At Greenshoes we know how indispensable a feasibility study is for a hotel, a hostel, resort or a B&B. Having opened various hotels we have noticed that many hoteliers make decisions based on assumptions when it comes to their new hotel concept, without conducting any notable research on building a hotel business that will be consistently profitable and competitive.
Free template to prepare your case study (no download required)
As experts on Hotel Management, we want to share our advice and help at this moment when you are writing your ideas down on paper and benchmark them against the market to determine the chance of success of your hotel, hostel, resort or B&B.
In this article we will look at the steps involved in carrying out an effective hotel feasibility study.
What is a hotel feasibility study and do you need one?
As the name suggests, 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. It is as key as a is the Hotel Business Plan. 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). It is therefore ill-advised to proceed without carrying out this crucial investigatory and illuminatory step.
A classic mistake, for instance, is hotel companies that want to enter the market with a flat rate structure. In essence from a positioning perspective it sounds great. You will attract a lot of consumer attention offering such transparency. However in reality, as hotel markets are driven mostly by dynamic rates which fluctuate with demand (a bit like the stock market), you will find your hotel out-priced by competitors in low season.
So, how to prepare and avoid these kind of situations while respecting your Hotel Concept? You will have to do a thorough market research and perform a feasibility study.
Here below you will find a template plan and approach the expert team of our hotel consulting company takes to put together a comprehensive validation report, based of financial and market analysis, to determine the viability of a new hospitality project or lodging concept.
The key steps of an effective hotel feasibility study
1. Location analysis and Development pipeline
Studying proposed sites for your hotel or resort aims to answer a number of questions critical to the success of your hotel project. What makes the location an attractive site? Is there a supply of labour sufficient in number and quality? What human resource costs can be expected? Is the hotel supported by easy transport links? What are potential risks and advantages associated with the local area?
What other hotels are planned to be constructed and open in your immediate area? How many rooms will be added? How will this impact your market share and financial results?
These are all very relevant questions that cannot be ignored. And investors will be extremely interested. Mind you, if an area is popular and many new hotels are planned it can have a positive effect as well, and increase overall demand.
2. Market Performance
Let’s start with a generic market study. You need to obtain statistics on occupancy, average rate, revenues of the surrounding area of your hotel. If you get data for the last few years of similar 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.
You can obtain data like this from researching the internet as many data is published in press releases. To get exact numbers you should contact consulting companies like PWC, STR and HVS. They are specialized in collecting hotel market performance statistics and trends.
3. Total costs calculation
This includes the development and architectural costs prior to opening the hotel. Then there are the operating overheads which the hotel will incur, including licences, taxes, equipment, furniture, insurance, human resources, inventories, electricity, water and more.
I would advise to be prudent and conservative, or rather be realistic and honest. Don’t put numbers on paper investors would like to see, but make an achievable forecast. Add revenue and cost predictions from all operational departments (restaurant, bar, banquets, front office, housekeeping, engineering, etc …) to get to you GOP (gross operating profit).
Include the undistributed, fixed and overhead costs to get to your NOI (net operating income) or EBITDA (Earnings Before Interest Taxes Depreciation). This is basically the profit generated from the hotels own operations.
To estimate costs you can use local industry standards as a benchmark. I would recommend creating a staffing schedule for each department to simulate your cost, and ensure you are at the right level.
4. Competitive Analysis
Next step, you need to make a detailed overview of your competition. We differentiate competitors in 2 groups. First we look at conceptual competitors that have a concept which is similar or comparable to yours in essence. And second, there are proximity competitors that are in your immediate surroundings and this will be your local competition.
Start with building a summary outlining in detail:
- hotel name
- concept type
- number of rooms
- star rating
- chain affiliation
- all facilities
- website url
- website languages
- website versions (desktop, mobile, tablet)
- online reputation and review scores
- price range and average rate (see Google Hotel Finder and TripAdvisor)
5. Local hotel supply and demand investigation
This involves analyzing all hotels in the local area, chiefly their competitiveness. Information can be found with tourist boards, tour operators and travel research groups. 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.
6. Room rates and year-round occupancy levels
After establishing hotel supply and demand, your own hotel’s competitiveness, your projected operating costs, desired ROI, and crucially, benchmarking your competitor hotels, you can focus on room rates. Year-round projections for demand will go a long way to informing your pricing decisions.
7. Establishing and projecting hotel revenue sources
The main sources of revenue for your hotel will come from room stays, food and beverage, and events such as conferences and meetings. Using your projections for average year-round room rates and occupancy levels, you can project sales from different revenue sources, including food and beverage, leisure and events.
8. Hotel feasibility study projected ROI
One of the most important parts of your hotel feasibility study is the projected ROI. ROI is worked out by using a number of metrics, including internal rate of return (IRR), net present value (NPV), debt coverage ratios and discounted cash flow (DCF), as well as others. They help to show if the investment return is enough to proceed and if you will need to find financing from elsewhere.
If so, will the lenders of this capital be content with the projected ROI? If not, the hotel proposal can be abandoned altogether or it can be altered to make the return on investment attractive enough to proceed, such as changing site, tweaking room rates and reducing costs. A clear and comprehensive report is what banks, institutional or private investors (family offices) will be looking for.
The final word - Hotel Feasibility Study
As you can see, a hotel feasibility study is extensive, and with good reason. It gives you and all interested stakeholders such as other investors a much clearer picture regarding the costs involved, whether the return on investment is desirable, and helps in deciding how to proceed.
Doing this exercise yourself is a great experience to validate your plan and I highly recommend to do this thoroughly (in-house) before even going to an accredited consulting agency. The reason is simple, to do the thinking and to work with the numbers yourself will clarify the main ideas and will surface the most difficult issues. And only there, is point from which an expert, as Greenshoes Hospitality Management Consulting is not just needed but also the most valuable company for you and your hospitality business.
Pablo Fernández Valdés & Patrick Landman
Green Shoes Hospitality Management