_Driving hotel value: Eight initiatives to uplift hotel value by up to 22%

Given the increasingly challenging environment facing the UAE’s hospitality sector in recent years, attributable to both supply and demand side factors, hotel operators and owners have been looking at how to drive incremental value from their existing portfolio. While the most straightforward way of doing this is simply to cut costs – often starting with payroll – many recognise that simply eliminating headcount is not sustainable in the long term.

October 08, 2017

In order to try to bridge the gap between actual and budgeted returns, concerned stakeholders are turning to new ways of increasing the bottom line both by streamlining costs and creating new revenue streams.

This paper examines a number of such practices that the team at Knight Frank has encountered over the past 24 months, their inherent risks, and ultimately what the potential impact can be on hotel value.

Through our eight recommended strategies we find that there is a potential for up to 22% uplift in hotel value through a combination of initiatives aimed at both increasing revenues and decreasing expense.

We highlight these key initiatives briefly below, for the detail please read and download the UAE Hospitality Report 2017.

Initiative 1: Rooms: Managing OTA relationships – 6.5% increase in room’s revenue

Hotel operators and Online Travel Agencies (OTAs) have historically had an uneasy relationship. While operators have not been able to deny the effectiveness of such booking platforms, the fee structure – which often can go to 25 percent of the booking value – has always been a bitter pill to swallow.

While OTAs are a necessary tool to drive third party hotel bookings, it is important to note that they can also generate direct traffic to hotel websites. A recent study from Hitwise revealed that 5 to 10 percent of traffic on hotel websites comes directly from OTA platforms, and a slightly more dated Google survey indicated that 52 percent of guests visit a hotel website after finding them on an OTA, and 20 percent of total direct bookings occurred after guests encountered an OTA listing.

What this means is that the onus is on the operators to capture this traffic with a compelling website that offers value propositions over and above what can be found elsewhere. When Knight Frank examined a sample of hotel websites across the UAE, in over fifty percent of the cases, online platforms published more competitive rates that were not available on hotel websites. Of the remaining properties, (some of which may have been compelled to have rate parity with the OTAs) many were able to add value through complementary upgrades, perks, or amenities which were only available after joining the loyalty program – subliminally also sending the messages that points are being left on the table when bookings are not done directly.

What this means is that the bargaining power and OTA reliance of an operator can have a measurable impact on net revenue. Assuming constant room night demand, the strategy that the operator takes in regard to OTA business can result in a difference of up to 6.5 percent in room’s revenue as shown in Figure 1.

Initiative 2: Pricing strategy during low season – 3.6%increase in rooms revenue

During times when demand is subdued, revenue managers typically deploy one of two measures in order to stimulate occupancy levels.

The first is simply to lower rates, while the second is to keep the rate constant, but to package it with ancillary services – or in other words to create and capture value. By employing such a strategy, the understanding is that during low season, guests are not necessarily drawn to the lowest rate, but instead seek the best value for money.

In an engagement undertaken by Knight Frank within the UAE, this phenomenon was studied between two hotels in the same location with a comparable product offering and different promotions between May and August.

The first simply lowered rates (or offered three nights for the price of two) while the other packaged the rates with value added activities including a spa experience, a sports activity, breakfast and set menu dinner which all had marginal incremental costs. The difference in achieved room revenue (after allocations) was significant and the incremental gains in RevPAR are shown in Figure 2.

Initiative 3: Outsourcing an outlet – 10% increase in outlet revenue

When dealing with an outlet that is not delivering the profitability or net revenue desired, there is often a tendency to treat them as a necessary burden that is covered by the wider business.

In cases where remedial courses of action do not take hold, hotels have been increasingly willing to outsource their F&B operations to a third party. Identifying and formulating the optimal operating model for an underperforming outlet is subject to each owner’s and / or operator’s objectives and the positioning of the hotel. The primary operating models available include:

1. Straight-lease agreement

The outlet is leased out to a restaurant operator with its own team and a base rental fee is charged. Well negotiated agreements will also include a termination clause and a profit sharing mechanism (in some cases if a stipulated goal has been achieved), which can range between 5 and 10 percent of total revenue / profit.

2. Management agreement

A specialised third party food and beverage operator is appointed to manage an outlet. In this agreement, the third party would assign its own key personnel (e.g. general manager and chef de cuisine), with the remaining staff coming from within the hotel team. In this setup, the hotel owner would pay a management fee to the operator, which would typically range between 2 and 5 percent of total revenue.

3. License / Franchise agreement

Through license or franchise agreements, hotel owners pay fees to obtain the rights to operate outlets under a particular brand. This fee typically consists of an upfront license fee and / or an incentive fee based on a percentage of total revenues or net profits.

Initiative 4 – Membership programs: AED 1,000,000 contribution to revenue

There are a number of third party membership programs in Dubai which offer members the opportunity to utilise recreational facilities at selected hotels in exchange for monthly fees. Programs such as GuavaPass, ClassPort and

ClassDive offer members access to a variety of health and wellness classes (both in stand-alone and hotel gyms) such as yoga, pilates, circuit training, and aqua cycling among others. Other programs such as Privilee are more leisure focused, and offer benefits such as beach club access, hotel gym utilisation rights, spa treatment discounts, F&B discounts and tennis/squash courts access across participating hotels in Dubai.

In return, hotel operators are able to charge these companies participation fees for negotiated amounts that can, in some cases, exceed a million dirhams depending on the agreed terms.

Initiative 5 – Spa operating model: 2% increase of total revenue

Often neglected, it is not uncommon to see hotel spas situated in unintuitive locations that are not visible from high traffic public areas. In practice, of the operating departments, it is most common to see the profitability of the spa fall into negative territory.

Hotels have two primary operating models available when outsourcing spa operations:

• leasing out the entire area to a reputable operator or;

• appointing a spa management company.

Initiative 6 – Leasing gym: revenue in excess of AED 400,000

Hotel gyms are traditionally cost centres and are seldom a meaningful source of revenue. Given the initial capital investment requirements, staffing costs (especially with the inclusion of personal trainers) maintenance and replacement costs, the various expenses can add up.

By engaging third party fitness operators through straight lease agreements, operators have the option to generate incremental revenue streams, minimise operating costs and enhance the value proposition of the hotel.

Initiative 7 – Other operating departments: Chauffeur services uplift in revenue of AED 500,000

Given the success of peer-to-peer travel, the majority of hotels in Dubai have been facing continuously declining demand for chauffeur services to the point at which break-even profitability is often the expectation.

When considering the costs of purchasing / leasing and maintaining a fleet of cars coupled with the staffing requirements, many properties have decided to outsource the function altogether.

In a number of cases, third party entities are willing to pay fixed fees for the exclusive right to operate a fleet of luxury car rental and have them on standby outside hotel properties without any obligations or guarantees from the hotel operator.

Initiative 8 – Energy cost savings: savings up to 20% of utility expenses

Hotel owners and asset managers often search for ways to promote sustainability, reduce their carbon footprint and ultimately lower the property’s utility costs.

Within a hotel’s undistributed operating expenses, utility costs can account for 6 percent of total revenue and any savings realised directly flow through to a hotel’s bottom line.

As a result, a range of tools and sustainability practices can be implemented to realise the benefits of reduced energy costs.

Innovative engineering and advanced technological equipment is likely to reduce energy costs and consumption by an average of 15 to 20 percent.

Click here to read the full report.

For further information regarding this report or any enquiries you may have please contact Ali Manzoor, Head of Knight Frank’s Hotel Development Consultancy team.