Synchronised for Success - The Red Sea Development Company
By Jay Rosen, Head of Finance and Investments, The Red Sea Development Company
In the lead up to the 2019 Arabian Hotel Investment Conference (AHIC), we asked a number of industry partners how they synchronise for success.
The Red Sea Project, one of three giga-projects under the direction of the Public Investment Fund, is unique in many ways. Its strategic location on Saudi Arabia's Red Sea coast, the diversity of natural environments that make up the destination, the largely unexplored cultural and historical treasures within the region, newly created business friendly legal and regulatory framework and the world class residential, entertainment and commercial facilities planned for the destination are all compelling reasons for business partners to consider participating in the project.
Hospitality is the anchor of The Red Sea Project with nearly fifty hotels totaling over 8,000 hotel rooms. Having multiple competing hotels in the same destination is far from unique - any large-scale destination in the world will have multiple hotel owners and multiple hotel operators vying for market share in a highly dynamic market. However, having every hotel in the destination sharing common ownership, as is the case at The Red Sea Project, is unusual and unique and fundamentally changes the dynamics of the market. And that means that the framework governing the relationship between the hotel operators and the owners - and, by extension, the destination as a whole - has to change.
By way of illustration, consider a situation where multiple hotels are competing to attract a large group booking to the destination. In a traditional market, where each hotel has a different owner, each property would offer a series of competitive bids and incentives in order to secure the booking and the ancillary spend that would accompany it. The winning hotel (and owner) would secure the revenue. The unsuccessful brands and owners would receive nothing.
However, in a market or destination where every hotel shares common ownership, each successive competitive offer is potentially cannibalizing the other. No matter which brand wins, this 'race to the bottom' has a detrimental impact on all of the hotels and the overall destination itself, adversely impacting the commercial viability of the entire destination.
The search for human capital (i.e. hiring employees) in such an environment creates another potential imbalance. In a dynamic market with a significant population of experienced talent, operators can and will hire from competitors and offer salary packages that are commensurate with the need to acquire the best people from the talent pool to the detriment of their competition. In a destination like the Red Sea Project, however, every salary increase offered by the operator translates into higher costs for the hotel owner across the entire network and every employee lured from a competitor creates a new vacancy that can most conveniently be filled by hiring from another competitor. The inevitable result is spiraling hiring costs that affect both the owner and the operator to the detriment of the destination.
What is needed to complement theses fundamental competitive dynamics that exist in every market is a more collaborative framework that focuses on the overall destination just as much and in addition to the individual assets. Success in this model translates into success for the individual brands that operate there and for the overall destination. This revised model dynamic, focused on the destination as a whole, will maximize return for all stakeholders - the rising tide lifts all boats.
At the Red Sea Project we are seeking to create just such a relationship. As a new destination, we do not have the existing dynamic market that characterizes other destinations. Added to that is the fact that we aim to set a new global standard in sustainable development at every stage of the development - from planning to development and construction to operation. Implementing and maintaining this commitment over time is a significant undertaking and one that is best served by retaining custodianship of the destination and the delivery of long terms goals. We take sustainability extremely seriously and as such, are best placed to own destination-wide policies that will ensure the protection, preservation and enhancement of the environment.
That is why at the Red Sea Development Company we are implementing a framework that emphasizes synchronicity and collaboration between brands that are often competitors in other markets. It is a framework that recognizes the fact the global competitiveness of the destination should be a primary consideration both for the hotel owner and the operators. From the perspective of the owner, any other alternative is a zero-sum game.
This framework also creates opportunities for deeper collaboration, such as a sustainability council which shares and implements best practices in sustainable operations. Or a cooperative marketing arrangement which brings together the chain marketing expertise of the brands with the reach and spending power of the destination. Or a talent council which coordinates training and development for people seeking to build their careers in the travel and tourism industry.
There are also opportunities to streamline operations through shared services such as laundry, security, landscaping, maintenance and even employee accommodation, which provide a far more cost-effective solution as opposed to arranging individual contracts for each property and takes advantage of the economies of scale that result from representing fifty properties. These types of shared services can support all of the assets within the destination at significantly reduced costs, streamlining operations and reducing the need for capital investment in individual, standalone facilities and equipment. Equally important is the assurance that across all properties, elements like safety and quality are being met, in line with destination-wide aspirations.
That is why we are being very selective in our choice of partners. We want to work with organizations who share our values: our commitment to sustainability, our unwavering dedication to providing seamless, customized visitor journeys supported by the very highest standards of personal service and our belief in the power of tourism to drive positive outcomes for the people and the economy of Saudi Arabia.
Simply put, the way to create the most value for all stakeholders is to synchronize activities and collaborate to achieve the broader objectives of the destination. If the destination succeeds, then so do all of the constituent parts, including the many stakeholders and the assets themselves. If the destination fails, then all will share the same fate.
True synchronicity is possible only when there exists a profound commonality of purpose. When the destination, the asset owner and all stakeholders work in a collaborative framework, the basis of competition moves from a price-based to a value-based model. Under such conditions everyone prospers: not only the destination, the owner and the operators but also the individuals and the communities that rely on the destination for their future livelihood and well-being.
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