The Plasencia Group, Inc.
Hospitality Transactions & Consulting Services

Hotel Crisis Strategies

By: The Plasencia Group, Inc.

Over the past six weeks, The Plasencia Group has been engaged by numerous hotel owners to review the performance of the hotels they own, analyze local lodging markets, and assist in the development and validation of future property performance forecasts. In virtually all of our engagements and discussions with owners and managers, the phrase "lack of future clarity" has sounded like a drumbeat. Entering the fourth quarter of 2001, hotel owners and operators have responded to the combined effects general economic slowdown and the September tragedies with varying degrees of cost containment steps in an attempt to mitigate 2001 profit erosion. Many owners and operators, however, are experiencing a degree of planning paralysis with regard to the formulation of 2002 business plans and budgets. Operators and hotel employees require a clearer sense of direction going into the New Year in order to effectively run their businesses and to plan their work lives. Bernard Murphy, our West Coast Vice President, has prepared the following suggested steps to planning in an uncertain environment such as the one we find ourselves in today.

Establish an Expectations Hypothesis 

The first and most crucial step in developing a process to deal with the challenges currently faced by the industry involves the establishment of a more global view of the lodging market and a translation of that view into a 2002 performance assumption. Examples of such an expectations baseline might be: "Return to occupancy levels experienced in 1999" or "Occupancy declines of 15% from 2000 levels". The key point is to establish some definitive expectation of the baseline to be used by operations staff. The development of a baseline hypothesis need not be done in the dark, however. Some suggested areas of data analysis and inquiry would include: · Review the lodging demand characteristics of a hotel's local market. Which customers and demand segments are likely to be adversely affected during a downturn? Which customers and demand segments are likely to benefit? · How is leisure demand likely to be affected? Evaluate airline inbound seat capacity and load factors. Is your market a drive-to location? What are the area's leisure attractions, how have they been affected and what are they expecting for the next year? · Look to history for lessons. How did your market perform during the last recession of 1990-1991? How long did it take to recover and why? How and why has demand changed in the intervening years? What supply changes have taken place and how have they affected the local market?

Build Your Top Line 

After an evaluation of your desired market positioning, hotel physical condition, competitive hotel changes (additions, deletions, renovations, etc) and other internal and external factors, you should establish realistic expectations as to your hotel's market demand penetration and the consequent occupancy projections. Critically evaluate this projection by: · Measuring rooms already on the books and the reach required to achieve your projections. Is it realistic? Conservative? · Determine the price level is the hotel most likely and able to achieve to hit the desired demand penetration target? How have competitors reacted with their own price adjustments? What are current and potential customers telling you about their pricing expectations? · If you elect to significantly cut prices to achieve your desired market penetration, consider how long will it may take to recover your original pricing power (longer than you think - look at the industry's history). What implications will rate dilution have on your perceived product positioning within the marketplace? Will it affect the quality you should be delivering to your guest? · If you decide to maintain higher rate levels than competitors, at the risk of losing occupancy, identify those "value added" elements that can be introduced and promoted to convince the customer that a few more dollars is well worth it. · What is your forecasting team telling you? Demand forecasts (particularly transient forecasts) and automated yield management functions require very close scrutiny in the current environment. The forecasting algorithms utilized by these software programs are likely incapable of fully factoring the scale and velocity of the post September 11th lodging demand declines. The fine-tuned occupancy forecasts derived from considering the items listed above will then allow the hotel operator to build other revenue projections and, consequently, a total revenue budget.

Build a New Business 

During our recent discussions with owners and operators, we have heard 2002 operating expense projections characterized by a wide variety of sweeping statements such as "the world has changed", "hold all margins constant", "cut costs by 10% across the board" and similar missives. While it is true that the current operating environment presents hotels with extraordinary uncertainty, it also offers a superb opportunity -- while consumer sentiment is supportive -- to take a step back and to re-engineer your business by: · Establishing (or re-establishing) productivity expectations and consequent staffing guidelines for each production function such as front office, bell staff, PBX, laundry, housekeeping, catering, restaurants, gift shop, business center, etc. · Zero-basing all labor in undistributed departments such as A&G, Sales & Marketing, Engineering, and Human Resources. · Establishing very specific expectations and measurement tools of return on investment for each sales, advertising, marketing and promotional dollar to be spent. · Forgetting the concept of "fixed costs". Evaluate every single amenity, outside vendor, contract and lease, kilowatt-hour, operating policy & procedure, printing job, AND capital investment using the following filter: Does the function generate (or facilitate the generation of) incremental revenues, reduce expenses or enhance the guest experience? If the latter, is the enhancement significant enough to allow for a significant rate increase? · Looking for areas that might actually generate revenues. Outsource your own engineering staff to smaller area properties, "lease" your employees to sister hotels and even competing properties during their heavy occupancies or large events at their hotels, take on additional work from other properties in your own laundry if capacity allows it, etc. At the end of what will admittedly be an arduous process, the owner and operator will be rewarded with not only a well-reasoned operating plan for 2002 but also a more efficient and productive operating business. Steps implemented today will likely present even greater benefits when the economy picks up once again.

What If We Are Wrong? 

There is no doubt that significant cloudiness exists on the horizon as a result of recent events. Further, barely a week goes by without a warning about some new or potential threat or disturbance. Yes, the expectations hypothesis could be faulty - by a little or a lot. We have seen a flurry of what have been called contingency plans hastily constructed and implemented since September 11th. We submit that these are not really contingency plans but rather reaction plans. Hotels have long maintained fire emergency plans, natural disaster plans, guest incident plans, and emergency communications plans to better manage unexpected disruptive events. Everyone (management, staff, guests) can act more quickly, smoothly and effectively if they know, well in advance, what the expected response plan is. Hotel operators must now develop financial "disaster" plans in advance of economic turbulence. We suggest that subsequent to the development of the upcoming budget as suggested above, true contingency plans must be developed to address revenue generation, expense control and guest experience maintenance in the event of a pre-defined shortfall threshold. These threshold triggers might be based on: (1) Occupancy levels; (2) RevPAR levels; or, (3) certain levels of total revenue. And each trigger must demand very different actions that will be taken based upon several degrees of severity, such as 15% below budgeted RevPAR, 30% below budgeted RevPAR, and so on. For each of these thresholds, very specific action steps would be specified in the plan. Some examples might be: completely closing outlets, guest floor closings or the complete shut-down of a wing, guest amenity reductions, housekeeping service level modifications, stress-period promotions, concentrated sales missions, and market segmentation shifts. Each contingency should have a revenue, cost or service implication attached to it.

Plan to Take Control 

The lack of clarity drumbeat will likely continue for some time to come and many events that will have deleterious effects on the lodging business will remain beyond our control. However, owners and operators can clearly exercise increased control over cash flow variances by establishing several theories of the future against which to operate, re-engineering their business to match the confirmed theory and by planning in advance for actions are to be taken in the event of deviations from that theory.

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In the coming weeks, The Plasencia Group will provide on our web site a series of cost containment and incremental revenue generation ideas and suggestions.  And in response to the many questions we continue to receive regarding the valuation of hotels and resorts, we will soon be publishing an article addressing possible methodologies to be used in these difficult times.  Having dealt with similar crisis situations in the past, the staff of The Plasencia Group is already bringing its expertise to bear on behalf of severl of our clients in need.  If we may be of service to you or to obtain more information about or Crisis Strategies Services, please call Lou Plasencia at 813 / 932-1234 or email him at lplasencia@tpghotels.com.   Previous articles and newsletters may be found at WWW.TPGHOTELS.COM.

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The Plasencia Group specializes in implementing and consummating disposition programs for institutional quality hospitality investments throughout the United States, Canada and the Caribbean.  The principals of The Plasencia Group, and our sister firm, Thompson Calhoun Fair, have a combined experience level of nearly 200 years in the real estate and hospitality industries. During the current investment cycle, we have sold 290 hotels (including 19 portfolio transactions), equating to nearly $4.0 Billion in transaction value. We have also successfully marketed twenty-one hotels encumbered by long-term brand management contracts, with a combined transaction value of $775,000,000.

The Plasencia Group, Inc. - Tampa International Airport - Tampa, Florida 33607
Telephone: 813-932-1234
Facsimile: 813-932-4321
Website:  http://www.tpghotels.com

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