Hotels: Hospitality or Hogwarts?
Weldon Mather discusses the differences between hotel management and managing the hotel asset
What is the business of hotel keeping really about? Strange question you might say but just stop and think about it for a moment. Is it traditional hotel keeping in the purest sense or simply all about increasing the value of hotel asset (bricks and mortar) with a view to selling on later? In reality it’s a combination of both. Hogwarts School of Witchcraft and Wizardry might be imaginary although some might say a good hotel manager needs elements of both on a daily basis!
When I was a student in Shannon College of Hotel Management our training was a blend of academic and vocational learning. Long tedious lectures coupled with great practical classes and exciting placements taught us all aspects of hotel management & operations. Then off to placements in Europe and onwards as trainee managers to become a “real” hotel manager. You knew that you had arrived when you were handed the DM keys and pager and a roster that included every weekend and bank holiday. “Blue chip” training as someone recently said to me. But was it really?
What about the ownership and transaction side of the hotel business? Could it be that hotel keeping in itself is just another form of retailing in a (property) asset usually located in a prime area? I met a CEO of a Hotel Investment Company recently who told me the story of being a student at Cornell and one day a visiting property expert asked how many in the class wanted to actually own hotels? One guy put up his hand and yes you’ve guessed it – it was the aforementioned CEO.
Sorry to disappoint the purists out there but that is the way hotels are evolving – in many cases it is simply a property play with good quality management in situ to drive up trading results to deliver a higher value on the property. Of course, many family and independent hotels are not in this category and never will be but its important to understand the shift in the industry that has occurred in the last 10 years.
The longer I spend in this industry the more I realize that hotel keeping is simply a means to improve the value of the asset (by increasing earnings) in preparation for sale. Years ago, I recall listening to a speaker at a seminar explaining that McDonald’s is not in the fast food business but it is actually a real estate vehicle. Recently Russell Kett, MD of HVS London, commented that the more McDonald’s that open, the stronger its share price will be. He also noted that retail in a high street location is just that – it doesn’t matter whether you are running a hotel or M&S; the value of the asset (bricks and mortar) should be increased by the trading activity (and inflation). The only difference with hotels is that every hotel is so different in a variety of locations and this makes hotels notoriously fraught with danger for investment purposes. Blue chips become pommes frites if you pardon the pun!
So now that your bubble has been well and truly burst as a high quality hotel manager you are probably wondering – why did I bother spending years in training if the property/asset managers are the ones really calling the shots? Well, quality managers are required to add value to hotels through operational experience and that’s where you have to leverage your expertise. Being a blue chip hotel manager has its upside as the property agents don’t know or want to become operational. Some clever hotel management companies have recognized this in the UK and Ireland and already some have been bought out including Chardon that sold to Interstate recently.
REITs (Real estate investment trust) limit investor involvement in operations therefore good operators are in demand but only if they can add value to the asset. And because investments show a higher total return on capital employed for gateway cities, that’s primarily what the REIT market is targeting. So ask yourself the question – what value can I add to the asset? Improving EBITDA (earning before interest tax depreciation and amortization) is your goal. When the asset and business is being valued using the earnings method a multiple of EBITDA is applied which helps determine valuations. Of course there are many other factors in the valuation mix but earnings are central to this.
Traditional game (Inn) keeping or poaching?
Depending on your point of view, owning a hotel is either a means to an end (improving earnings and selling the asset in the future) or a long-term commitment to running a professional business and generating yourself a steady income. Of course its not that simple but no matter where you are in the hotel management food chain ask yourself the question: what is the long term play here? Despite the best intentions of career hoteliers or family owned hotels, at some point the business or property may be sold. Every owner has a selling price and while staff loyalty and goodwill is noble, in a sale, money talks and employees get transferred to the new owner or are made redundant.
Professional hotel managers should familiarise themselves with the business of hotel asset management before they are indeed mistaken for pommes frites and get eaten up!
Weldon Mather is an independent hospitality and tourism consultant in the hotel, restaurant and pub sector.
For more information please contact Arlene McCaffrey on 020 7025 1872 or email@example.com