How will hotels turn profitable again?

How will hotels turn profitable again?

The onset of COVID-19 is the mega crisis of our lifetime. For the hospitality sector, it is an Armageddon event threatening to wipe out the good, the bad and the ugly without any distinction.

Arne Sorenson of Marriott described the impact of the pandemic to be more severe than the 9/11 attacks and the 2008 financial crisis combined. It may be argued that hospitality sector, often criticised for its high fixed costs and low ROCE was anyways overdue for a major course correction. Perhaps, COVID-19 has only exacerbated the already festering problem which needs a deeper solution with exponential results. This crisis is bound to push all hotel owners, management companies, franchisors and operating teams to go back to the drawing board.

In times of crisis, it’s wonderful what the imagination will do. – Ruskin Bond

The sector may see a protracted recovery cycle of 12-18 months, during which time the revenues may contract to 30-50% of 2019 levels. This would lead to operating costs consuming most of the truncated revenues leaving little else for debt servicing, essential repairs and so on. Payroll cost in hotels typically ranges between 20-25% of the ideal revenue which would increase to 40-50% of turnover, if revenue is reduced to half its original level.

World over, hotels have resorted to aggressive furloughing (where ever supported by state programs) or salary reduction for managerial staff to mitigate the impact. But hotels are still haemorrhaging – they need much more than a Band-Aid and they need it fast. We believe that fundamentally, hotels must utilise their human capital with far greater efficiency levels. Questions have to be asked, rules have to be rewritten and mindsets have to change.

Here are some ideas, thoughts and questions with an aim to utilise the human capital in hospitality more productively. The questions here point towards the art of possibilities and do not purport to be all-encompassing solutions:

 

  • Reduction of layers in the hierarchy

    • Can hotels operate with a flatter structure – GM, line managers, rank & file?
    • Can we set processes that allow teams to perform independently and without inspectors?

  • Eliminating duplication of responsibilities

    • Are job roles clearly defined? Or do responsibilities overlap and are concealed in indistinct job titles?
    • How are the responsibilities of Director of F&B different from that of the F&B Manager? Isn’t a director the manager of the managers?

  • Compensation mechanism needs to tilt towards variable pay

    • Can hotels continue to afford to pay high fixed salaries to General Managers and HODs?
    • Why not structure the compensation of key management personnel to mimic the fee structure of hotel operators and bring out the entrepreneurial spirit in them? A lower fixed salary but with a high incentive salary based on performance? Incentives could be 2x or 3x of the fixed salary with no upper limit.

  • Temping is critical to fix the issue of fixed costs

    • Can industry leaders along with relevant ministries and colleges enable an environment for temping where college students could self-support their expenses while working part-time in hotels and restaurants?

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