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Mistakes in feasibility studies for new hotels

Mistakes in feasibility studies for new hotels

 

The most common mistakes made in feasibility studies for hotel new buildings or hotel conversions

 

We are often asked to review self-made feasibility studies or to supplement a professional business plan to convince banks. Unfortunately, the expert opinions of numerous consultants also contain serious mistakes. Sometimes they come from lack of knowledge. Just as often they come from the endeavor to offer such a project for 10,000 or 15,000 €. Even with a 30 to 50 room hotel, investments of 3 or 4 million € are quickly achieved. Saving in planning and design can prove to be an existence-threatening mistake.

 

A reliable feasibility study (feasibility analysis) consists of the following individual components:

 

Location analysis

The suitability of a possible location is examined. From development status, meaningful sizes, connections, accessibility by different means of transport, environmental factors – all from the perspective of different target groups. A strength/weakness profile is often useful. Sometimes it shows that the best hotel can barely offset certain location disadvantages. The result: a new demand profile should help search for a new location. Then the task is to describe the important requirements for the optimal location.

Demand analysis

These questions must be answered: Who should stay or eat here? Which business or private travel arrangements lead to demonstrable demand? Where do these guests live? Where is growth to be expected? Where a decline? What are the requirements for the various segments? What is the quality of the food?

Competitive analysis

Where is the perfect niche? Which requirements of the demonstrable potential are only insufficiently fulfilled by the existing hosts? In which areas is there already a convincing offer? How professional are the sales strategies of the future competitors? How satisfied are the guests with the existing offer? Of course, a new hotel will focus on growing demand. But it is also about removing existing potential suppliers who are already dissatisfied with the performance or the price or both. The question of whether other hotel projects are already planned should not be forgotten.

Operating type design

On the basis of the determined demand, the most important target groups and their expectations, the possibilities of the property and the relevant trends & developments in the hotel market, the operating type is designed. This includes the determination of structural requirements and the calculation of construction costs. This requires a detailed spatial concept and a description of the qualities. A first planning of the future price strategy per segment, room category and demand is as much a part as the planning of the distribution channels.

Profitability calculation

This includes the creation of the staff placement plan and the derivation of additional turnover per segment. The detailed, day-by-day and segment-specific planning of overnight stays and other sales, which may consist of outlets, such as the wellness area or a conference offer.

AFA and amortization are calculated from construction costs and other investments. A lease value analysis and the expected liquidity situation of the future operator should be considered. Hotels are rarely profitable from the get go, so start-up losses should be part of the financing. The study is rounded off with a tax assessment of the profitability analysis (G & V, AFA, liquidity), as well as possible financial and support measures and their effects on results and liquidity. It is also important to examine and compare the different corporate forms, as well as the differentiation of ownership and operating company.

These errors are often made in feasibility analyzes for hotels:

One consultant for everything

If someone once led one or more hotels, this does not qualify for the requirements, which represent a serious feasibility study and conception of a new hotel. Hotel, marketing & sales experts, civil engineers / architects and experts for finance and tax issues must form a consultancy team. This team must work closely together and critically interrogate each other and always commit themselves to further development.

The demand is simply calculated on the basis of bedding, which is published by the statistical office

“What the other hosts can do, we can do too…” Unfortunately, this is a mistake. If you want to evaluate the future guests of a hotel, you have to research more detailed and this is time-consuming. The methods include: expert talks with local business operators, destination management (which unfortunately mostly do not collect enough analysis and facts), possibly data analyzes from sales portals for different segments. Evaluating the prospects for the future of different overnight generators, such as trade fairs, tourist attractions or business enterprises, can be an important part of the correct assessment.

Sales are calculated on a yearly basis without segmentation and distribution channels

A simple conversion of sales, which is subsequently billed by 2% to 3% each year, is the basis for the so-called profitability forecast. There is no estimate of the guests in their different price categories per day pr segment, nor the proportion produced by the various mediators. If a hotel later produces 50% of its overnight stays through online travel agents and has to pay 18% direct selling costs, liquidity planning quickly shakes. This could be a threat to the tenant (and, if applicable, the owner).

Old hotel models are simply copied

According to the motto, ‘what’s been good will also function in the future’, the classic hotel models are copied. The classic hotel à la Carte Restaurant is also an end-of-the-line model, such as single rooms or the printing of hotel and price lists. Experienced consultants often shy away from modern digitization strategies as part of the USP or even only to increase the efficiency of the employee’s potential. The courage to have a clear position and specialization is often lacking.

Costs are calculated on the basis of published operating comparisons

Neither a company-specific determination of the investment and running costs nor a modern planning of profit center calculations, revenue management, distribution and sustainability strategies are carried out. A comparability on the basis of sizes or hotels is by no means specific enough!

One of the big mistakes is that only a “how” and not a “whether” is examined. It is also important to evaluate whether the owners are personally or professionally qualified to lead such a company.

Unrealistic investment costs are assumed

Two sources of error are particularly frequent:

  • The hotel-specific equipment and ancillary costs such as OSE and pre-opening are not taken into account or underestimated.
    • construction costs are underestimated, which today account for 40% of the construction costs of a middle-class hotel.

 

This list could be continued indefinitely, as a hotel project by private and often foreign investors can not be underestimated. The comparatively low-risk industry does not forgive mistakes – unfortunately.

 

 

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Comments

Shivam Sahu schreibt () :

I just loved this article! As a former high school teacher, I know well the study mistakes students make – esp. studying what you already know.

Every time I mentioned this mistake to a student and/or parent it was like an epiphany. Oh, and telling students about this study mistake needs to be done individually. Students who make this mistake don’t hear the suggestion when told to the entire class.

I always suggested that students list what they know (yes, handwrite the list!), put a check by it (give credit to yourself which gives confidence), and then move on!

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