As AR Hospitality Consulting celebrates its second anniversary, the market uncertainty that has beset the hospitality sector for so long shows no signs of abating. Employers’ national insurance increases and the Trump administration’s protectionist stance are just the latest in a long line of negative impacts.
In this article we outline our approach to robust market and hotel performance forecasting in these continuing uncertain times.
With our broad client base of owners, developers, investors and banks, accurate forecasting is essential to ensure the project, acquisition or refinance can comfortably meet its future investment and debt servicing obligations whilst also being able to accrue a reserve to fund future capital expenditure.
Any good hotel forecaster will immerse themselves in data to understand the current and historic performance of relevant competitor hotels, room pricing and impacts of seasonality / events, operating expenses and profit conversion for similar properties etc.
However, it is our bespoke market deep dive approach, looking beyond the data and treating each project differently, driven by many years’ operational and advisory experience that sets us apart. In the last two years alone we have worked on over 50 projects for a broad range of more than 40 clients.
Macro Trends
A deep understanding of the long and short-term macro trends that influence travel and translate to individual markets and destinations is essential, but it is as important to be able to relate this to the demand drivers in the micro location.
For example, the general trend is a long-term decline in service sector business travel and more recent reductions in domestic leisure travel, mitigated to an extent by growth in international tourism to the UK. However many markets, with the right destination profile and demand drivers will buck these trends, often benefitting from multiple business and leisure demand segments.
Demand drivers
This is key to understanding hotel performance. What is going to drive demand for the hotel (destination profile, commercial drivers, events, visitor attractions) and what is the demographic profile of visitors?
To what extent and how often does demand outstrip supply, or is strong enough to drive very high room prices? For this we look at trends in room rate fluctuation, impact of specific events, seasonality and performance by day of the week.
Supply and Demand Growth
Everything is driven from the top-line occupancy and average daily rate (ADR) performance, so getting this right is key.
New supply can negatively impact the performance of a market set of hotels, so having a full understanding of the relevant projects, their status and likelihood to proceed is essential.
Demand growth forecasts come from a deep understanding of current and historic trends as well as future requirements driven by new developments / investment, corporate sector growth, new / reinvigorated attractions etc. Where possible we will engage directly with the main sources of demand to fully understand their growth trajectory.
Performance against market
Understanding the market and its future growth is one thing, but how will the specific hotel perform against and within that market. Market penetration and average rate index projections are influenced by numerous factors including product positioning to best fit the market opportunity, location, size of hotel, facilities and brand.
Underwriting food & beverage and ancillary revenues
For a new or repurposed hotel (without detailed trading history) it is extremely difficult to benchmark and predict the vast array of factors that can impact non-room revenue performance, from curbside appeal to the quality of the food and service staff.
Nevertheless, taking time to fully understand the proposals, along with sensible (but not overly cautious) projections of throughputs and average spends, sense-checked against relevant competitors together provide a supportable approach.
Zero basis modelling
Rather than a ratio-based approach, our financial performance modelling takes account of the structure and expenses required to operate to the service standards and levels of revenue projected.
Our team has many years’ experience in operating hospitality businesses as well as in an advisory capacity. That means we can confidently prepare a payroll model based on the staff required to operate at the service and activity levels projected.
Sensitivity Analysis
Ultimately, whilst our projections are as robust as possible, it is never possible to completely understand what will happen in the future that could influence the performance of a hotel.
Sensitivity analysis is therefore important to understand the future trading performance if one or more factors change, for example lower demand growth driven by a decline in one or more market segments, higher payroll / cost inflation, economic stagnation or recession, major project stalling etc.
We can run various scenarios to demonstrate the potential impacts, ensuring that under different market conditions financial obligations can still be met.
If you would like more information on our services or to discuss our approach to forecasting, contact Andrew Renouf at andrew@arhospitalityconsulting.co.uk or on +44 7584 186520.
Photo by Adam Śmigielski on Unsplash