Key Elements in the Hotel Feasibility Study - Report Example

Feasibility Study for Hotel: Key Elements Contents Introduction 3 Key elements in the hotel feasibility study 3 Site evaluation 4 Analysis of the market area 4 Demand analysis 5 Competitive supply analysis 6 Total project cost estimation and financial analysis 7 Recommendations for facilities 8 Other recommendations 8 Conclusion 9 References 11 Introduction A feasibility study is the initial main tool for assessment of development planning of hospitality, leisure or any events facility. In any feasibility study, data pertaining to market and finance are collected, then assimilated and finally analyzed. It is a creative, rational and objective process the purpose of which is to determine whether it is feasible to proceed with the project under consideration, defining the appropriate and optimum scope for quality of facilities along-with quantification of the prospects for assessing financial success or failure with an input of reasonable amount of accuracy (Chon and Maier 2009). The feasibility study investigates the need for the proposed project with proper estimation, documentation and support in order to satisfy the client that the proposal has justifications to go on the floor. There are certain elements required to be taken into consideration in the feasibility study so that the report can be prepared with accuracy and appropriateness and the decision regarding the opening of the facility could be taken (OFallon and Rutherford 2010). The essay presents the key elements of the feasibility study carried on for the project of developing a new hotel i.e. in the hospitality sector. It includes sources of information that are helpful in conducting the feasibility study. Key elements in the hotel feasibility study A hotel feasibility study is required to be carried out for assessing the economic viability of the proposed hotel looking for the business opportunity and roadblocks simultaneously in order to identify the successful realization of the project. There are three major and crucial components in the study of the hotel feasibility report. They are preparation of market feasibility study, costs estimation for all elements of the proposed project and determination of sources of financing (Hotel Feasibility Study 2012). In a typical hotel feasibility report, the key elements are evaluation of the site, analysis of the market area, demand analysis, competitive supply analysis, recommendations for facilities, forecast of income and expenses, and total project cost estimation (Wood and Brotherton 2008). Site evaluation In order to assess the suitability of the proposed project, there is the need for assessing the size and topography of the site. Noting down the uses of the surrounding land along-with proximity to major demand generators is required. The location of the site in relation to the key highways and inter-states is considered for identifying the ease of access for the motor traffic vehicle (Hsu and Powers 2008). This element has different level of significance for different forms of lodging operations. For example, accessibility and visibility is the major factor for hotels that target individual tourists, while tourists on business travel are often interested in using public transportation. Lodging operations that depend on demand operators, such as an airport or convention centre is required to take into consideration these demand generators (Hsu and Powers 2008). Analysis of the market area Demographic and economic indicators show the current trends and they are employed for supporting and demanding growth projections. Several indicators’ history is reviewed for identification of trends and project visitation (Chon and Maier 2009). In order to identify the commercial visitation to the place of proposed hotel with convention volume, indicators such as income, population, employment, retail activities, airport passengers, occupied office space, cargo traffic and relative development of the area are also taken into consideration. Estimates on vacationer visitation are based on highway traffic, statistics on past tourist visit, visits to nearby attractions with tourism development plans of the area are studied and analysed (Hsu and Powers 2008) Demand analysis It is another key element in the preparation of the feasibility report for the new hotel proposal. It is analyzed and studied through major market segments, such as meeting, commercial and vacationer segment. There are two approaches for analysing the demand. The first is the build up approach (Piotrowski 2010). In this approach, the demand is estimated through initiating interviews with people who are connected to travel generators. It leads to determination of the amount of demand that each market segment provides on a weekly basis or monthly. Other crucial information related to visitors such as spending patterns, length of stay, number of people gathered for a party, etc. in the surrounding area where the construction of hotel is proposed are obtained and analysed (Piotrowski 2010). Another method for estimation of demand is totalling of number of rooms that are occupied in the local area and lodging operations. The data can be obtained from local convention centre or visitors bureaus or through calculation of tax figures of the room that can be obtained from local government offices (Hsu and Powers 2008). Demand estimates that are obtained from the two methods are then required to be compared so as to cross validate the information and its assessment. The future demand forecast is another component and is obtained from analysing current demand and projected rates for growth. The two factors are estimated on the basis of the economic and demographic factors that are studied in the analysis of the market area (Hsu and Powers 2008). Competitive supply analysis The next critical element in the feasibility study is competitive supply analysis. It refers to the identification of existing as well as planned properties that would compete directly and indirectly with the proposed hotel plan in the hospitality sector. Relevant statistics that is required to be included are number of rooms, location, average rate of occupancy of rooms, rates of rooms, target markets, facilities and amenities. The basis for the analysis of the competition should be set in the respect of the demand in a specific and particular market. For instance, well established competitors in the area are not as considerable as a threat in the market where there is excess capacity or the market is underdeveloped (Jagels 2006). There should be a competitive survey for evaluation of strengths and weaknesses of the existing and planned hotel properties that will compete directly or indirectly with the hotel proposed to be constructed. Evaluation of the market determines determine the situation of the existing supply which is based on the reputation, product, positioning, appraisal and the markets these supplies attract. The analysis of the trading performance of the competitors in the place is closely looked at in terms of their pricing structure, published tariffs, discounting policies and sensitivity to the price both during the weekend and during the midweek, which affects the average room rate (Jagels 2006). The future supply assessment is based on the interviews with hoteliers, planning officials, tourist officials, hotel companies, etc. so as to identify whether there is threat to the proposed hotel construction (Jagels 2006). Total project cost estimation and financial analysis It includes thorough market analysis with as many aspects as possible that are different, both existing and projected aspects that may have an influence over the operations of a hotel (Hotel Feasibility Study 2012). Generally, under this analysis, there is projection of cost, income and expenses for a period of five years due to the reason of nature of development of hotel business as the hotel cannot be developed overnight. It takes years to well establish the operations and image of the hotel (OFallon and Rutherford 2010). There is projection of the profit for each of the operating sectors of a hotel such as spa, division of rooms, F&B, wellness, etc. In addition to this, financial analysis projects costs both fixed and variable costs along-with calculation of gross operating profit (Venter and Cloete 2007). Preliminary cost estimates are made based on the scope of the proposed project. After its completion, there is more detailed capital budgeting projection which should be refined at regular periods throughout the developmental plan. Every revision is given a date so as to avoid confusion regarding the most recent estimates (Fercher 2006). There is requirement of rigid cost controls and periodic reviews of total expenditures incurred, for ensuring that the hotel is completed well within its economic limits. Cost elements pertaining to the development of a new hotel that should be included in the feasibility study are land, construction, interest during construction, operating equipment, furniture equipment, inventories, pre-operating expenses and working capital (Birchfield and Birchfield 2008). The cost of land depends on purchasing or owning the land. Taxes and costs pertaining to clearing of the land are included in the overall cost. The construction cost is the largest cost element in any hotel project. Inventory costs are categorized into beverages, food, cleaning and paper supplies, guests’ supplies, engineering supplies and stationery. Pre opening expenses pertain to payroll, training costs, sales expenses, advertising, travel etc. All these pre opening are factored into the overall budget (Piotrowski 2010). Working element is also considered in the financial analysis for determining cash flow health of the upcoming hotel (Venter and Cloete 2007). Recommendations for facilities There should be proper analysis of the relative profitability of the outlets of food and beverage beyond just departmental profit margins. The key element to take into consideration is that the feasibility report should enable the owner of the proposed plan to decide on whether to manage, lease or franchise the hotel plan (Fercher 2006). Specific decisions regarding facilities will be required to be made on the basis of the type of hotel and the expected rate of arrival of guests. Space allocation and budgetary factors are the influential factors in the budgetary design. A resort in the hospitality sector will have much more options and space for recreational facilities and guest accommodation in comparison to a small suburban hotel which is located on a highway (Birchfield et al 2008). Survey should be conducted for all the other facilities, such as banqueting, special events, sports facilities, memberships, entertainment facilities and their rentals, etc. so that their feasibility regarding their rate of utilization can be obtained (Jones and Lockwood 2007). Other recommendations The above mentioned are the key elements that are required to be taken into consideration when developing the feasibility report. The recommendations for a good feasibility report is mentioned below shedding light on some critical elements that can make the report more analytical and thorough. One of the critical subjects in determination of the success of the new hotel project is the level of debt and interest rates. There should be proper mention of the relationship between the projected results for bottom line and the level of debt service for the proposed hotel (How To Improve Feasibility Studies 2012). Generally, marketing expenses are projected as the four to six per cent of the gross revenues. However in any new hotel, it is approximately half of what is required in the first few years of operation. Furthermore, there should be reflection of the real volatility in the market place by projections on occupancy and average daily rate (How To Improve Feasibility Studies 2012). Conclusion Feasibility study is an important tool to analyse the economic success of any new plan or proposed ventures. It helps in analysis of the viability of the project both in the terms of market prospects and financial viability. The hotel feasibility report has several critical elements such as site analysis, cost estimation and projection, projection of income and expenses, analysing demand supply forecasts for identification of the future success and development of the hotel, recommendations related to facilities, etc. With the help of inclusion of these elements in the feasibility report for a hotel plan, the report becomes able to present thorough and well analyzed facts for the development of the proposed plan in front of the owner of the proposal. The site analysis takes into consideration the land and location whether it is perfect for the hotel or not. The demand supply forecast analyses the completion and operational requirements, the cost estimation presents well-analyzed information on budgeting and other financial factors, and the facilities recommendations include criteria for level of facilities required to be installed. The key to the good feasibility report is presentation of the study and analyzed information in such a manner so that the owner can take the appropriate decisions. References Birchfield, John C. and, Birchfield, J.J. 2008. Design and Layout of Foodservice Facilities. John Wiley and Sons. Chon, K. S. and Maier, T.A. 2009. Welcome to Hospitality: An Introduction. Cengage Learning. Fercher, W. 2006. Feasibility Studies for Hotels: An Analysis of Essential Elements in the Preparation Process of Feasibilitry Studies for Hotel Projects. Diplomica. Hotel Feasibility Study. 2012. [Online]. Available at: http://savath.net/en/services/planning-development-hotel-projects/hotel-feasibility-study [Accessed on: 18 February 2013]. How To Improve Feasibility Studies. 2012. [Online]. Available at: http://www.ishc.com/uploadedFiles/PublicSite/Resources/Library/Articles/HowToImproveFeasibilityStudies4-28-04.pdf [Accessed on: 18 February 2013]. Hsu, C. H. C. and Powers, T. 2008. Marketing Hospitality. John Wiley and Sons. Jagels, M.G. 2006. Hospitality Management Accounting. John Wiley and Sons. Jones, P. and Lockwood, A. 2007. The Management Of Hotel Operations. Cengage Learning EMEA. OFallon, M.J. and Rutherford, D.G. 2010. Hotel Management and Operations. John Wiley & Sons. Piotrowski, C.M. 2010. Designing Commercial Interiors. John Wiley and Sons. Venter, I. and Cloete, C.E. 2007. A framework for successful hotel developments. [Online]. Available at: http://repository.up.ac.za/bitstream/handle/2263/5588/Venter_Framework(2007).pdf?sequence= [Accessed on: 18 February 2013]. Wood, R.C. and Brotherton, B. 2008. The SAGE Handbook of Hospitality Management. SAGE. Read More