What was achieved?
Even seven years after the Swallow Hotel Group was taken over by Whitbread, it is still sad to see the name of what was a highly respected and sound company being dragged through the mire and associated with failings and an unclear future for those who have since become involved with the brand.
But the change that has happened to the structure of the industry since 2000 is fraught with difficulty. What we have seen so far is but the tip of a huge iceberg. Why is that? Essentially it is because there are two camps involved with unrelated interests.
The first are property investors who simply want a guaranteed return on their investment, which is calculated on the value of what they paid for the properties and is thus the basis of the rent that the operator pays. Many of these arrangements, however, bear no relation to the units’ operating potential.
The second player is the operator who sees an opportunity to get into the market with limited capital. Three problems arise from this:
- First, to make it work they have to be very good operators.
- Secondly, the properties must have the right potential.
- Thirdly, there has to be a sound agreement on funds for maintenance and refurbishment to keep the properties up to scratch.
London and Edinburgh Swallow Group (LESG) failed on a combination of these essentials. The situation was exacerbated by the rapid purchase of hotels from which even a top-class operator would have had difficulty yielding a reasonable profit. They had probably overpaid significantly for their original purchase from Whitbread, added to the fact that there had understandably been limited expenditure on the properties in three years as an earlier sale had been anticipated. [1]
Without the comfort that owner-operators had of knowing that any capital investment (let alone maintenance expenditure) made to the properties would ultimately enhance and protect the value of the business, these current operators have (I was going to say—very little chance—but will moderate that to) a huge challenge to make satisfactory profits to meet their rents, debts, allow for depreciation or amortization provisions, have good supplier relations and, most importantly, be able to concentrate on running good hotels with well-motivated and well-paid staff to the ultimate benefit of their customers whose loyalty is paramount to sustaining a good business.
The other problem is that they are stuck with it. They have little to ‘sell on’ if they don’t satisfy what the previous paragraph demands, mainly because without the asset value and profit there is not a lot of value in the business.
Implications of scale
This situation was caused by major international companies looking at ways of exiting owning properties as, with the high capital values, the returns were not good enough to keep shareholders happy in comparison with the returns of other industries.
Those companies who own major brands are thus able to develop their portfolio of operations with the right properties, lower capital employment, more franchisees and yield better-looking percentage returns. Some who had bought into major brands, like Whitbread with Marriott, didn’t even have that option as the high franchisee fees made good capital returns more difficult. They therefore ultimately chose to exit this market and concentrate on achieving better shareholder returns from other activities.
However, the crux of the problem is that the above strategy is not really an option for smaller operators. They simply don’t have anything like the same brand value, brand discipline or scale benefits such as efficient purchasing, training, marketing etc.
The 'third layer'
Additionally, this situation is made even worse when a third layer appears, with its associated costs, eroding the profits by making an extra call on the rent revenue. These are the people who come between the property owner and the operator, supposedly to protect the former’s interests and make sure the operator performs better. Absolute nonsense in terms of good structures, good hotel-keeping and good organisation.
The result is limbo! The only winner is the property investor but even he must see problems ahead with potential default. The last shake-out in the industry was brought about by the evolution of the budget hotel in the 1990s. That saw the end of lots of two-star hotels who could not compete. Because of what has happened in the past five years it has moved up a notch and now the three-star mid-market hotels are being challenged. Even poorly presented four-star units that don’t match up to the quality of the international group hotels—who are just not interested in provincial, other than essential, locations—are under threat.
The future of this market sector is going to be challenged mainly because of the erosion of the quality of the asset, the inherent quality of the unit management and what is delivered in terms of guest satisfaction. The current financial and organizational structures will just not deliver in the longer term and more unsustainable businesses will be identified. So is there an alternative?
The old structure of large publicly owned, owner-operated companies is clearly dead for the time being. The structures just did not deliver what the City now demands for shareholders, which is very sad in many ways—especially for customer satisfaction. What really was ever achieved by the Granada-forced demise of Forte, and more recently that of Swallow, of De Vere and many others who passionately strived to deliver more and more?
What education can do
There is, however, going to be great change. In many ways that is where our colleagues in higher education have to evaluate their contribution; in the recent past that has been the thrust of my argument and the raison d’etre for educational establishments offering courses that focus more on hotelkeeping. They mustn’t lose sight of what the industry needs now and may need in the future. Sometimes that is lost in the current thrust of delivering a broad general education in volume. Given this need it and the all important aspiration for brand supremacy, it is anomalous that one of the most recognized and respected brands in hospitality education has recently decided to ditch its ‘hotel’ association and be satisfied to be known as a university department.
The industry needs more good hoteliers and fewer accountants to deliver a quality hotel industry. The quality of hotel management has declined in recent years and consequently the quality of mid-market hotels when, in fact, the opposite should have been happening, given the proliferation of courses now offered. Some blame for this can be laid at the door of these newly structured companies whose life is split between cutting corners to help pay the rent and trying to negotiate better financial arrangements. This situation will not endure.
A new opportunity therefore beckons. Small- and medium-sized hotels cannot be run by head offices. They need either a professional owner-operator or management with some form of vested financial interest and incentive. This has long been overlooked, with hospitality graduates either being lost to the industry completely or relying on the few who manage to make it to the top.
Professional hotel-keeping is a wonderfully rewarding career with good inbuilt progression opportunities and great personal satisfaction but is sadly undersold. Why? I am sorry to keep banging on about ‘hotels’ but that is the very heart of what we are talking about. The thrust of education maybe to create more and more star performers with the highest qualifications but this may make people too aspirational when what hoteliers need is personality, passion and a thorough knowledge of their subject. If this is what the industry needs then there has to be a correlation between college recruitment, the objectives of the courses and the expectations of employers. Are these relationships sound enough?
A new opportunity
So are we prepared for this change that is beckoning? Is there a new dawn for marketing consortiums, training organizations, and other experienced specialist individuals to help this market sector survive and deliver traditional values but in a different and sustainable format? And this need is greater if the real future is going to be more and more individual-owner or financially-involved operators.
If the government and opposition are to believed, the future opportunities are for individuals to own their own companies. That will demand hoteliers with a passion and a deep knowledge of their business as well as new financial and fiscal incentives. But what an opportunity for the future of a strong hotel industry.
It is easy to explain the reasons for the growth of the ‘no-service’ sector by the demand for low rates relative to what is offered (which is probably true) but that is an easy solution. Lack of response and capability from the ‘service’ sector could equally be a factor.
The current separation of property ownership and management in the non-branded sector of small and medium hotels will not endure and is no recipe for giving the public the opportunity to enjoy good hotel experiences.
So does education lead or follow? Or is this also a real and meaningful opportunity offered to time spent on research? Whatever, the two camps need to work together like never before.
Reference
The author
