Why hotels can spend more money than the room cost
Published on: 19 May 2024
Chris’ wife and 2 children were on holiday.
The location: Ritz-Carlton Hotel, Florida, USA.
Their little son had a soft toy: a small giraffe he carried everywhere.
Many little children are strongly attached to their soft toys – they play with them, talk to them, and sleep with them.
Chris’ son called his little soft toy ‘Joshie’.
When they came back from holidaying in Florida, Chris and his wife were slightly stressed.
They could not find Joshie.
Their son was unable to sleep because he was worried about Joshie.
Chris quickly made up a story.
He told his son that Joshie was having a longer vacation in Ritz-Carlton.
Hearing this, his son was relieved. He fell asleep soon.
The same night, Chris got a call from Ritz-Carlton’s Loss Prevention Team. They had found his son’s toy.
Chris told the staff about the story he made up – that Joshie was just having an extra long holiday.
He asked if the staff could click a picture of Joshie resting beside a swimming pool – as if the soft toy was on a holiday.
The staff agreed.
A few days later, a package arrived.
It had Joshie in it.
Also, there were multiple pictures of Joshie.
One showed Joshie sleeping beside the swimming pool. One showed him getting a massage in the hotel’s spa. Another showed him driving a golf cart on the beach.
There were a few more.
Chris was immensely impressed.
So impressed, he decided to write an article about this incident in HuffPost (Chris Hurn – Stuffed Giraffe Shows What Customer Service Is All About).
Ritz-Carlton is well-known for going out of their way to keep their guests happy.
All major hotel chains try to ensure their customers have the best possible experience while in the hotel.
In another case at The Inn (Little Washington), a husband-wife duo checked into a hotel to celebrate their anniversary.
At that moment, the wife realized something – she had forgotten her bag at home.
The husband had missed it and now his wife did not have clothes to wear on a 3-day holiday.
One staff member got to know about this. He took the house keys from the couple and drove 8 hours back and forth.
By dinner time, he came back with her bag.
These are well-known examples of customer service that are published in the news.
If you spend some time reading online forums, you can read even more incredible stories.
Once a man forgot his bag in a cab. When he realized this, he started panicking.
He did not remember the cab number. All he remembered was the color of the cab and the fact that the driver was female.
The hotel staff managed to trace down the cab and bring his bag back to him.
The bag contained diamonds.
Luxury hotels going out of their way to make their customers happy is an industry practice.
Ritz has a policy of $2,000 per guest. Any employee of their hotel can spend up to $2,000 without approval to make a guest’s experience smooth.
Literally any employee – not just the front staff or the waiter, but even the electrician and cleaning staff.
Most other big-chain luxury hotels have a similar policy.
It is not much of a secret anymore.
Business Model
Why do this?
The point of businesses is to earn money. Not spend extra money on their customers.
Well, with these luxury hotels, the customer experience is crucial to revenues and profit.
If the customers have a great experience, they come back more often; they tell their friends; they suggest others visit the same hotel.
Overall, that makes the hotels more revenue.
So they are not as careful with spending money on guests – if it helps.
Of course, there are guests who try to take advantage of this. However, hotel staff are trained to handle such cases.
Luxury hotels earn fat margins.
There are quite a few ways they can make money.
Rooms is one way we all know about.
But there are also events like corporate conferences and weddings.
Experiences like fine dining, drinks, spa, and concierge service also contribute to their revenues.
With such hotels, location is of extreme importance.
They have to be close to where their clients are – airports, commercial hubs, business districts, and tech parks.
If not those, then the location would have to be exotic to attract guests – Goa beaches, hills of Himachal Pradesh, palaces in Rajasthan, and so on.
In the luxury hotel industry, one metric that gets talked about more than most others is: occupancy rate.
If a hotel has 100 rooms total and 68 of them have guests in them, the occupancy rate at that moment is 68%.
Of course, this occupancy rate is different in different seasons and locations.
Some locations are busier in summer and empty in winter. Example: Sikkim. Some see a similar occupancy rate throughout the year. Example: Mumbai.
Revenue per available room: this is another metric that gets talked about a lot.
It aims to tell how much revenue a company is making per room – ignoring whether the room is empty or full.
Average length of stay: as the name suggests, it throws light on how long guests stay.
And of course, there are metrics that are used in other industries as well: operating income, customer acquisition cost, return on investment, etc.
Biggest Names in the Industry
Marriott is the biggest name in the industry. Their market cap is about $68 billion right now.
They own many top hotel brands like Ritz-Carlton, Sheraton, JW Marriott, Westin, Fairfield, and Courtyard.
Hilton is another major hotel chain. Their market cap is about $51 billion.
In India, the biggest name is Indian Hotels Company Ltd (IHCL).
Never heard of it?
IHCL is a Tata Group company. They operate hotel names like Taj, Vivanta, SeleQtions, and Ginger.
Its market cap is about $9.5 billion or Rs 80,000 cr.
Hotel stocks have seen a growth spurt after the pandemic.
Traveling picked up in a big manner and these hotels were a direct beneficiary.
Many hotels are expanding aggressively and opening newer properties.
Traditionally, these large hotel chains owned the buildings of the hotels.
But now, an ‘asset-light’ business model is gaining popularity.
Marriott has pioneered this model where they have different kinds of arrangements.
One arrangement is running and managing hotels owned by others like real estate developers.
They also offer franchise agreements where hotel owners can call their hotel a Marriott Group hotel. They have to adhere to strict standards set by Marriott.
In both cases, Marriott takes a cut from the owners.
About 99% of all rooms under the Marriott brand are in properties they do not own.
Of course, they still continue to own some key hotels – their top flagship properties.
Other hotel chains are also liking this model. Many of Marriott’s international customers are also betting big on hotel management agreements and franchise agreements.
Even in India, IHCL has started a similar program where they manage hotels that they do not own.
It allows these companies to start new hotels with a lot less cash than if they owned the property.
It also reduces the stress and worry of the real estate side of things. Hotel companies are able to concentrate on what they are good at: providing a great service.
In India, rooms in these top luxury hotels can easily go as high as Rs 20,000 or even Rs 30,000 per night. Despite the prices, industry seniors say there is a shortage of rooms.
Many new luxury hotels are being constructed.
Not only IHCL (Taj Hotels) but other Indian chains like ITC and Oberoi too.
International hotel brands are active in India too. Marriott itself is opening hotels in India along with names like Hyatt.
Marriott plans to open 100 more hotels by 2030 – 10 of those will open in 2024 itself. Hyatt has similar expansion goals.
Younger audiences across the world are prioritizing experiences – holidays, expeditions, music festivals – and not just tangible items like phones and cars.
Investing
Like any sector that is growing, the luxury hotel space is attracting investors.
Hotels are making money. So buying hotel stocks might appeal to some investors.
As with any industry, the luxury hotel industry too has its unique traits.
Any investor exploring hotel stocks must understand how the industry works.
What are the most important factors affecting their business?
What indicators show positive growth?
What are the risks?
What looks bad but can be ignored?
What should never be ignored?
The luxury hotel space is quite glitzy. Investors need to find answers to these questions among all the glitz and glamor.
Is this boom going to be followed by a bust?
Or are the good times here to stay?
The images above were generated using AI tools.
Quick Takes
+Personal Computer (PC) sales in India rose by 2.6% year-on-year in the Jan-March quarter: IDC.
+Indian govt has reduced windfall gains tax on domestically produced crude to Rs 5,700 per tonne from Rs 8,400 per tonne.
+Acer has launched its consumer electronics brand Acerpure (starting with TVs) in India.
+India’s trade deficit rose to $19.10 billion in April (was $14.44 billion previous year). Imports rose by 10.30% and exports by 1.10% year-on-year in April: Ministry of Commerce.
+Share of coal dropped below 50% (first time since 1966) in the country's total power generation capacity in the Jan-March quarter: IEEFA report.
+India’s wholesale inflation (WPI) stood at 1.26% in April (highest in 13 months): Ministry of Commerce & Industry data.
+Domestic passenger vehicle sales rose by 1.3% year-on-year to 3.36 lakh units in April: SIAM.
+India signed a 10-year deal with Iran for operation of Iran's Chabahar Port.
+India’s imports from FTA (Free Trade Agreement) countries rose by 38% to $187.92 billion during 2019-2024: Global Trade Research Initiative data.
+Retail inflation in India fell marginally to 4.83% and food inflation rose to 8.70% in April: MoSPI.
6-Day-Course
Theme of the week: IPO pricing
We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper!
Question 1:
Which method is more popular in recent times?
-Fixed price method
-Book building method
Question 2:
In the fixed price method, investors know the exact price offered per share before they apply for an IPO.
-True
-False
Question 3:
In the book-building method, the IPO price is decided by _____ ?
-Bidding by investors
-The investment bank
Question 4:
In the book building method, if an investor applies with a price that turns out to be lower than the final allocation price, then ____?
-The investor still gets some shares
-The investor is not allocated any shares
Question 5:
IPOs are generally either underpriced or fairly priced, but never overpriced.
-True
-False
Answers:
Q1: Book building method
Q2: True
Q3: Bidding on the floor price
Q4: The investor is not allocated any shares
Q5: False
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest