Strategies in International Hotel Industry - Example

HOTS Analysis Report Table of Contents Executive Summary 3 0 Introduction 4 2.0Performance and Financial Analysis 5 2.1 Total Hotel Revenue and Total Hotel Net Income 5 2.2Rooms Department Revenue and Rooms Net Income 7 2.3 Food and Beverage Department Revenue and Net Income 9 2.4 Return on capital Employed 10 2.5 Occupancy, Average Daily Rate (ADR) 12 2.6 Refurbishment Spending and Extra Facilities Built 13 2.7 Staff Turnover 16 2.8 Marketing Spend and Activities 16 2.9 EMS Spend and Activities 17 3.0Business Plan for year 4 17 3.1SWOT Analysis 17 3.1.1 Current Strengths and Weaknesses of the hotel 17 3.1.2 Current opportunities and threats of the hotel 18 3.2 Objectives 18 3.3 Strategies 19 3.3.1 Corporate / Weekday Market 19 3.3.2 Leisure / weekend Market 19 3.3.3 Other market segment 19 3.3.4 Food and Beverage 19 3.3.5 Staffing and service quality 20 3.3.6 Physical property condition 20 3.3.7 EMS 20 4.1Reference List 21 Executive Summary In year zero, looking at the hotel’s income statement, the business had a total revenue which amounted to $278,932. During this year, the hotel was still trying to put down its resources into work and be able to get established. For this reason, there were a lot of expenses that were incurred by the company that added up to $295, 216. This saw the company closed the year with a net income before tax which was a negative, meaning, the business made losses in the first year. On to the year 1 of operation, the business made good sales which made the revenue to increase up to $581,311. The total expenses during this year were a bit lower; hence the business had the opportunity to make some profits. Therefore, the company made a profit before tax of $96,068. During the year 2 of operation, the sales increased greatly, which increased the total revenue collected also, hence translating to increased profits. Increased sales or revenue, however, comes with increased expenses. These expenses try to reduce the total revenue in order to bring down the value of the resulting profits, but this value is not huge enough to reduce the revenue to an extent that the business’s net income results to losses. The net income before tax in this year amounted to $210,264, which is much higher than the previous year. Year 3 also has its revenues increased to $826,079 which is more as compared to the previous year’s 769,204. This resulted into a higher income before tax of $280,877. The expenses here again increased considering that revenue also increased, so, the expense to high revenue must also be high. In general, the trend here is that, there is an increased sale per year which results in increased revenue, increased expenses and most importantly, increased income before tax. This is therefore a good indicator that the company is doing well and on the right track ever since it was initiated. The company has also grown in assets and equity as we find that, the initial total assets for starting up the business amounted to $9,959,607 while the total equity for this year, zero, amounted to $9,275,099. When this is compared to the year 3 of operation, it is clear that, in year 3, the company had a total asset amount of $15,591,160 and a total equity of $11,913,291. There is a great improvement as far as the company’s progress in concerned. Given that the business was newly started at year 0 and was meant to expand every year, the business has continually collected new assets to increase its asset base which is necessary for expansion. By doing so, the level of operational expenses also increase with the volume of production and sales that increases with the business’s increase in its assets volume. It is also worth noting that, the business was able to break-even on the year 1 of operation it was able to pay back the initial investment amount and end up with a positive income before tax. 1.0 Introduction This report is aimed at showing the analysis of operations that took place in the 4 star hotels for the last 4 years of operation. The report will look at the analysis of financial statements to find out whether the company has been making profits or losses. There will be analysis of revenues and net incomes as well as the analysis of the rooms’ department revenue and net income. It will also look at other areas such as return on capital, employee turnover, SWOT analysis as well as the strategies employed in the hotel. 2.0 Performance and Financial Analysis 2.1 Total Hotel Revenue and Total Hotel Net Income Hotel revenue and Income Starting with year 0, the hotel was just planning to start up; therefore, putting down the logistics to ensure the hotel begins to run well, and have anything in operation. For that matter, the hotel begun with having a lot of expenses than the revenue they collected for the year. The expenses added up to $295,216 while the revenue added up to $278,932. The result of the high expense over the revenue is the total income before tax which became a negative figure ($-16,284) showing that the hotel made a loss. Going to its year 1 of operation, the hotel seems to have begun operating well and has actually acalamatize to the business environment. It had more expenses which were contributed to the fact that, the sales revenue also increased. The expenses added up to $485,243 while the new revenue amounted to $581,311. This gives us a net income of $96,068 before taxes. This shows clearly that the business was able to break-even during its year 1 of operation and even makes some profits on top. The business therefore seems very viable and profitable. Year 2 of operation shows clearly that the hotel already caught up with the trend and was making even more revenue. However, with high revenues, there are increased level of expenses. The expenses add up to $558,940 while the new revenue becomes $769,204. This brings a total of $210,264 in income before tax, which is well above the previous years’ incomes; hence the hotel is in a good progress mood to making higher income every year. The trend seems predictable as the business seems to break-through the obstacles in the environment, increase its investment each year, which also increases the resulting revenue and the income from the business. The fourth year of operation, year 3, also depicts the same trend as the previous years, as shown in the graph above, the net income is continually increasing as the revenue increases. This year the hotel recorded as total revenue which amounted to $862,079 with total expenses that amounted to $581,202. As one can realize here, the revenue increased as the expenses also increased. The resulting income before tax increases but it is reduced by the increasing amount of expenses. This keeps the trend controlled as the increasing level of expenses checks the increasing revenue to ensure that the resulting income is stays without any expenses. In general, the hotel has a definite trend in its revenue collections per year which shows clearly that the business is growing each and every year. It builds and increases on its income each year as the revenue also increases. 2.2 Rooms Department Revenue and Rooms Net Income Looking at the rooms department, it seems as this is the major department in terms of contribution to the revenues in this hotel. Beginning from year 0, the hotel receives revenue for the rooms already, which might be in terms of early or advance bookings that were made before the hotel set into operation. The hotel attracted a total of $175,493 in revenue on this particular year. However, due to the total expense in the department which added up to $47,244, the resulting income became $128,249 which was not bad at all. The hotel however, seems to have incurred a lot of expenses during this year of operation since it was just launching its operations, hence a lot of expenses must be met. On to year 1 of operation, the department recorded an increase in revenue which made the revenue to amount to $308,140 while the expenses reduced to $83,228. The income hence increased to reach $224,912. This shows a positive progress in the department’s operations as it is able to meet its own expenses and even make some profits on top. The department reached the break-even point within the year 0 of operation since it was able to pay all the all its expenses and even make some profit on top. Year 2 of operation was not much different from year 1 since there was an increase in the department revenues collected for this year just as there was an increase in the previous year. The revenue increased to $446,374 as the expenses also increased to $101,700 which makes the income before tax to increase to $344,674 for the year. The department has gotten used to and adjusted its conditions to the changes in the environment in order to attract even more clients. On to the last year, which is year 3, the department increases its investment level which in turn increased its yearly revenue to $500,408. Due to the increased revenue, there is an increased expense which accompanied the revenue. This amounted to $108,954 which if used to reduce the revenue, the resulting income before tax gets to $391,454. This then shows that the department is making a high income as the income makes 78.2% of the total revenue collected. The expense takes only 21.8% of the total revenue; hence, the department is at a good rate with the expenses as it takes a smaller and reasonable percentage of the revenue. This applies to all the other years where the percentage of revenue used in expenses is less than the percentage of revenue in net income. 2.3 Food and Beverage Department Revenue and Net Income Looking at the food and beverage department, the trend is not that different. The revenue keeps on increasing with an increasing rate just as from year 0 to year 3. Beginning from year 0, the revenue was $98,589 while the income for that year amounted to $28,592. The low income could have been recorded just because the department was still putting things in order before the launch their operations officially in year 1. During year 1, there was an increase recorded by the department in terms of both revenue and income. This increase could have been recorded due to the fact that, the department in this year, had already stabilized in investment and embarked on issues that would increase the revenue ($251,917) in the department. However, the increase in revenue comes with a corresponding increase in expenses ($41,147) in the department which therefore makes sure that the total revenue does not translate to net income; hence the income recorded was $111,132 which was much higher than that recorded in the year 0 of operation. Considering year 2 of operation, the beverage and food department again was in the rise where the trend still remained that the revenue increased hence increasing income. The revenue therefore increase to $284,028 with an the new level of expenses being $52,899, the net income resulted to $143,470. This shows a great improvement in the department’s level of operation and profitability. The improvement could have been contributed to by the fact that, the business had established and was now catching up well. The fourth year, the year 3 of operation was also remarked with the same trend in this department where the revenue took a similar increasing trend, just as can be seen in the graph. This led to an increase in the level of expenses used to arrive at the high revenue, and because of the increased revenue, the income for this department also increased. In general, the food and beverage department is a growing department with a steady increase in revenue and net income 2.4 Return on capital Employed Return on Capital Employed is calculated as; ROCE = Earnings Before interest and Tax / Capital Employed For year 0; = -16,284 / 408,480 = -0.0399 Year 1 = 96,068 / 2,739,068 = 0.0351= 3.5% Year 2 =210,264 /2,399,976 = 0.0876 =8.8% Year 3= 280,877/2,060,884 = 0.1363= 13.63% Return on capital employed is a financial ratio that measures a company’s profitability in terms of its efficiency in using its capital employed. In year 0, for instance, the ROCE was a negative, which means that, the company was not profitable at this points as it was not using efficiently its capital employed. Looking at year 1 of operation, the hotel had a positive ROCE of 3.5%. This shows that the firm was not so efficient in using its capital employed, but at least it was improving as it begun from a negative percentage of -3.99%. The increase shows that, the hotel is increasing its efficiency level of using the capital employed. On to year 2 of operation, things are slowly changing here but steadily. This is because, the return on capital employed ratio is increasing slowly by slowly year by year, and now it has reached around 8.8%. This clearly shows how the efficiency of the hotel on applying its capital employed is increasing. As we know that, the higher the return on capital employed ratio, the more efficient the firm is in employing its capital, then we can generalize that, the firm is becoming more efficient year after another as its ROCE is also increasing every year. The ROCE for year 3 is 13.63%, which is the highest so far looking at the graph above. This shows that, the firm is more efficient in employing its capital this year than on the previous years. 2.5 Occupancy, Average Daily Rate (ADR) Looking at the weekly graph, the average rooms’ rate is about $95 over the week, it then about $100 during the weekends and $105 during the weekdays. The occupancy on the other hand is not in any way following any pattern, but for the last 12 months, the trend the occupancy begun by being so high, where on certain days, on weekends, the rate hit 100%. However, the 1st quarter was seen to be having 80% and 75% occupancy rate on average over the week and on weekdays respectively. During the second quarter of the year, the occupancy rate reduced so much up to averages such as, weekends having around 55%, weekdays having around 50% and the over the week rate also being around 55%. These rates increased during the third quarter of the year where the rates increased to about 55%, 55%, and 60% for the over the week, weekday and the weekend occupancies respectively. It is only in the last quarter when the occupancy rates were seen to increase again to show how the rate of occupancy of the rooms again increased after the long decrease throughout the last two quarters. The Revenue per Available Rooms (REVPAR) will therefore increase during the 1st quarter where the occupancy rate was very high followed by the last quarter and the second and third quarters respectively (Charlyn, 2009). 2.6 Refurbishment Spending and Extra Facilities Built Looking at the hotel’s balance sheet over the 4 years, the amount of assets are increasing every year, this shows greatly how the hotel is employing its resources in building and acquiring extra facilities since it got into operation. Maintenance cost also increase in a way to indicate that, the hotel is doing refurbishment on its facilities in order to make them be in a good state of operation. 1.1 Short-term and Long-term Stability Ratios Some of the short term and long-term stability ratios commonly used in business include Debt ratio = Total Liability / Total Asset Equity Ratio = Total shareholder’s Equity / Trade Creditors Gearing ratio = total asset / total shareholder’s equity Debt Ratio; Year 0: 9,959,607 / 684,508 = 14.55 Year 1 12,371,283 / 3,348,377 = 3.69 Year 2 3,493,204 /13,510,005 = 0.26 Year 3 3,677,869 / 15,591,160 = 0.24 Equity Ratio: Year 0: 9,275,099 / 279,488 = 33.19 Year 1: 9,022,906 / 635,393 = 14.20 Year 2: 10,016,801 / 833,853= 12.01 Year 3: 11,913,291 / 830,287 = 14.35 For year 0, the debt ratio is high and it reduces as years go by. This shows that, in the beginning, the hotel business was greatly financed by the borrowed funds, but the loans kept on being paid back until the third year when the debt ratio is diminishing. On the other hand, the part of the hotel investment which is made up of the owner’s equity is also large as the hotel starts up. This means, the owner’s invested their own money apart from the loans in the business. The part of the owner’s equity however, decreases as years go by but increases in the last year of operation, year 3. 2.7 Staff Turnover The staff turnover in year 0 was seen to be too high than the other years. This could have been caused by the fact that, the hotel had not stabilized; hence, it could not be able to pay its employees well and on time. Employees could have moved to seek for more stable and well paid jobs. The trend begun stabilizing as the hotel also stabilizes in the market. Year 1 was a sign of this stability where the staff turnover reduced to about 40% from the initial 68.8%. in year three, the staff turnover seem to increase again, maybe because of lack of promotions and pay rise in the hotel. 2.8 Marketing Spend and Activities On the part of marketing spending and activities, the hotel spends money in the tune of between $250 and $1500. This is mostly for advertisements, staff information norms, refurbishments and such like activities. 2.9 EMS Spend and Activities The hotel seems to be spending so much in EMS as most of the activities here are of level 3. This means that they are will managed in order to provide better and efficient services to the hotel in order to enable it to save on cost of operation by reducing on wastage. 3.0 Business Plan for year 4 Considering the previous performance in years 0 through to 3, the hotel can make projections for the business plan in year 4. The trend can easily be read through the graphs, therefore, it wouldn’t be hard for the hotel to know what to expect in terms of bookings and food and beverage for its clients. The revenue has been in the increase each and every year; therefore, the hotel must include higher projections of materials and costs in its budget to cater for the increase in clients which will again result to higher revenue. Therefore, more specifically, the hotel must increase the number of rooms available for bookings since there are some days previously where the rooms were 100% occupied. This means that, the hotel might lose some customers owing to the fact that, it does not have enough capacity. The management will also have to add more workers and provide adequate services through all its departments such as food and beverage department. 3.1SWOT Analysis The hotel carries out environmental scanning in order to identify the strengths and weaknesses in its internal environment, as well as the opportunities and threats in the external environment. 3.1.1 Current Strengths and Weaknesses of the hotel In the internal environment, the hotel has received strengths in areas such as its unique ways of serving customers, hence has created a good brand name which is well known to customers. It also has the a strength in its well trained employees who make the hotel win over many loyal clients to bust its yearly revenue. The hotel uses its strength in order to get more clients and expand. The weaknesses include the facts that, the room capacity is sometimes not enough to accommodate all the clients who want the services of the facility. This makes the hotel to lose clients to the neighboring competitors. The management however is trying to make sure that all such loopholes are smeared to avoid future leakages. The seasonality of the clients is another challenge which makes the hotel to lose a lot of revenue during the low seasons. 3.1.2 Current opportunities and threats of the hotel The hotel enjoys the privilege of being the best hotel in town; hence it uses this as an opportunity over the other hotels to win over more and more clients. Other opportunities that prevail include the fact that the hotel enjoys a high competitive edge in the industry, and with its high outlay of revenues, it can be able to exploit other opportunities by venturing into new areas some as neighboring towns and cities to increase its market share. However, the hotel is faced with the threat of the changing environment in the hospitality industry where new technology and innovation is the key to success in the industry. For instance, due to new technology, the online booking system that was launched in the hotel has really seen the hotel invest a lot of money in its efforts to try and keep at par with innovation and technology. There is also the threat of new and upcoming hotels in the town which are applying certain strategies just to ensure they compete for both the loyal and new clients of this hotel. 3.2 Objectives The hotel has the following objectives: 1. To be the best hotel in town and provide high quality services to meet 95% of the customer requirement by year 1 of operation 2. To make an income of $300,000 by the end of year 3. 3. To be the best hotel in the region where over 50% of the customers in town visit 4. To increase its sales revenue up to $900,000 by the end of the year 3 of operation. 3.3 Strategies 3.3.1 Corporate / Weekday Market In this case, the hotel targets the corporate world where it has conference rooms suitable to hold meetings, conferences and trainings (HOTS, Conference Feasilibilty, 2012a). It uses the 4Ps of marketing where the hotel itself provides the services that the clients really like, at affordable prices, and being situated in a town where there are many companies. It also carries out its promotion by sending its sales representatives to these companies to create more awareness (HOTS, 2012b). 3.3.2 Leisure / weekend Market The hotel also targets the leisure market segment which is more prominent during weekends. There are different packages for this group which are affordable and more exciting to the clients. The promotion in this case is done through televisions and posters (HOTS, National Economy, 2012c). 3.3.3 Other market segment The other market segment that the hotel target is the domestic and international tourist sector that come to visit the town. It also targets those who just want to eat and drink and those who want to spend in town just for few days may be because of job, and go back (Cornell, 2013). 3.3.4 Food and Beverage The food and beverage sector is also another way that the hotel ventures in to bust its revenue. It specializes into provision of exquisite good food and exotic drinks which are fetching high revenues. 3.3.5 Staffing and service quality The hotel has its staff well trained to provide high quality services to its clients as this is the key to success in the hospitality industry (Whitla, 2006). 3.3.6 Physical property condition The hotel is also investing into making its property new and appealing every time so that it can attract more clients who believe in the physical look of an hotel to provide high quality services. 3.3.7 EMS The hotel also uses the EMS service as an additional service to attract its clients and diversify its business entity through posting and delivery of mails and parcels to the customers up to their door step. 4.1 Reference List Charlyn, K. (2009). Defining an Average Daily Rate. A Journal of Hotels and Travels , 1-3. Cornell. (2013). Global Hotel Industry Strategies. A Journal of Cornell School , 2-6. HOTS. (2012a). Conference Feasilibilty. HOTS (v7SH): Griffith University. HOTS. (2012b). Effects of Adevertising. HOTS (v7SH): Griffith University. HOTS. (2012c). National Economy. HOTS (v7SH): Griffithy University. Whitla, P. (2006). Strategies in International Hotel Industry. Journal of Hospitality Application and Research , 45-58. Read More