Managing a UK Hotel in the Economic Downturn - Essay Example

Managing a UK Hotel in the Economic Downturn Submitted by: Submitted In Partial Fulfillment Of the Requirements in [Subject] [Date] Introduction Tourism is the fifth largest industry in the United Kingdom with £114 billion total (direct and indirect) contribution to the economy or 8.2% of GDP and supports over 1.36 million jobs. Total spending of visitors, both domestic and international, amounts to £86 billion in 2007. The United Kingdom is also the sixth top destination in the world making it attractive to own and operate a hotel business in the country (Deloitte, 2008). Nevertheless, the unprecedented economic crisis brought about by the US sub-prime mortgage crisis has indelibly left its mark on the UK hotel industry. Business organizations are cutting down on costs with sponsored travels to conferences, meetings and trainings being usually the first to go. Families are also cancelling their holiday travels as these present significant expenses unwise in the face of job insecurities and shrinking currency value. As people and organizations prefer not to travel, occupancy rates have fallen leading to rapidly shrinking revenues that could be barely enough to sustain overhead costs. Tourism-related businesses are not new to the prospect of crisis and its effects on the industry. War, terrorism and disease outbreaks have severely affected tourism statistics before but the current situation is unique as the effects are immediate but long-lasting. The credit crunch also affects consumer finances while terrorism and diseases only affects consumer confidence. People are easier to convince to take vacations and business meetings when they have the money to spend. The current economic crisis, therefore, calls for an analysis and evaluation of management practices. This paper aims to determine and evaluate hotel management practices designed to address the current economic crisis. First, the state of the UK hotel industry is presented to enable the reader to know the current conditions. Based on this knowledge, an analysis would then be conducted on appropriate measures to be adapted on the following areas of hotel operations and management: revenue management, cost control and guest satisfaction. The State of the UK Hotel Industry To know the cure for an ailment, one must first have relevant and useful information. Hence, an understanding of the current conditions of the industry is called for before proceeding with the determination of appropriate hotel management practices. In the following, we will be looking into the trends and developments of tourism and its effects on the hotel industry. . Trends in the Visitor Economy As with all other industries, the tourism sector is currently weathering the effects of the global crisis that ensued from the US sub-prime mortgage crisis. The ensuing layoffs, cost cutting and salary downgrading is said to have significantly reduced the demand for travel, both by British and foreign citizens. Research conducted by Visit Britain in 2010, the national marketing agency for tourism, found that inbound tourism visits, domestic overnight trips and bedspace occupancy rates have slumped in the period coinciding with the global crisis. Inbound tourism visits have fallen more than 10% in 2009 alone as shown in Figure 1: Another measure used in the hotel industry is the customer’s length of stay. The Business Development Research Consultants (BDRC), a service market research agency, reported in its 2009 Hotel Business Guest Survey that the long stay leisure market is on a steady decline while short term breaks are increasing. This is shown in Figure 5: Long term stay is defined as a 5+ night stay. Figure 2 shows that the demand for leisure-related nights peaked in 2004 with over 30 million short stays and 24 million long term stay. From then on, short term breaks have increased but the total room nights have continuously decreased indicating a sharp drop in long stays. Indeed, long term stays have decreased 50% from 22 million in 2006 to 11 million in 2008. The data also indicates that people increasingly prefer short breaks which explain the demand influx from 35 million in 2007 to 37 million in 2008. Hotel Room Rates A survey conducted by Hogg Robinson Group (2010), a hospitality market research firm also found that room rates in 10 key cities were declining as shown in Figure 3. The steady decrease in inbound tourists and domestic overnight travels has reduced occupancy levels forcing hotels to offer more competitive rates. A deeper analysis of London average room rates indicate that the steepest decline was mostly in the financial district (city) as shown in Figure 4. Room rates in London districts fell from £159.45 to £146.73, an 8% decrease from 2008 levels. Room rates in West End and Central Districts, where most five star hotels are located, also experienced a 3.75% decline as preference for lower star ratings increased. Budget hotel brands have been found to be on the rise as business travelers prefer them from five star hotel to maximize allowances. As evidence, the top most improved business brands in the hotel industry in terms of advertising awareness are all budget brands and include Premier Inn, Travelodge and Holiday Inn Express. Nonetheless, the Premier Inn figures indicate that the demand is less from previous rates though not as severe as their up market counterparts. Opportunities for the Industry A holistic analysis also calls for the determination of possible avenues of growth. We do not want to adopt management practices influenced only by fear of bankruptcy due to the global crisis. Other factors must be known as well and these are considered below. The United Kingdom is to host the 2012 Olympics which mean that there will be a significant uplift in the tourism sector. Looking back to Figure 1, one can also see a positive growth in domestic overnight trips indicating the preference of British citizens for ‘staycations’ (stay vacations). The weakening Pound, when compared to the Euro and Dollar, is also beginning to attracting people from other countries to visit the United Kingdom as they get more value for their money (BHA, 2009). PriceWaterhouseCoopers also reported that in its March 2010 tourism research that after 18 months of recession, the economy is now moderately recovering and so are hotel occupancy rates. Data for London hotels such as the Holiday Inn and Holiday Inn Express indicated a turnaround in the 4th Quarter of 2009 coinciding with the reported economic recovery. Provincial occupancy rates are still projected to decline but not as steep as what happened in 2008. Economic growth, however, is expected to be modest and so is the return of corporate visitors, transient guests and conference participants. Hence, only significant gains are expected for the year 2010 and 2011. Management Practices From the data indicated in the previous discussion, one can see that there is a significant shift from luxury brands to budget hotels and that people prefer short breaks. The trend is also to decrease room rates as competitors try to attract what is left of the visitor population. Noteworthy also is the fact that business related travels have decreased while domestic visits are on the rise. Having this information, we can now proceed with the determination of management practices. Revenue Management From 1990 to 2004, UK Tourism has seen tremendous positive growth. The first part of 2008, in fact, saw a boom in the hotel business as foreign demand increased leading to a high Gross Operating Profit (GOP) for most hotels (Visit Britain, 2010). With profits running high, many hotels operators were less concerned with the amount of cost control system in place. In the face of the economic crisis and decreased demand, hotel operators should become conscious of how to manage their revenues. Revenue management in the hotels sector involves the anticipation of demand so that pricing and inventory management techniques that maximize the potential revenue for the ‘perishable inventory’ can be determined. The hotel sector is unique because the main product that they offer, the rooms, depend on time. Once a room is not sold tonight, the opportunity for sales is lost forever hence the term ‘perishable inventory’. In principle, revenue management calls for an accurate demand forecast so that pricing and volume tactics can be targeted at specific periods in time. Basically, this involves ‘selling the right product at the right time, at the right place at the right price and the right guest’. Hotels should no longer stick to the former practice of charging the same prices and offering the same services as before (Nikolas, 2009) We can see that revenue management is made of three core components namely: time, price and volume. Hotels should respond to the changing times of the market by adapting appropriate pricing schemes and maintaining the right services. For example, the manager should contemplate whether it is still financially viable to maintain spas and in-house restaurants? To be able to address the core components, information gathering is essential. Since trading of information between hotels have been illegalized in the European Union, hotel management can hire professional help from companies tailoring to market research. They can provide information regarding Revenue per Available Room (RevPAR). Even public agencies such as Visit Britain (2010) and PriceWaterhouseCoopers publish information regarding the overall performance of the hotel industry and these can be used to assess performance. Some examples of the data were presented earlier in the discussion. The statistical information on RevPAR can give an idea of how the hotel is faring with other competitors. An example is provided in Figure 5: From the data for October to Nov 2008, one can see that the RevPAR % change for the competitor has declined to -24.7 in November from -19.5 last October while our hotel declined only -15.0 from a former -27.1 last October. However, the competitor bounced backed to only -19.9 % change while our hotel suffered -24.9 % change in December of 2008. These values give us a measure of how well our own hotel is performing. A deeper investigation on why the other hotel is performing relatively well in an economic downturn could provide valuable insights to our hotel as well. From the statistical data presented earlier, the management should realize that the prices of hotel rooms are going down. They can use the data for city-by-city room reduction rates as a benchmark for their own rates. Customer composition is also changing as local tourist dominate the scene indicating that services catered for international tourists can be postponed or not maintained for the time being. Hotel operators could also re-tailor their customer experience schemes to make the most of their short time breaks from the previous long stays. These are just of the information one can come up under the revenue management scheme. Information gathering activities can also be integrated in the hotel operations. Data regarding reservation conversation ratios or the amount of calls actually translated into a booking can be acquired by instructing receptionists to log the calls and reservations made. This data can help in providing accurate demand forecasts. There are other information gathering systems that can be put in place. It is up to the manager to determine the best system for the implementation of the revenue management (Nikolas, 2009). Guest Satisfaction and Customer Care When business is good, the benefits of quality assurance programs such as training, guest research and customized services are easily recognized and justified. In the face of the severe economic downturn, however, these programs are usually the first to go. For example, management may cancel scheduled training programs or reduce room service operating hours to cut back on costs associated with maintaining room service cooks and attendants. Attractive as it may seem, cost cutting measures involving sacrifices affecting the quality of services, can be detrimental to the hotel’s overall operations. The manager must realize that as customers have less disposable income, they become more discerning and sensitive to their vacation experiences which they will broadcast to their peers. He must also realize that hotels mainly rely on customer experiences and it is the hotel staff that would make or break their impression on the services offered. Thus, a careful contemplation on the benefits and harm of employee layoffs or reduced working time is called for. When it is clear that employee layoff is necessary, Visit Britain (2010) recommends hotel owners and operators to implement the following measures to keep the remaining workforce from being alienated: Communication Making everybody feel part of the team is a common management advice but in the case of the hotel industry, there is an additional requirement of inspiring them to become good hospitality providers. The economic crisis further makes this requirement hard to achieve. Nonetheless, a manager must provide a fun and engaging environment for ‘keeping in touch’ meetings. This is where the management informs and explains the challenges faced by the business and the steps it will to maintain financial viability. The hotel staff must also be provided information on forecast and targets. Our discussion on the Revenue Management scheme would prove valuable information for explaining and answering questions of the staff. Discussions involving specific information regarding bottom line profits and salary discussions should generally be limited. The staff should just be made to appreciate the urgency of the situation and be able to contribute solutions. By upgrading the staff this way, the manager will be able to cultivate a renewed sense of belongingness and commitment to the hotel’s quality service goals. Training Expensive, outsourced training programmes can be discarded and replaced with in-house basic customer training courses developed and given by the management. Most department heads would have undergone training which they could use to come up with a tailor-made course. This saves up money for consultancy and training provision costs. In this time of crisis, a system of on-the-job training and handing-down of experience should be established to minimize the need for outsourced training. Most department head will have qualms regarding this system as it will present added workloads but they should be made aware that the training could also benefit them in the future as they can rely on somebody to do some of their responsibilities. Empowerment With the two staff-oriented strategies, the hotel should have a properly informed and better trained people without costing too much for the company. Next is the issue of empowerment. Oftentimes, decision making on small matters is left completely to the supervisor. Empowerment involves giving waiters the authority to decide on small matters such as giving a discount or complimentary drink to a customer complaining of the food not being good. Giving these small and controlled decision-making powers to qualified employees has been known to make them treat customers as if they were a guest in their own house. Cost Control Measures to control costs and wages are inevitable but it must be done with customer satisfaction and employee motivation in mind. To minimize the need to halt training provision, reduction of working hours and layoffs, the management should look into cost-cutting measures with its suppliers. Companies supplying hotels considers would also want their business afloat indicating that they should be open to contract renegotiations. Significant savings can be realized if all suppliers are amenable to price adjustments. Management should also bear in mind that the economy is expected to recover. Hence, they should be cautious in implementing drastic cost-cutting measures as they may be unable to bounce back when the Olympic-driven demands come in. A long-term view should always be adapted. Conclusion Hotel business is down in the United Kingdom leading hotel managers in a rather desperate situation to ensure the continuity of the business. As our analysis would indicate, hotel managers should establish systems for accurate information gathering and expense analysis. This way, the manager can know what decisions to make. While sacrifices are inevitable, the manager should also see to it that customer experience is not compromised achievable through hotel staff motivation procedures discussed earlier. References: BDRC (2009). Will the recession change the UK Hotel Industry. Retrieved from 09 April 2009 from www.bdrc.co.uk BHA (2009). British Hospitality: Trends and Developments 2009. BHA Publications: London. Gurtman, J. (2010). How to Think About Pricing Strategies in a Downturn. Harvard Management Update, Vol. 7, No. 3, March 2002 Nikolis, N. (2009). The Effect of Yield Management on Hotel Chains. Travel Trade Gazette: UK. PriceWaterhouseCoopers (2010). UK Hotels Forecast: 2010 and 2011. PCW Publications: London. Visit Britain (2010). Headline UK Tourism Trends – 23 February 2010. Retrieved 09 April 2009 from www.visitbritain.com Read More