Five Ways of Hotel Management
India has seen in the last decade a lot of hotels mushrooming into the 3-star & 4-Star categories as many owners/investors were motivated by the positive hotel trends from 2000 onwards. Many of these owners have not been fully aware about the hotel business nuances such as ROI (Return on Investments) which used to take approximately seven years in the Indian Hotel Industry but due to the increase in supply it increased to nine years and beyond (before the Covid-19 Pandemic).
The hotel owners have the following choices for managing their properties:
1. Managing themselves
2. Fixed Lease Agreements
3. Variable Lease Agreements Based on Performance
4. Franchise/Manchise Agreements
5. Operating Management Agreements
Each of the above agreements have their own advantages and disadvantages and I would like to throw some light on them:
1. MANAGING THEMSELVES:
a. If the owners are not well-versed with the Hotel industry’s intricacies and think that the management of a Hotel is a very an easy exercise and do not understand the technical difficulties such as REVPAR, Revenue Management, Food Cost Management, etc. they will run into difficulties at a later stage.
b. The owners initially start the hotel project but always find it difficult to continuously get trained manpower as mostly they are singly owned hotels and do not offer sturdy growth to its managers/ associates.
c. This industry requires continuous monitoring and there are many loopholes which require professional supervision and audits.
d. The only example of large hotels being run by owners in the last few decades are The Leela Group and The LaLiT Group. Though they of course took assistance of good Hotel professionals
2. FIXED LEASE AGREEMENTS:
a. The owners generally prefer these agreements as they calculate the ROI and do not want to get in to any headache of performance, operations, etc.
b. As it is a landlord and tenant relationship, the Owner gets its fixed lease and is not responsible for the P&L of the Hotel.
c. The owner gets the guaranteed income and in some cases certain percentage of total revenue if the hotel performs beyond the budgets.
d. No interference or involvement of the owner.
e. Better freedom for taking decisions in running the property for the lessee.
f. In some cases the maintenance and housekeeping of the property suffers.
g. The tenant or the lessee mostly desires to “squeeze out the juice” as he has the burden of paying the lease rent.
3. VARIABLE LEASE AGREEMENTS BASED ON PERFORMANCE:
a. This has become extremely popular due to the Covid-19 Pandemic as surety of business cannot be predicted for the near future.
b. The variable share on turnover varies from 8 per cent to18 per cent in different cases depending on the hotel location, readiness, quality, financial viability, etc.
c. The recent example of The Taj Mahal Hotel, New Delhi going for a higher percentage of turnover is a unique one, more so as the Taj Group would not let its brand image and prestige suffer and lose this property in the Capital city of India.
d. In some cases the variable lease would also be linked to the Gross Operating Profit/share. Some owners are looking for guarantee, but most good hotel companies will not give this and hence it is a word of caution for the owners.
e. Regular monitoring of account to check the turnover, profits need to be done by the owner’s representative.
4. FRANCHISE/MANCHISE AGREEMENTS:
a. The large American chains have been following this for many years and hence, thousands of hotels with their brand names all over the world.
b. In the franchise agreement one gets the brand name with all brand standards that need to be adhered to by way of a manual and also gets listed in the hotel reservations network system. The initial brand fees are low but their hidden fees for reservations network per room business, marketing, etc could add up.
c. In some cases the management and operations lacks and though the standards of the product may be as per the specifications of the brand, the quality of food and service start suffering.
d. Manchise – we are seeing a new trend where the brand name of the franchise is of an international brand but the management is given to another hotel operator. In such cases the management fees and the franchise fees would normally get quite higher. There would also be problems in coordination between the two (Franchise and Management Operator).
5.OPERATING MANAGEMENT AGREEMENT:
a. In my view this is the most beneficial to the owner provided they find the right operator who has a good record and technical background of the hotel industry, and someone who has the appetite and passion to manage the hotel property by giving his time that the property deserves. For this, the hotel owner is fully responsible for the P&L statement and during good times could make large profits.
b. The management company gets a fixed percentage of turnover and certain percentage of profits as incentive fee which is recommended to encourage better performance.
c. A good hotel operator ensures total transparency and makes presentations monthly or quarterly to the owners on the various parameters of the hotel operations.
d. The maintenance and housekeeping of the hotel property is better as the hotel is regularly reviewed by the operators.
e. Bespoke arrangement are usually done by the hotel operator to suit the owners requirements which sometime cannot be done by large companies.
f. The operator takes personal interest as their hotel brand name is involved and at stake.
g. The owner learns by working parallelly with good operators and slowly but steadily ensures that the performance of the hotel improves.
h. It is advisable to be clear on what are the obligations of the owner and the operator in the beginning.
i. The operator will be able to sell better with their experience of OTA handling/reservation network system/revenue Management etc.
j. The operator will be able to maintain the costs better-especially food cost/payroll cost etc
CONCLUSION:
• The owners must involve professional/hotel consultants before they venture into the hotel project for the right concept, market study and financial feasibility and more so for the planning for front and back of the house designs and smooth operations.
• The owners must choose the right management style which suits their requirement.
• At the present moment due to the Covid-19 Pandemic, it is extremely difficult for the hotel operator to predict and give minimum guarantee and therefore, it is advisable not to go for such promises.
• Once an owner decides on an operator then he must give freedom to operate while keeping an eye on critical issues.
