The Business of Hotels
Introduction
I am lucky enough to be the bag-carrier of one of the UK’s leading hotel reviewers. This means I get a lot of time contemplating the hotel business, as I sit by the pool sipping cocktails I’d never normally drink. There aren't many sectors where business and consumer are quite so up close and personal for an extended period. It's like the difference between meeting someone you know vaguely well for lunch and staying with them for a week. It's pretty easy to pretend to be a normal human being for a couple of hours but a few nights together will begin to reveal both of your true colours. Your penchant for courgette juice and their chronic nose-picking habit won’t remain a secret for long. If hotels don’t have their entire operation together the cracks will quickly show. So what goes into keeping you and your sudden demand to be waited on hand and foot satisfied and is it worth it?
Sector: facts and figures, trends
Hotels form part of the wider hospitality sector and within it there is a huge range from the seediest of motels to the 7-star (an unofficial ranking) resorts where chopper or Rolls-Royce are the standard methods of arrival. This caters to the huge range of guests from people on the run, to ageing rock stars who have decided to permanently move into a suite. About 40%1 of the market consisted of business travel pre-pandemic.
Revenue from hotel rooms globally was $550bn in 20192 (and is still recovering), there are 4 million hotel rooms in 700,000 hotels worldwide3. Around 80% of hotels are franchised4 (meaning they are owned by individuals who pay a group such as Marriott or Wyndham to operate under their brand – we’ll come back to this).
The pandemic has been a kick in the teeth for the sector, the main long-term fall out being a reduction in business travel now that virtual meetings are more standard, and companies look to cut costs and reduce their carbon footprint. Labour and supply chain issues are also causing headaches but long term, these issues will likely iron themselves out. Aside from this the sector will continue to grow, particularly in developing countries, where travel is becoming a more viable option for millions of people.
Other than recovering from the pandemic and restarting growth, two of the key trends that will continue to develop are:
‘Smart’ hotels – you may have already noticed the increasing presence of gadgets in hotel rooms from in-loo bidets (warning: these can be alarming if you haven’t experienced it before) to voice assistants. This will continue with everything from robots delivering your 2am sandwich to keyless room unlocking. Whilst technology will provide a smoother experience and ultimately reduce the level of staffing needed to run a hotel, luxury hotels in particular will always demand a substantial level of human interaction.
Sustainable hotels – staying at home is usually the most sustainable option but given our thirst for beach holidays (Cornwall doesn’t count) people will be looking to minimise their carbon footprint when travelling. Hotels are generally beginning to address this (fewer plastic straws in those piña coladas) but will continue to do so through all aspects of their operations whether it be sourcing food locally or using non-carbon energy sources. In most hotels you now have the option to do both your hosts and the environment a favour by not demanding fresh sheets and towels every day.
So having looked at the industry as a whole and where it’s going, what actually goes into starting and running a hotel?
The Hotel Lifecycle
Development
Opening a hotel is never a simple or cheap process but it is much easier to buy an existing property and fit it out rather than building something completely new. Resorts can cost in the tens of millions to build and therefore pose a lot of additional risk. The upshot is you can charge hundreds of pounds for a room and provided your guests don’t leave during their holiday; you have a monopoly on their money.
If you are just starting out, something more middle market is the place to focus (you know the type, generic but clean and not creepy). Another big area of risk is your food and beverage (F&B) offering – having a restaurant in your hotel is essentially starting another (very expensive to run) business at the same time and it’s not unheard of that its poor performance drags the hotel under. It’s for this reason that in many hotels any amenities (F&B, spa etc.) are concessions (operated by another company).
As mentioned, most hotels are franchises. This means that you pay, for example, Hilton, royalties to set up a ‘Doubletree by Hilton’ which adheres to their specifications and branding. The benefit of this is it massively reduces the risk involved in setting up a hotel. You will receive bookings through their booking engine, support, and guidance in managing the hotel as well as access to their supply chain. The downside is firstly that you have to pay them roughly 8-12%5 of your profits in royalties/fees and secondly it does tie your hands with regards to what the hotel feels like. Different franchises will have differing levels of strictness in terms of how closely you have to follow their standards, but most won’t allow helter-skelters.
Operation
As you probably guessed, running a hotel is a pain in the arse. It’s a 24/7 operation, the building is big so things are always going wrong, guests always want stuff and you just can’t get the staff these days. On top of all of this you are trying to minimise the cost of running the hotel to maximise your profits. Once the online travel agency (e.g. Booking.com) has taken their 15%6, the franchise owner 10%, your staff 30%, you’ve paid for clean sheets and to fix the dripping tap, suddenly that £100 the guest paid for their room isn’t feeling like very much. You will have more wiggle room if your guests are paying £400 at a luxury hotel but the service and experience they’ll expect won’t be cheap.
You’ll therefore need an excellent pricing strategy to ensure your maximising the amount you receive per room and be on the lookout to sell guests additional services (jet skiing anyone?). Alongside this you’ll need to manage the whole operation with military efficiency to ensure costs are being kept down.
Transaction
The normal length of a franchise agreement on a hotel is 20 years but 5-year breaks can be negotiated. It’s likely therefore once you’ve spent several years turning the run-down old building into a profitable hotel with a great guest experience, you’ll want to sell your operation and move onto the next thing. There is an added level of complexity because you are not selling the hotel as a property (like a house) but as an entire operation. It is therefore vital you don’t have too many skeletons in the closet because the buyer will factor their removal into the price they pay.
The opportunity
Career – given the scope of hotels, the career you can have in them are equally as varied. It would seem though that on the whole (I’m basing this on Fawlty Towers), liking people is a fairly key ingredient to enjoying your career.
Starting a business – it can seem like starting a hotel can have a high bar to entry as it does require a fair amount of money. The hotel business is well understood by potential investors/lenders however so provided you can convince them you have what it takes to run one, it is not outside the realms of possibility. You also have the option to start small with a B&B that has a handful of rooms and will not cost the earth. Be under no illusion however – it is a 24/7 job, at least to begin with.
Investing – largely a subject for another day and someone more qualified but your options are really investing in listed hotel groups, Real Estate Investment Trusts (REITs), a travel and leisure ETF or even in hotel rooms.
So there you have it, a whistle stop tour of the business of hotels. Hopefully you have a renewed appreciation for what it takes to keep the whole thing going and a starting point to contemplate a life in the hotel sector.
https://www.condorferries.co.uk/hotel-industry-statistics
https://str.com/sites/default/files/global-hotel-study-report-2019-2020.pdf
https://www.condorferries.co.uk/hotel-industry-statistics
https://www.jll.co.uk/en/trends-and-insights/investor/why-more-hotels-are-owned-by-franchisees
https://www.forbes.com/sites/quora/2013/02/28/what-does-it-take-to-start-a-hotel/?sh=86120a364525
https://partner.booking.com/en-gb/help/commission-invoices-tax/commission/how-much-commission-do-i-pay