Throughout my career, I have seen thousands of hotels some is are more impressive than others. One thing always strikes me that most of these hotels built based on;
The owner has some plot of land wanted to use it
They wanted to get government support, tax exemptions and free credits.
Some built in a location that is not suitable for the business, it feeds to personal ego’s and shows off their wealth
No feasibility works done prior to or during construction to meet the requirements and demand of the area
Most hotels constructed by architects who specialise in residential buildings or shopping centres but not hotels
Using the most expensive marbles or material rather than what suits best in the environment
Recruiting a lot of staff to fill the ground but not the right people to build, develop and serve to get the most out of the area and its potential.
You can add more to this list. When all is done and dusted then it will be the responsibility of the operators to struggle and find the right mix to make these hotels successful.
I always wanted to write an article on Hotel Feasibility, it is my passion and also covers all angles of the hotel business. I believe once anyone masters hotel feasibility works, they will understand the great puzzle of hospitality starting from Finance, investment, location/ size/type selection, brand selection, operations, marketing, revenue management, project and asset management as well as operating them successfully.
There are other factors such as whether it is a new hotel from scratch or buying an existing hotel and developing. And also, whether the approach should be causal with key areas to look at or more structured and literature format. I will try to cover as much as possible I can and therefore, instead of writing a boring long article, I will try to split them into two readable parts. Please bear with me, the result will be great. Finger’s cross!
Prior to building a new hotel, buying a hotel or developing current hotel the investors, the architect and development team need to create a project that is ultimately economically feasible. Unless the hotel’s owner is cash rich and ego driven rather than economically motivated, most investors are looking for a return on their invested capital. Most of these cases projects are funded by investors, international developers or financial institutions.
A Hotel Feasibility Study investigates your hotel proposal to see if it is feasible as a sustainable, profitable business model by considering its viability relating to market, location, costs and financing.
No plan is viable without some form of research. Especially if you require outside investment you will need to demonstrate you have done a feasibility study for your new hotel concept. Most of these institutions require an independently prepared market and financial feasibility study for the development of any project. They usually conduct some research of their own however it does not go in the same depth as a feasibility study conducted by independence and objectivity as third-party professional consultants.
Since feasibility means different things to different people, we have seen how many would-be hoteliers simply assume that their vision will succeed, without conducting any notable research on building a hotel business that will be consistently profitable and competitive. This could be very dangerous as any unforeseen change you might have to implement at a later stage due to a false assumption could bring with it additional costs that will have a negative impact on your bottom line.
Especially if you have raised capital investment from banks or other lenders, this puts you in a difficult position, as it might not be possible to pay off loans in the time frames agreed, or ROI will not reach the expected levels. Pressure will subsequently mount to make other changes to your concept to recuperate and offset the additional costs. Such changes might even affect the uniqueness of your original concept, but you will have no choice but to compromise and please investors.
So, what is a hotel feasibility study and do we really need one prior to any development project?
A feasibility study investigates your hotel proposal to see if it is feasible as a sustainable, profitable business model. It does this by considering its viability relating to market, location, costs and financing.
A feasibility study forms the cornerstone of your preparations for your new or remodelled hotel. It shows investors how they will receive a return on their investment (ROI).
A feasible project is one where the economic value is greater than the cost
In this article, we look at the steps involved in carrying out an effective hotel feasibility study. The process I like to use for determining whether a proposed hotel is economically feasible is to compare the total project cost (including land) with the hotel’s estimated economic value on the date it opens. A feasible project is one where the economic value is greater than the cost. Accurately estimating the total project cost is a relatively simple process for the architect and development team. However, determining the economic value is much more complicated.
Hotel feasibility entails three major components;
Preparation of a market feasibility study for the project,
Estimation of costs for all elements of the project
Determination of sources of financing.
You can arrange feasibility studies in two phases which are market feasibility and economic feasibility.
The feasibility study also includes a variety of work steps which enable us to evaluate historical trends and project the future competitive supply of and demand for proposed accommodations in the area. And the basic objectives of the study are to:
Evaluate the market potential for the proposed hotel based on an analysis of the market support for a hotel facility on the subject site.
Identify the appropriate numbers types, and sizes of guest rooms and other amenities which would best serve the needs of the market.
Project levels of market penetration, occupancy, and average room rate for the proposed hotel for the first ten years of operations.
Prepare detailed projections of cash flow from operations before fixed charges for the hotel for the first ten years of operations.
Provide a written report containing the conclusions of the Feasibility Study and present financial projections for the proposed hotel.
Let’s try to review some key steps of an effective hotel feasibility study;
1. Location analysis / Survey of Site and Surrounding Area
An inspection of the site and surrounding area to determine their suitability for the proposed hotel, taking into consideration such factors as accessibility, visibility, and proximity to demand generators. Studying proposed sites for your hotel or resort aims to answer a number of questions critical to the success of your hotel project;
Compilation and analysis of the statistical and analytical data describing the economic, demographic, political and social conditions of the market where the proposed project is located
An examination of the existing and likely future tourism trends in the area
Infrastructure and communications servicing the site and immediate surroundings
Understand what makes the location an attractive site
Identifying if there is an adequate labour supply with the right skills and quality in the area.
Depending on the above creating labour cost projections; area wage trends, benefits, union structure, flexible workforce potential.
Inspection of the transport system to identify whether the hotel supported by easy transport links; airport, seaport, train, metro, highway etc.
Identifying potential risks and advantages associated with the local area
Proximity to Business and Trade Centres, Highways, Traffic Levels, Key Attractions, Shopping Centres, Population Backup
Site-specific requirements; size, zoning laws, height restrictions, parking, visibility and accessibility requirements
2. Market Performance / Study
The first step in the valuation process is to perform a market study which folded in two steps;
Assessing present and future demand is quantified and allocated among the existing and proposed supply of hotel facilities as well as other facilities affecting proposed hotel such as public areas, leisure facilities and food & beverage outlets.
Estimating operating income and expenses for five or ten years after the hotel opens.
You can use PESTLE/PESTEL Analysis technique for your Feasibility Study. A PESTEL analysis is a framework or tool used by marketers to analyse and monitor the macro-environmental (external marketing environment) factors that have an impact on an organisation. The result of which is used to identify threats and weaknesses which is used in a SWOT analysis.
Knowing local hotel supply and demand helps in projecting occupancy levels and rates for your hotel, one of the key elements in establishing its economic feasibility.
Information can be found with tourist boards, tour operators and travel research groups. Also, you can obtain area specific, historical and future projection reports by contacting consulting companies like PWC and STR as they are specialized in collecting hotel market performance statistics and trends. If you get data for the last few years of similar and/or CompSet hotels in your market you will get a good idea of how the market is evolving, giving you a rough perspective of what kind of overall results would be possible.
While conducting market study you also need to understand sources of business and market segments to be able to make an effective marketing plan. Some key questions you need to answer are;
What creates the demand in your market?
Why do travellers come to this destination? Are there any other alternatives?
What is the motive for their trip?
Where are they coming from, or rather, what are you feeder markets?
Definition of Market segment aimed at defining a concept development strategy for the proposed project (commercial, meeting and conference, leisure segment)
Quantification of accommodated room night demand for a given market
Market Positioning of the proposed project in the market and the classification of services
Recommended facilities mix of the proposed project for demand optimization
Seasonal trends affecting the hotel trading patterns
Estimation of achievable average occupancy and revenue levels for the proposed project
Operations performance forecast adapted to local market conditions and fiscal incidence on net profit
All the tasks highlighted above and their results are then regrouped under a full market and feasibility study. I have uploaded a Sample Feasibility Study Structure as a guide, please visit our “Resource Hub” to download.
I am not going to touch on how to create 5-10 years revenue and cost estimation plans as it is a subject on its own for another article. However, I will cover Hotel feasibility calculation industry standard guidelines and analysis in my second part of the article.
Please feel free to contact me for any requirements, questions and support for your projects. You can reach me either contact tab on www.hospitalitycode.com website or via email directly on harundagli@hotmail.com to arrange a private chat.
I regularly upload easy to use spreadsheets for guidance and free to use basis. Please visit hospitalitycode.com/resource-hub to download.
Please follow me on www.hospitalitycode.com for my articles on various areas of Hospitality business, trends and interpretation methods.
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