World Panel
Viewpoint21 January 2021

Is the wolf scratching at the door? Lessons learned so far from the COVID era...

Hotel Ownership, Development and Management

— 10 experts shared their view

share this viewpoint
This viewpoint was created by
Demian Hodari, Associate Professor of Strategic Management at the Ecole Hôtelière Lausanne (EHL)
Peter Norman
Senior VP, Acquisitions & Development at Hyatt Hotels Corporation

The journey you started with us several years ago I believe has put us at an advantage in reacting and dealing with today's challenge that is having such an impact on the hospitality industry. The way we now approach our business strategy, at both hotel and regional levels, has been a cornerstone to how we have dealt with what COVID has thrown at us with our Vision and Purpose a key foundation on which we have built our responses and actions. I believe that one of the key learnings has been the importance of a business strategy that is relevant to our organization, culture, fully thought out and embedded into the organization.

Comment
Guy Pasley-Tyler
Director - Portfolio & Fund Management at Archer Hotel Capital

Our core investment strategy has been to seek out high quality assets in central locations in the top 10-15 European cities, typically attracting a high proportion of international (non-European) guests. Historically, we have seen assets fitting this description achieving higher returns, in part due to their greater resilience in a downturn. However, COVID-19 has certainly given us cause to reflect on this approach as in this downturn these types of assets have tended to underperform due to deserted city centers and a practical embargo on international travel. see more

It remains to be seen how much the changing role of the office might impact city centers in the long-term but it was our belief even pre-pandemic that leisure demand would be the major driver of growth over the next 10-15 years and that remains our conviction once the pandemic eases. Consequently, I don't think our investment strategy will change materially in terms of the real estate we seek to acquire but the pandemic has emphasised to us the importance of the capital, rather than the operating counterparty, having control over the asset and its destiny so we will seek opportunities where we are better able to exercise full control.

 

Comment
Saar Sharon
Managing Director at West Ridge Asset Management

The past six months of the COVID-19 pandemic has forced companies and individuals to reconsider not only what they do, where they do it, and how they do it, but also why they do what they do (or don't do what they don't do). In other words, it has forced executives to reflect more intensely on both the external environment in which their firms compete and the ways in which they do so. Strategic thinking, management, and implementation have never been more important than now in the hospitality industry as countless firms across the world are fighting for their survival. As Professor Richard Rumelt once wrote, successful companies may not actually engage in strategy work until the “wolf is at the door.” In today's COVID-19 world, not only is the wolf at the door, but he is scratching to get in, ready to blow the house (or hotel) down. The question, therefore, is what have you and/or your firm learned most about your business strategy, and what are you doing about it? see more

Businesses face risks or "wolves" periodically and it would be unrealistic to think a business can avoid such periods. The theory is that we should be able to anticipate it and prepare for such risks as good boys and girls scouts.

I do not agree with the above quote from Prof. Rumlet mostly because it is a generalization as some companies are forward-looking, anticipate, adapt, and reposition. Some do not. I agree with the undercurrent of his words that sometimes it is worth playing a good position game of chess but adaptation will only be forced by circumstances - when the crisis is at the door. In business terms, this is what working capital is for. If you have a sound, lasting business model and you are well-positioned, why change the model just because there is a global pandemic? Take a breather, make some adjustments, and when sanity returns engage. Alternatively, I would agree that until the crisis unfolds and you have a sight of solutions there is no point in adaptation just for the sake of it. You could use scarce resources to reposition and take your business in a wholly unviable direction. 

My business strategy has always been reliant on integrity and personal relationship and I sought to leverage that. Position the business in the market, target the right capital and the right acquisitions, and do well. My view has shifted throughout the C19 crisis from it being a medical emergency to it being a shift in political thought. This is not the medium to discuss it but the view I have is that although C19 is a serious health threat the response to it is entirely political, disproportionate, and harmful. I have the UK in mind below but this is true for most countries that adopted this strategy. Medical establishments have developed statistical models of critical bed usage in winter and built a yearly calendar of response to it with a very small confidence interval margin. It seems that every winter the press is reporting about bed shortages, canceled elective operations, and often excess deaths. It seems the administrators of health systems have not left room for intensification of pressure through the pandemic. They have not adapted during the pandemic either and did not invest in the infrastructure. They have not invested in human capital (nurses) through the crisis; they have not added real capacity and therefore the only action they can take is through limiting human behavior which has been unsuccessful and harmful. 

This is the environment we work in and it is important to understand it before we adapt the business.

Throughout the pandemic, I was looking for economic, political, and medical clues as to when hotel investments will return. I have come to realize it has been a political not medical or economical decision to disrupt hotels and hospitality businesses and it is therefore imperative, in the future to invest in other real estate asset classes that provide income. As much as I love hotels, other real estates will be acquired in the future. Secondly, hotel real estate will be repurposed to include other uses like co-working, membership clubs and I am working on such concepts. Thirdly, technology will replace Fourth, hygiene will become integral to the experience offering. The fifth strategy will be a long term customer-focused relationship with local communities and domestic markets.

I am undecided about geographic diversification yet the response has been overwhelmingly similar and global. I believe it is the wrong response but that does not matter. Business-wise we must adapt to it and there is no escaping lockdowns in most countries in Europe for example and many others in the world. There is no escaping the restrictions on hospitality as a sector; the sense it has been deemed expandable by the governments of the day almost globally; and, the impact of the enforced ban on international travel.

I am positive about acquisitions. This crisis will open doors as well. Prices will adjust, capital will be deployed. People will travel. The fact we are seeing pent up demand in leisure and to an extent, in business, will shine through when politicians will reopen the economies. Because it is a political decision to close economies, the reopening will be fast and the bounce significant.

Have a wonderful 2021!

Comment
Anders Nissen
CEO at Pandox AB

My experience is being successful has an ability to constantly develop its strategy and adapt business development and skills. Like a sports team how every day tries to improve. Therefore, the wolf rarely comes to visit. see more

Effects of COVID 19

I believe there is new knowledge and confirmation to be added to the hotel business. 

Market

Confirmation: the domestic market has always been the most important and the most stable segment. Most likely will the domestic business be larger than ever in 2021. Is this a long term trend? 

New knowledge: resort and leisure business is the most value-adding product segment. Not international business. 

Staycon segment is new learning. People how normally traveling frequently to international destinations travel, as a consequence of pandemic, domestically, and stay at premium hotels with has a luxury independent profile. The global brand does not fit in here.

Distribution 

Confirmation: local brands are more stable

New knowledge: local and regional brands strengths their positions vs global brands.

OTA challenge global brands more than ever.

Business development

Confirmation: the most important value-adding element for hotels is high-skill operations with a focus on productivity. 

New knowledge: more leisure products must be included in the hotels' product range.

Management and organization

Confirmation: positive and visible leadership is always key in crises time. The centralized organization is not a good model in this environment. 

New development: multi-skill, less reporting- better to talk, better to things, even if this wrong than to wait for attitude is the right to move.

Business models

Confirmation: specialization limits strategy development. The management contract with global brands is out. The fix lease model is out.

New development of hotels is an expensive and high-risk business. 

New knowledge: be active in the full value chain is value-adding. The management contract with the third-party local player is in. We need a new version of the Franchise Contract. More focus on key elements for distribution less on brand standards. 

Revenue lease model with share investment is in. 

Comment
Robert Herr
General Manager at The Bürgenstock Selection

The biggest learning about the business strategy is to go back and revisit the original plan and see whether it still holds in the new environment and changing context. This impacts mainly the long and medium-term strategy as the short term has been disrupted tremendously by this one-off event with potential huge long-term impacts.  see more

If the long-term business strategy is built on solid foundations and is built to be "crisis-proof" then it just may mean that certain goalposts get moved further away into the future or in some cases my be reached sooner depending on how the consumer responds to it in such an environment. 

Every crisis is also an opportunity, a turning point, which can either excel the business strategy or requires it to change completely in order to survive. It means also for our business that certain aspects of the business strategy may turn out to be even more relevant than before and others less. These aspects need to be calibrated again in a careful manner in order to be clear about the direction and focus one wants to steer actions and decisions that support that medium to long term strategy: For instance, if improving technology services for the guests especially to facilitate contactless and time-independent experiences (be it check-in, room access, payment of bills at departure, restaurant and spa bookings, etc.) was part of the business strategy to increase guest satisfaction, reduce operational and commercial inefficiencies or payroll costs, then this aspect of the business strategy may need to be accelerated to stay ahead of the competition and gauge more consumer attention especially in the current context. 

On the other hand, if the business and commercial strategy relied very much on having products and services geared towards a singular consumer group be it a business segment or geographic origin, that may need to be revisited and diversified for the future. The current global event has proven that being reliant just on one type of consumer could lead to business failure if that particular consumer group does not recover quickly enough to keep the business afloat.

So in essence, the existing business strategy for our own organization may not require a complete overhaul, but an adjustment in certain aspects of it because the long-term narrative is still valid, it is just being told in a different way for some parts of it. Being aware and reacting to it accordingly will then lead and propel the continued success of it also into the future.

Comment
Peter Szabo
Senior Associate at HVS Hodges Ward Elliott

Our key learning in 2020 as hotel brokers was the value of being nimble, allowing us to pivot and refocus our resources very quickly. As a large part of the transactions market froze, we transitioned from a number of forward-sale deals with developers to working with hotel operators needing to free up capital from owned assets, particularly in the resort market. see more

Our key takeaway remains the same whether the recovery is V, U, W or K shaped: being nimble, and continuing to provide highly personalized services to hotel owners. With an eye on the expected recovery and a change in sentiment starting in mid-2021, we have refocused our business and our strategy to suit this new hotel real estate landscape. We are closely following early recovery areas of the industry with significant pent up demand, such as leisure hotels, and this is where we expect further consolidation and transaction activity in the near term. 

Comment
Anne-Marie Auriault
Founder & Managing Director at Pimlico Asset Management, and Independent Board Member

2020 was a turbulent year for our industry.
Hotel owners have been highly focused on cash management: it is all about minimizing working capital and continue revisiting variable costs. see more

Many operators have adopted a zero-base budgeting model. They have also taken the view that many services/facilities are a stand-alone business model, and it can only reopen if we can achieve break-even.

Brands, hotel owners and asset managers are committed to working together, and we will work better on (re)forecasting and scenario planning along the year.

We have to remain flexible and take advantage of any opportunities as vaccine rolls out during the second half of 2021.

Comment
Ramsey Mankarious
CEO, Cedar Capital Partners

We have learned that our business strategy is still valid and is perfectly positioned to take advantage of the downturn. We have just acquired a hotel in the US and are analyzing numerous new opportunities.  see more

When times are “good” there are lots of new investors trying to acquire hotels because it is easy to raise financing. When this happens, prices of assets increase and we have more competition at less favorable returns. When there is a significant downturn (as occurred due to COVID-19), these “new” investors disappear because financing becomes much more difficult. For us, we are still able to get financing (as this is our core business and banks will only lend to the best during a downturn) and we are able to purchase assets at lower prices with less competition. 

Our business has always had its best times during severe market downturns (post 9/11, post-global financial crisis, and now due to COVID-19). 

Comment
John Willcock
General Manager at Macdonald Hotel Windsor

This COVID pandemic has forced us to “rip up the rule book” in a number of ways. Previously held assumptions on how we operate, our business mix and market trends have been reset and we are in the process of setting the strategy for the future, for as I write this the UK is in its 3rd lockdown. see more

Setting any form of strategy during this pandemic has its challenges for we are in a very fluid, uncertain environment and need to be extremely flexible, being prepared to change our plans at sometimes very short notice. This applies to government-enforced restrictions on business as well as consumer behavior and demand.

Pre-COVID, our business strategy was centered around the international conference and leisure markets, individuals, and tours. Not only have these segments provided zero volume since the first lockdown last March due to travel restrictions, but it is also inevitable that when restrictions are eased, they will not return to pre-COVID levels, at least not in the foreseeable future. This is particularly the case with the international conference market, which is predicted to be radically different now that firms are so reliant on technology to hold virtual meetings over the past year. Executives will question the need to commit to the cost involved in organizing face to face meetings when it can be done virtually at no expense. Individual international leisure is expected to be strong again but it could be a long time before we see this return and tour groups even longer due to social distancing/capacity restrictions.

In the same way, our transient corporate business is not expected to return to the same level as in the pre-COVID days. Many firms now encourage their employees to work from home and the economic impact of the pandemic will surely cause executives to review their business travel expenditure.

With the almost guaranteed absence of international travel and the weakened demand for corporate travel in the short to medium term, we need to target other segments for a bigger slice of the market. The biggest opportunity lies in the domestic individual leisure market. As was proven last summer when hotels were permitted to re-open after the first lockdown, there was significant demand for “staycations” with many operators reporting similar occupancy levels to the previous year. With international travel restrictions expected to be in place for several months ahead, we need to be fully engaged in capitalizing on this demand when we emerge from the current lockdown in Spring and make it our priority market segment. This means allocating significant resources to marketing campaigns that will reinforce this message to our customers. We are also working closely with the local tourism board to promote any events or activities that might appeal to our customers as well as connect with their followers on social media.

With the majority of weddings having to cancel in 2020 due to the pandemic, this has created a golden opportunity for 2021 and 2022. There is a higher demand than ever for weddings, as those couples who have had to suspend their plans for 2020, combine with the standard annual demand we would expect. We are therefore more focused than ever to capture this lucrative market.

In addition to the markets we target, the COVID era also provides us with the opportunity to review how we operate internally, thereby increasing our profitability. The pandemic has forced us to make a significant proportion of the workforce redundant, which has allowed us to restructure the team into one which is more efficient. This has been particularly the case with our food and beverage department, which was running at a loss pre-COVID but overlooked due to the high overall profitability of the hotel. We have now created a food offer more suitable to our business with a vastly reduced kitchen team, enabling the department to run at a profit.

As a result of requiring to close the business for so many months, with zero revenue, the focus has switched to our fixed costs. Every pound being spent is being heavily scrutinized to assess if savings can be made. Some supplier accounts and partnerships are clearly essential for any hotel business even when closed. There are some agreements, however, that may have been set up years ago and have never been properly reviewed since. We have found that there are several agreements that are either no longer required or that do not justify the cost and have since been terminated. This will again put us in a more efficient position when trading picks up and we can maximize our profits.

Comment
Philip Bacon
Senior Director, Head of Planning & Development and Valuation at Horwath HTL

“Planning is Everything; the Plan is Nothing.”
This quotation is usually attributed to former US President Dwight Eisenhower. He meant it in a military context. When the wolves at the door are soldiers (or even heavily-armed and bizarrely-dressed “Republicans”), your plan may have to change rapidly and radically, but you must have one, and you must be clear about where your plan is taking you. This means strategy. see more

Strategy and planning provide the link between the current and the future direction of a business.

Strategy isn't vision or mission.

A vision without a strategy is a dream.

A mission without a strategy is a hope.

It is therefore important to separate the process of strategic thinking from the management of current operations. Riding a bicycle and changing a wheel at the same time is a difficult trick to pull off at the best of times, but this is what having and implementing strategy means for the hotel business; a business that has to deal with glacial real estate development lead times, combined with rapid changes in consumer habits and behaviors. Just because it is difficult doesn't mean you can avoid it without negative consequences.

What have we learned after nearly a year of stop/start lockdown caused by a health crisis that has brought into question the very existence of the hospitality business? 

We have learned that we humans love making plans and that the removal of this privilege causes confusion, frustration, and short-term decision-making. 

That when things are going exceptionally well, we forget about cycles (economic ones, not two-wheeled ones). 

That making a plan is not just a question of taking last year's results and adding 10%.

That profit-taking in the hotel operating business should take second place to investing in the future of that business.

That sound asset management is often the difference between life and death for a hotel.

That hotel assets must either be future-proofed or recyclable.

That the privileged few depend upon the low-paid many to provide the hospitality services that we all took for granted. 

That the world probably has too many bars.

That the traditional conference business model is broken and something should be done to mend it. 

That EBITDA per square meter is the only truly comparable measure of management success and profitability.

That renting out hotel rooms during the day is no longer a suspicious activity, and that chairs in rooms are for sitting on and working, and not decoration.

That people value their health and wellness above almost everything else.

That, in any business, cash is still King.

We have also learned that a forced timeout helps us to re-examine, re-think, and adjust our plans; something we should all be doing, all the time. Best not to wait for the next crisis.

Related article by Philip
Comment
Advertisements