Introduction. The report was prepared for GR Hotels Board of Directors review. It examines current opportunities to increase profitability. Several options were examined and the most plausible solution proposed – Upgrade to upscale both hotels. This measure will increase long term profits and improve position in the core business. GR Hotels current mission and vision :
MISSION: Clean Comfortable rooms(what), good quality service(how) to business and pleasure travellers(who) in Toronto and Montreal (where) at competitive prices ( how). VISION: GR Hotels are hotels of choice for travellers in Canadian cities. CURRENT SITUATION:
GR Hotels financial situation has been stable for the last 3 years. We have improved our profitability, our liquidity remained stable and ability to pay our debt improved. (Please refer to Appendix 1). GR Hotel Montreal occupancy rate is 59% with the revenue available per room of $56. Midscale hotels in Montreal have 64% occupancy rate and $59 revenue available per room.
GR Toronto performance metrics are 64% and $64 in comparison to airport hotels 70% occupancy rate and $77 available revenue per room. Please refer to Appendices 1, 2 and 3 for detailed current situational analysis, and GR Hotels performance against industry benchmarks. BUSINESS PROBLEM: How to increase percentage of business travellers in the customer mix and improve occupancy rates. WHAT ARE THE MAJOR ALTERNATIVES?
1. Exercise the land option:
a. Build a conference centre
b Purchase land and keep for future
c Sell the land for a quick profit
2.Upgrade one or both hotels to upscale status.
3. Attract more leisure travellers
PREFERENCES OF STAKEHOLDERS.
BOARD: Persue new direction: increase occupancy rate; attract business travellers. SHAREHOLDERS: 15% Tax return on any proposed investment.
BANK: Operating profit of 11% revenues per year.
CONSTRAINTS/TARGETS. Bank requirements to keep operating revenue at certain level; financing available. KEY SUCCESS FACTORS
Good Management team
Good Service – Special touches
Central online booking
Business travellers stay at upscale, luxury hotels
Rames ethics questionable
Does not offer room service; dry cleaning, internet access; internal control( sending cheques to former employee, no record of employment Mayd requested market value of the hotels on financial statements Worldwide events can seriously impact demand in hotel industry,( SARs, terrorist attacks. Competition from large brands is growing
STRATEGIC ALTERNATIVE 1 – BUILD A NEW CONFERENCE CENTRE
( Please refer to Appendix 4 for detailed calculations)
Under certain conditions the NPV of the project can be positive. For example if we assume that the occupancy rate will increase to 70% and the revenue from the, conference centre on average remains at 7,3 million the Net Present Value of Building a new conference centre will be 3,5 millions. However, if the occupancy rate remains at 65% and the average annual revenue from the new facility will be at 5,5 million the NPV will be (2,2) million.
The new conference centre can make GR complex very attractive to business travellers since the event centre and hotel are going to be in one place. GR Hotels INC has central online and telephone booking system, great location, quality service and great Management team. Our purchasing department will benefit from economy of scale and can make better deals with suppliers.
However, GR Hotels does not offer room service dry cleaning, internet access. It is a good value for the money hotel, yet with the completion growing from big brands the project can become risky. This project can potentially undermine our operating profits that can lead to problems with the bank and investors. b. Purchase land and keep.
GR Hotels win if it purchases land and keeps it at least for 2008. During last 2 years the commercial value of the land increased from $950,000 to $1,100,000. Current financial forecast states that Canadian economy will decrease slightly to 2.2% in 2008 and then rebound to 2.9% 2009. It is highly unlikely that the price for land in the prime area – Downtown Montreal will decrease. In a year we can revaluate this decision. c. Sell the land for a quick profit.
This alternative will improve GR Hotels financial results, increase ROE, ROI and profit margin. It will increase GR Hotels cash and liquidity, helping to move into new direction. However, benefits are short term. The management team will benefit from better salaries and bonuses for 2008. STRATEGIC ALTERNATIVE 2 – UPGRADE HOTELS TO UPSCALE
(Please refer to Appendix 5)
This alternative has positive Net Present Value. GR Hotels Gross profit margins stands at 27% well above required by bank 11% to secure the funding. GR Hotels has a reliable contractor Larson. His pricing is always within the budget and all contracted projects were delivered on time. It makes sense to upgrade both hotels since booking and administration grow 20% regardless the # of hotels upgraded.
This alternative will improve occupancy rate to 72% in Montreal and 75% in Toronto It is above industry average for upscale hotels. In room and restaurant service will bring additional incremental revenue. Guests will spend additional 10%. This option will have a big impact on restaurant personnel. RECOMMENDATION:
Based on qualitative and quantitative analyses it is recommended to proceed with upgrades of both hotels to upscale. This project makes economic sense – positive NPV, it will meet the need of business travellers and growing number of leisure travellers willing to spend more money for better
Manny Bluenose Prepares proposal for the bank to request financing. Human Resources Manager prepares plan to train/hire additional staff Mat Gleeson contacts 3 leasehold improvements contractors and obtains a detailed estimate of the work need to be done.
Board meets and approves all the documents. A newsletter to employees and meetings at each hotels are organized. March 1st. Start of the Hotel upgrades. Start of the personnel training. New restaurant chef is hired. April 1st, Major renovations Complete. Internet and furniture upgrades. April 15th – April 30th . Heavy discounts and promotion of newly renovated hotels. May 1st . Service begins at regular flow.
APPENDIX 1. CURRENT FINANCIAL SITUATION
Gross Profit Margin % =($21,993-$15,967)/$21,993= ($21,595-$15,814)/$21,595=$19,798-15,123)/$19,798= Gross Margin/Net Sales27.40%26.80%23.60%
Return on Equity=$971/$1,322=$834/$1274=$603/$1,107=
Net Income/Av. Equity73.50%65.50%54.50%
Return on Assets=$971/$11,471=$834/$11,634=$603/$11676=
Net Income/Total Assets8.50%7.20%5.20%
Operating profit($1,618+$586+$430)/$21,993=($1,391+$598+$428)/$21,595=($1,005+$610+$418)/$19,798= % of Revenues12.00%11.20%10.30%
Current Ratio= $1553/$1523= $1533/$1463= $1333/$1328=
Curr Assets/Current Liabilities1.021.051.00
Asset Turnover$21,993/$11,401=$21,595/$11634=$19,798/11,676= 1.931.861.7
Times Interest Earned($1618+$586)/$586=($1391+$598)/$598=($1,005+$610)= Income before taxes +Interest/
GR HOTELS PERFORMANCE AGAINST INDUSTRY BENCHMARKS
Room Rate*Revenue per
Mid-Scale Hotels14562% $ 105 $ 65 GR Montreal28059% $ 95 $ 56 Mid-Scale Hotels-Montreal15065% $ 91 $ 59
Downtown Hotels18968% $ 130 $ 88 GR Toronto29065% $ 105 $ 68
Toronto15564% $ 100 $ 64
Airport Hotels19570% $ 110 $ 77
Upscale Hotels24073% $ 160 $ 117
* Average daily Room Rate=Accommodation Revenue per day divided by the total number of rooms sold
** Revenue available per room= Average occupancy rate X Average daily Room Rate
APPENDIX 3. SWOT ANALYSIS
STRENGTHS: Good reputation for Service. Skilled management team. Restaurants have catering experience. Good HR policy. Excellent Location. Good relationships with a bank. Comparable occupancy rates. GR uses reliable contractors. Accurate budgeting. Option to purchase land beside Montreal hotel. Central and online booking.
Shareholders willing to invest additional million and common shares, Unqualified audits of Financial Statements. Recognized mid-scale brand. Low staff turnover. Effective purchasing practices. Good service- special touches. Bank willing to refinance existing mortgages. Financial statement analysis shows improvement in profitability and ability to meet obligations. WEAKNESSES: Profits have been paid out in dividends vs. reinvesting in GR hotels; high labour cost.
Gleeson/Rames do not get along; Mayd requesting market value of the hotels recorded on the financial statements; Rames ethics questionable (free stay at the hotel) Does not offer room service; dry cleaning; internet access. Hotel performance reports include head office allocation; internal control (sending cheques to former employee, no record of employment). Business travellers are looking for dry cleaning, room service and internet access. EXTERNAL ENVIRONMENT
Canadian tourism forecasted to grow 3-5%. Points program generate great business; demand for business facilities at airport hotels are growing; business travellers stays at upscale luxury hotels. Government tourism promotes stay at Canadian cities. Montreal is a popular tourist and business destination. Online booking is growing in popularity.
Leisure travelers have more dollars. Moving to more upscale hotels. Demand growing for luxury hotels faster than mid-level. THREATS: Competition from large brands is growing. Government regulations (zoning, food, liquor, safety, taxes. Competitive industry in Canada. Numerous hotels close to Montreal GR hotel. Worldwide events can seriously impact demand in hotel industry, (SARs, terrorist attacks).
APPENDIX 4. NET PRESENT VALUE ANALYSIS – BUILDING NEW CONFERENCE CENTRE( ‘000s) Occupancy rate
Incremental cash Inflows
from increased occupancy 65%70%65%70%
(See calculations below) 583 1,068 583 1,068
Cash inflow from the
new conference centre
(See calculations below) Revenues @ 5,500 950 950
Revenues @ 7,300 1,850 1,850
Total Annual Cash Inflow 1,533 2,018 2,433 2,918 Income TaxTotal Annual Cash Inflow x 40% 613 807 973 1,167 After tax Cash Inflows(PMT) 920 1,211 1,460 1,751 Present Value of Annual Cash flows ( N=40 years, i/y=15%) 6,110 8,043 9,697 11,630 Capital Costs of Centre Construction( See calculations below) (9,000)(9,000)(9,000)(9,000) CCA-tax shield Building ( See Calculations below) 551 551 551 551 CCA-tax shield See calculations below
Furnishings and Equipment 321 321 321 321
NET PRESENT VALUE OF NEW CONFERENCE CENTRE (2,018) (85 ) 1,569 3,501
INCREMENTAL REVENUE FROM INCREASED OCCUPANCY IN MONTREAL HOTEL
( ‘000s) Occupancy Rate
Average annual revenue65%70%
Average daily room rate x # of rooms x
x Occupancy Rate x 365 Days
$95x280x0.65(0.70) x 365 Days 6,311 6,796
Less 2007 Room revenue(5728)(5728)
Incremental annual revenue 583 1,068
INCREMENTAL REVENUE FROM THE CONFERENCE CENTRE ( ‘000s)
Annual revenue before taxes 5,5007,300
Less variable costs at 50% of revenue (2750)(3,650)
for service delivery
Head Office increased promotion(800)(800)
Booking and administration
Fixed annual operating costs(1,000)(1,000)
Cash inflow before taxes9501,850
FINANCING NEEDED TO BUILD CONFERENCE CENTRE (000’)
Cost of Land500
Furnishings and equipment1,500
CCA TAX SHIIELD: (CxDxT/D+K)(1+0.5K)/(1+K)
C Cost of the newly acquired asset
D Maximum CCA rate allowed
T Corporate tax rate
K Discount Rate
Building (7000x.04X0.4) X 1+0.5*0.15551
Furnishings &(1500x.2x.4) X 1+0.5*0.15321
APPENDIX 5 NET PRESENT VALUE — UPGRADE HOTELS
Total Incremental annual cash inflows 3,984 4,210 Income Tax (1,594) (1,684)
After tax cash inflows 2,390 2,526
PV of Annual Tax Flows( 8 years, 15%) 10,726 11,337 One time advertizing Cost after tax (150) (150 ) Lost Business during renovations (860) (1,039) Capital Cost of Upgrades (2,675) (2,675) CCA Tax shield – Upgrades 517 517 CCA Tax shield Internet 20 20 CCA Tax shield Room Service 16 16 CCA Tax shield Business Centre 24