As I pen my thoughts today, the world wrestles with the unprecedented implications of COVID-19 coronavirus pandemic. Each one of us is witnessing a human crisis unlike any we have experienced. For the hospitality industry, it’s like experiencing a continuous wave of tsunamis where each subsequent wave is bigger than the previous one and the battering continues unabated with no end in sight in the short term. It seems like yesterday when we were sailing smooth waters and now suddenly we are all witnessing the darkest clouds gather at the horizon and we have to prepare to weather the perfect storm.
While the current situation is extremely fluid and continues to unfold, the single most important factor will be the duration and geographical spread of the pandemic coupled with the nature and extend of lockdowns. This, in my opinion, will play a pivotal role in resumption of travel and revival of demand for hotels. Currently, the possibility of a series of lockdowns looks eminent. Travel restrictions and social distancing is here to stay. Empirical evidence clearly suggests that while lockdowns create maximum social distancing and could assist with possible suppression of the virus and save precious lives, it also results in high degree of disruptions in economic activity, especially for services sector.
In this article I attempt to analyse the critical factors and strategies that the hospitality industry needs to adopt to mitigate the business risks in these turbulent times.
As the dust settles on major economic and fiscal reform initiatives in India, we take a look at the challenges facing the Indian hospitality industry. Further, we try and analyze how a new set of challenges are likely to bring about a paradigm shift in the way hotels are likely to manage revenues, costs and profitability margins in the future
Implement Enhanced Health, Hygiene and Emergency Protocols
When business resumes, hotels will have to implement detailed protocols to improve guest and employee health and safety. There needs to be an immediate switch towards extensive use of quality disinfectant products that have been pre-approved by competent agencies for use against viral pathogens. Usage of these products will become the new standard during routine cleaning of guestrooms and all public spaces within a hotel. All housekeeping staff must undergo comprehensive training to learn the proper use of these disinfectants safely and correctly. Staff should be sensitised to wear gloves and face masks while on duty to reduce risk of transmission as well as protect themselves against contamination. There exists a significant risk that linens may become contaminated, so it is also important to increase the frequency of linen change and add necessary disinfectants when washing laundry. Providing hand sanitizers at all public areas and rooms should be mandated and so should be the usage of disposable disinfectant wipes to disinfect room surfaces frequently touched by guests. Similarly, food preparation and handling procedures have to be redefined to reduce human interface to the best extent possible.
Guest history and PMS records will have to be re-aligned to enable effective contact tracing in the event that any infected guests have been to the hotel. HR and Personnel departments will also have to review staff records on a daily basis to track staff movements and access risk of exposures within their families and communities. Logs need to be maintained for all employee work areas and floor assignments. Secure documentation of key control procedures and security camera logs need to be maintained more diligently. SOPs also need to be defined to determine appropriate actions if a guest or staff presents symptoms of infection. Dedicated rooms will have to be earmarked if the hotel is asked to quarantine its guests or staff members.
Adopt a People First Approach
I am of the firm belief that the value of human motivation to overcome crisis and determined efforts of the most humane industry in the world is being underestimated. In these uncertain times, the simple act of paying positive attention to people, providing them encouragement and stability will go a long way and have a long-term impact on the spirit and morale of the organization to overcome the crisis. The very roots of hospitality are embedded in the idea of creating immediate and curated engagement that can enhance guest experiences and drive loyalty, this can only be achieved by the efforts of a highly motivated team. While I believe that certain job cuts are inevitable, it should be done as an absolute last resort and not as a proactive cost management strategy. The hotel’s leadership team could put a revised compensation package in place for all staff members for the next 2-3 months, following which the hope is that travel will resume and things would return to normal. The health and safety of employees and their families should remain the immediate primary concern and the economic well-being of each individual team member must be given utmost priority.
This is also the best time for hotels to embark on skill development and build a stable and motivated team which is future-ready. Hotels also need to undertake a comprehensive Training-Need-Analysis that will lead to increased awareness towards health, hygiene and emergency protocols, functional work efficiency that would assist hotels to meet their revised business objectives. Hotels need to remember that personalized customer service delivery will always continue to remain at the core of the hospitality sector and guests will always find solace in the human smile and warm delivery of services.
Migrate to Zero Based Budgeting
Historically, improved revenue delivery was the primary lever that would lead to profit enhancements. However, going forward profitability will be a function of internal cost management efficiencies and the capacity of the hotel to convert a significant portion of its fixed cost to variable costs. Payroll, Input & Raw Material costs, POM Costs and Energy costs comprise approx. 80% of the fixed costs for a typical hotel and the big four are likely to go up significantly due to lower revenue inflows. To mitigate the risk of steep cost escalations, operating hotels need to consider migration to a zero-based budgeting approach once business resumes.
The zero-based budgeting exercise will encompass all revenue and cost functions and every P&L line item and support function needs to be analyzed in detail. Further, the exercise needs to be flexible to allow for redefinition and realignment of all strategic performance goals (revenues and costs). Since Zero based budgeting is a detail-oriented and time-consuming process, hotels need to identify functional heads or process champions who will lead their respective teams in the development and implementation of revenue improvement, cost optimization and performance management plans. The goal should be to ensure effective benchmarking of optimal performance levels and compliances (process, service delivery and financial).
Explore Revenue Diversification Strategies
With a deep-seeded global recession and continued economic uncertainty, there will be reduced travel, discretionary spends will be curtailed and hotels are likely to witness rate rationalization coupled with subdued demand in the short term. To mitigate the risk of suppressed demand and reduced revenue inflows, hotels should prepare to augment revenue contributions through non-traditional sources of income. This can be achieved by reevaluating the traditional market segment mix and key feeder markets to enable a wider customer base.
Sales teams need to evaluate the options to monetize un-occupied spaces and augment per square feet yields. Revenue diversification strategies could be in the form of converting a section of the rooms inventory to leased rental pools. With international borders closed and wide-ranging disruptions in air travel, there exists a significant latent demand from various embassies and national missions to host their citizens in transit. With new measures being put in place to further extend social distancing in the coming months, patronage for restaurants and bars will continue to be affected. Home delivery of meals, institutional catering contracts, utilising F&B spaces as co-working spaces need to be aggressively explored.
Introduce Target Based Costing and Supply Chain Innovations
Hotels need to introduce target-based costing as a proactive cost management tool to reduce the total cost of business operations. Implementation of target-based costing will help hotels in managing profitability targets more efficiently in these extremely volatile market conditions. For effective Target Costing, all functional heads in charge of respective cost functions should identify a target cost benchmark for all products and services related to their respective departments. The objective of the exercise should be to ensure that products and services with low utilization ratios and high procurement costs are earmarked for effective migration/substitution. Each item defined under the plan should be either removed, replaced or substituted within a defined timeframe in line with the targeted cost. Target based costing can also be used for controlling the design specification and FFE related expenses as part of the annual procurement plan.
Going forward, innovations in supply chain management and sourcing will be critical and will have to be focused upon so as to reduce the level of uncertainty due to disruptions caused due to lockdowns or travel related restrictions. Those hotels which have a cost structure better than industry averages will tend to benefit. During this consolidation phase another important factor will be the ability of the top management to establish a clear view on core versus non-core areas of operations. Hotel companies with inherent flexibility to convert a large portion of the fixed business support cost to variable costs will reap benefits.
In Conclusion
At Prognosis Global Consulting, we firmly believe that the industry will start to witness recovery post October 2020 and there is possibility of a sharp V-Shaped recovery in 2021. In the interim highly leveraged hotels will have to implement a mitigation plan to avoid chronic and widespread bankruptcies. There is an urgent need to address the cashflow, liquidity and working capital finance related problems. All efforts need to be made to ensure that liquidity problem does not snow ball into a solvency problem.We are of the opinion that going forward there will be a paradigm shift in the dynamics of revenue performance and profitability management for the hospitality industry. Classical models and conventional wisdom will need to be constantly challenged to find opportunities in adversity and migrate to the new normal in a post pandemic world.
Author : Siddharth Thaker & Ritu Chawla Mathur
A man does what he must in spite of personal consequences, in spite of obstacles and dangers and pressures and that is the basis of all human morality. Success in not final, failure is not fatal, it’s the courage to continue that counts
– Winston Churchill