Financial Management for a 5 Star Hotel

12 December 2016

The service to be marketed is a 5 Star hotel with 380 luxury rooms supported by a range of food and beverage outlets. Located in Dubai, the domestic market will be considered to be the GCC, given the accessibility via short-haul flights and that currencies are broadly all pegged against the US Dollar, and therefore do not fluctuate against each other. The marketing strategy will cover sales in this domestic market as well as a range of global key feeder markets. Through analysis and comparison with economic theories, recommendations to guide the marketing strategy have been made.

These point to focussing more strongly on the domestic market based on the higher levels of government spending, backed by a high oil price, the relatively low impact of cross elasticity with airfares and the lack of currency fluctuation risk for sales. Firstly I will consider the cost of production and some scenarios which may impact on the marketing strategy. The main costs in providing a hotel service are labour, rent and upkeep, energy and room servicing supplies (such as linen and tea & coffee).

In terms of predicting costs for the first half of 2012, it appears likely the cost base will stay fairly stable. All costs are incurred in the UAE, with all items sourced in the local market. The major items, rent, labour and room servicing, are on long term agreements which are already fixed. Longer term macroeconomic effects may impact these, for example expat labour from Asia may be available cheaper next year in the global employment market if the world economy slips into recession. Unit energy costs are variable and could be influenced by macroeconomic factors affecting the oil price.

These are difficult to predict, however I have considered that a global slowdown in the period could lead to less demand, forcing the oil price to decline. At the same time, continued tension in the Gulf, particularly around the Straits of Hormuz, could lead to upwards pressure on oil prices. On balance, for this exercise I have assumed that energy prices in Dubai with remain broadly flat. In summary, the overall cost base for the hotel service appears to be relatively flat for the first half of 2012.

To assess the service type, I have analysed the price, income and cross price elasticities for the hotel service. I have observed from personal experience in the hotel market in Dubai that a 33% reduction in room rates results in almost doubling of demand, suggesting a relatively high price elasticity of demand of -3. This provides evidence that demand in the hotel market in Dubai is very sensitive to room rates. Whilst the service is considered to be a luxury item, the global tourist market is highly competitive.

The income elasticity of demand for such a service is likely to be relatively high, given a luxury hotel’s status as a non-essential item. Since it is a global market it is complex to assess how individual income effects will influence each feeder market, although I would expect that this elasticity will generally be greater than 1. For residents of some countries with high GDPs, such as the GCC, I would anticipate a luxury hotel in Dubai may have a slightly higher income elasticity of demand than for countries with a very low GDP, where increases in income may still not be enough to afford this service.

When considering possible cross elasticities, a key factor influencing hotel demand in Dubai is likely to be the cost of air travel to the UAE. Since such a high proportion of guests arrive by air, some from far away with relatively large airfares, there is likely to be a high cross price elasticity between demand for hotel rooms and the price of air travel. Looking to the first half of 2012, possible effects on aviation prices may include additional aviation taxes, such as the EU carbon tax [1].

This cross price elasticity may therefore result in less demand for McKenzie Group’s service from Europe. Assessing the market structure for the McKenzie Group Hotel in Dubai, it is highly competitive. For 2012 STR Global said “most rooms planned to open in the luxury segment (11,123 rooms & 34 projects) and upper upscale category (10,198 rooms & 31 projects). The new supply growth in 2012 is expected to reach 9. 6% causing both rates and occupancy to slow down” [2]. Given the range of hotels and brands, my assessment is that the market is near to a perfect competition.

Competitive strategies are likely to include discounted room rates, special offers for additional added benefits (such as complimentary transfers, room upgrades and theme park tickets), and increased sales and marketing efforts. Given the analysis above, The McKenzie Group will need to compete on pricing supported by investment in sales and marketing campaigns. In order manage the cross price elasticity risk with aviation prices, The Group should look to focus efforts on the non-air travel local market and pursue pricing opportunities for packages with airlines to give competitive overall costs to global customers.

The market for The McKenzie Hotel Group is mainly segmented geographically, location of customers is the biggest influence on buying behaviour. This can be grouped into four key feeder markets: Asia Pacific (10% of sales), Europe (40%), GCC (40%) and North America (10%). Demographically, gender has no noticeable effect and buyers from all markets tend to be middle aged professionals. In the European market government-level economic activity is likely to dominate prosperity given the current crisis.

High debt and deficit levels in certain countries will lead to big reductions in government spending and may reduce consumer confidence. Combined with general forecasts for flat growth, if not recession, in the first half of 2012, this could have a large negative impact on overall demand. The GCC market however could be buoyant with high levels of government spending activity, mainly on infrastructure backed by oil and gas revenues. There may also be additional government spending on social schemes as a result of the Arab Spring in Levant countries.

As a result of this activity, the domestic market is likely to remain strong. Given the analysis above on the economic climate in key feeder markets and the effects of government spending, The McKenzie Group should target the domestic GCC market much stronger in the first half of 2012. Given the breadth of global feeder markets, a variety of currencies must be considered in relation to pricing effects for customers. Costs are all incurred in UAE Dirhams so the main impact on currencies is not on costs but on sales.

Since the Dirham and GCC currencies are pegged to the US Dollar there is no consideration required currency fluctuations with the domestic (or North American) market. However some currency fluctuations could have a major impact on sales in the first half of 2012. The Eurozone crisis may reduce the value of the Euro against the Dollar (and hence the Dirham) which will make hotels in Dubai more expensive for customers in the Eurozone market. As well as the cost of rooms, customers will also be affected by the relative increase in costs for anything bought locally, such as food and entertainment.

This risk adds to the argument that Europe is not a good prospect for sales for the first half of 2012. Since the UK is not in the Eurozone its currency (Sterling) moves independently to the Euro and given that it is traditionally a strong market for McKenzie Group, this must be considered. Since the UK may enter recession again in the first half of 2012 it seems unlikely that interest rates will be increased from their current low rates. In addition Bank of England actions might also reduce the value of Sterling and so holidays in Dubai will seem relatively expensive for UK customers.

McKenzie Group should reduce its reliance on the UK market in the first half of 2012 to help protect against this risk. Having analysed various macroeconomic and microeconomic influences on costs and sales for McKenzie Group Hotels in Dubai in the first half of 2012, there are some clear recommendations for the marketing strategy. Costs are anticipated to be reasonably stable since they are either already fixed or are incurred locally. Sales are likely to be much less stable.

Given the high price elasticity on demand and the near perfect competition in the market in Dubai, price strategies will be key. For sales from the European market in particular, poor economic conditions, low levels of government spending, the risk of weak currencies, and cross elasticity with aviation costs, could all have a negative impact on sales. In contrast, these effects have much less, if any, impact on the domestic GCC market which is also likely to be buoyant from government spending. It is recommended to invest sales effort in the GCC for the first half of 2012.

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