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Evaluating alternative hotel development models

The client

Director of international development – global publicly-traded company with hotel interests.
Location: Global Project

Background

The client is the owner and operator of ABC brand, one of world’s largest hotels businesses with more than 480 locations.
The Board’s strategy is to concentrate management and capital on growing those businesses in which there are market leading positions and strong growth potential. A strategy consultancy has been engaged to start the assessment of the locations for development and the first output from this exercise is to be reviewed at a forthcoming Board meeting.

Without wishing to anticipate the Board’s decision in this matter, executive management’s current opinion is to focus on the opportunity that is presented by major brand development in two major economies, as well as ensuring that existing joint ventures are also effective in delivering large scale brand development quickly.

The business model for such development is yet to be agreed. The question is whether the business should develop through outright ownership, through leasing or through management contracts or through joint ventures. The client wishes to present a paper to the forthcoming board meeting that discusses the potential risks and rewards associated with these alternatives as applied to ABC development in the two identified countries.

Project scope

Initially, Hotel Solutions developed a model that suggested the level of hotel profitability that can be enjoyed by ABC in each of the two countries. To do this, we first accessed the only database of hotel operating performance available in the public domain. We extracted per available room and per occupied room costs and revenues from this survey and using our knowledge and experience normalised it to reflect the performance of an ABC rather than the hotels (mainly four and five-star full-service hotels) that contribute to the survey. To do this, we estimated the occupancy and average rate that ABC will achieve in these countries.

Hotel Solutions extended the model to suggest the levels of revenue and profitability that will flow from an aggressive expansion in each country. Using the current experience of ABC, Hotel Solutions estimated the level of corporate overhead required to support each of these businesses. There was also a calculation of the overall capital investment required to put in place the rooms. This was based upon ABC’s experience elsewhere adjusted to reflect any difference between land and construction cost in the identified countries that could be identified from data in the public domain.

With the capital and operating models for both countries developed, Hotel Solutions then prepared indicative estimates of returns that can flow from each of the different business models (ownership, leasing, joint ventures and management contracts).

Hotel Solutions prepared a written report to include not only the financial investment required and returns that can be expected from the alternative business models but also a short analysis of the business risks associated with each model.

 


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