drinking sales, per capita income and so on. Market Position : Melbourne's CBD ( Central Business District) is divided into two parts by River Yaraa, creating predominantly working class areas in the North and West regions, and more affluent areas in the South and East. Thus it would be more profitable to open the hotel in the South or Eastern region. Supply and Demand Analysis : Marketing Review : The four Ps ( Price, Place, Promotion and Product) needs to be considered here. The basis of comparison would be the competitors information. Under this discussion we would be looking into the following categories : Competitive Hotel Supply : The basis of hotels occupancy forecast is the amount of demand captured over a given period of time (usually one year) divided by the number of rooms available over the same period. A room night is the unit based by hotel appraisers to quantify this demand. A room night is the unit of lodging demand representing one room occupied by one or more people for one night. In order to assess room night demand for the proposed hotel development of establishing a new hotel , we would identify a competitive set of properties in the market drawing area based on published room rates, level of service, amenities and location. All hotels in the competitive set are considered primary competitors of the proposed development. The properties used in the analysis are listed below : Here the main task would be to identify primary and secondary competitors. As per the results of different surveys it was concluded that in total there were 20 hotels containing 2,762 rooms. Out of these 20 hotels, 9 could be considered as primary competitors (1,604 rooms) and 6 would be secondary competitors (743 rooms). Property Number of Rooms Hilton Inn 275 Radisson Hotel 250 Holiday Inn 175 Ramada Inn 150 Island Inn 135 Quality Inn 175 Out of 12 primary competitors, only six have been taken into consideration at the moment. Further to this, it is essential to have the information about each property's amenities, location and market segmentation. This would form the competitive set and would further help in understanding the current market position and estimating the market demand over the coming years. Seasonality: Another important feature to consider here is the seasonal demand. It is advisable to analyze the market area to determine its seasonality with regard to room night demand. Based on information obtained during field research, the market experiences peaking of demand during the months of April through June and October. The summer months tend to draw more leisure visitors to the area as well as the "Olden Days" festival, which takes place in the summer and is reported to increase visitation to the area significantly. Segmentation of Lodging Demand : Leisure Demand : Leisure demand consists of families, couples and individuals seeking vacation experiences including a weekend "get-away" or an experience that is different and unique when compared to their normal routine. Typically associated with vacationing leisure demand can encompass anything from an overnight festival attendant to the extended vacationer. Seasonality is the major factor when attempting to attract the leisure traveler. Peak demand periods for a leisure traveler are expected in July and August, followed closely by May, June, September and October. Typically, the months from November through March are slower periods for leisure demand. The new hotel needs to promote off-season recreation activites, packaging, and special events to entice leisure travel demand. This period will be associated with discounting in effort to stimulate this demand. Commercial Individual Demand : Commercial Individual demand is generated by business people traveling to or through the area to complete some facet of business. This group typically is the least price sensitive of the demand segments in that they are usually reimbursed for their expenses. They include business representatives, corporate trainees, interviewees, sales representatives, contractors and any other business associated travelers. This segment is expected to represent a larger portion of demand to the proposed property due to the presence of large corporations in the market drawing area. Group Demand : Group demand is generated by associations, government and business groups, which hold meetings, corporate retreats/outings and conferences. This segment includes groups (10 or more people)who reserve guestrooms typically with meeting/conference space, food and beverage. Expected sources of group demand include corporate groups, associations, non-profits and a limited number of government groups. Further research on the market area, suggests that group demand is more concentrated in the months of March, April, May and September through November. The summer moths of June, July and August are usually somewhat slower for group demand due to the high incidence of vacations and the inability of groups to ensure participation by key individuals. Groups typically receive some of the lowest room rates offered as the result of volume purchasing. In addition, group demand peaks, as described above, occur during shoulder seasons, a period when properties begin to offer incentive discounting. Demand Descriptions : It is a fact that different variations of demand exists between any primary market area. In general, demand for hotel rooms can be categorized as demonstrated demand, induced demand and unsatisfied demand. Following is the brief description of each type of demand and how they relate to our project of establishment of new hotel in the proposed area. Demonstrated Demand : Demonstrated demand is a demand that is already captured at competitive hotels. Currently, the competitive supply captures demand from primarily two of the three segments mentioned earlier : commercial/individual and leisure. Commercial individual demand comes from the large demand generators in the area. Induced Demand : Induced demand is the demand that does not presently seek accommodations in the competitive market, but could be persuaded to do so as a result of increased market capacity through marketing efforts, room rates, facilities, services and amenities. Unsatisfied Demand : Unsatisfied demand is the demand that seeks accommodations in the market but is not satisfied due to any one or more of a number of factors : sell - outs during peak season, lack of a particular type of accommodation, lack of meeting space, or high room rates. Using the historical growth in the market as a base, and taking into account the current demonstrated and future project economic conditions, we can conclude future growth in overall market demand. Average daily rate is estimated to increase at levels slightly above inflation for the next several years as a result of economic growth and development. Financial Plan : Classification of Revenues and Expenses : All revenues and expenses have been classified as recommended by the Australian Hotel and Motel Association using the Uniform System of Accounts of Hotels. In conformity with the system of account classification, only direct operating expenses are charged to operating departments of the hotel. Overhead items applicable to the entire operation are classified as "Undistributed Operating Expenses" and include such expenses as administrative and general expenses, marketing, property operation and maintenance, and energy costs. Revenue and expense estimates have been prepared, where appropriate, by means of comparison with actual operating results of comparable full -service hotels. Where necessary, estimates further revised to reflect the unique characteristics of the market and project under consideration. Since these estimates are based on assumptions regarding circumstances and events that have not yet occurred, they are subject to potential variation. Accordingly, we cannot provide any assurances that the estimates will be representative of the results that will actually be achieved during the projection period. Management and Marketing : It is to be assumed that the proposed hotel would be marketed and managed in a sound, competent and efficient manner. We further assumes that management understands the importance of effective marketing and would therefore commit the necessary funds and personnel to successfully penetrate the market. The marketing would include a strong pre -opening sales effort and a flexible continuing program that could adjust rapidly to market fluctuations and cycles, and effectively tap the sources of demand relevant to the subject market area. Departmental Revenues and Expenses : A) Rooms Department Rooms Revenue: Rooms revenue is based on estimated levels of occupancy and average daily room rates discussed earlier. Revenue for the representative year would be calculated as per the data projected earlier data. B) Food and Beverage Department : Here the expenses include such items as food and beverage cost of sales, payroll expenses and operating supplies. C) Telephone Department : Telephone expenses, which would include the cost of calls, the operation of the telephone department, the leasing and/or amortization of the call accounting and switching equipment, and any telephone company service charges, are based on operating results of comparable properties. D) Rentals and Other Expenses : Renting and managing fleet of cars for picking up customer from airport and dropping them to the hotel. Giving shift allowances to all the employees working in the night shifts which includes the receptionist, bell boy, waiters, security etc. Building and managing website of the hotel which is capable of handling online booking, re-scheduling and cancellations. Hiring gardener to maintain landscape of the hotel. All the record keeping system should be in place before starting. Basically Financial records should be maintained. Financial record too keep records of all the your business revenues and all your business expenses. Expenses can be divided into three general category. Direct expenses - Expenses on business alone. Capital Expenses - Expensed on expensive goods and commodity. Prorated Expenses - Expenses like mortgage interest and property tax. REFERENCES : - -> Arthur S Weinberger (2003) - The Handbook of Hospitality Management -> Lawrence Yu (1999) - Management and Operation-The International Hospitality Business -> John C Crotts (2000) - Global Alliances in Tourism and Hospitality Management Read More