Renovate to compete: How to ensure a rebuild will generate a return

Written by Rachel Grier, area vice president, Asia Pacific for IDeaS

A hotel renovation can make or break a property. Given the sheer scale of investment and the disruption to business, it goes without saying that any property upgrade needs to be carefully considered and planned.

To some hoteliers across the Asia-Pacific region, there is never a good time to renovate their property. Hotel refreshes are costly and can result in a whole or partial closure of their business.

Unfortunately, there is no easy way to avoid substantial property updates in the longer term, especially if owners and investors want to ensure their hotel competes with newer properties and caters to the evolving tastes, expectations and desires of targeted guests. The bottom line is all hotels will need an upgrade at some stage, and this requires careful planning that involves more than just designers and architects.

So, what should a hotelier consider before beginning a major property upgrade? What steps can they take to ensure the chosen path they take to renovate (to fully, or partially close) is the correct one and that any work not only provides a measurable ROI, but also will maximise future profits and help grow the value of the hotel asset in the coming years?

When to renovate

Hotel renovations can be driven by many factors: when finance for such a significant investment becomes available, if new properties are entering the market and creating additional competition and sometimes simply because an owner thinks the curtains look out-of-date.

Really though, major hotel building works should be undertaken when a property needs to be upgraded in order to maintain its revenues and defend its fair market share and revenue generation index.

A key indicator that it is time to put renovation investment on the table is when the asset experiences a sustained drop in room occupancy unrelated to any price rises or other factors the hotel could have manufactured that resulted in such an occurrence.  

Pre-renovation considerations

Before beginning with any building programme, hoteliers need to understand their place in the market, their demand by room type, their online reputation, their true competitor set and their aspirational set.

It is not enough to merely consider how building disruption will impact business and online reviews in relation to their existing competitor set. Any four-star hotel planning renovations today while rebranding their image will need to compare prices to future competitors and their aspirational competitor set as part of the repositioning process.

“Online perceptions of a hotel are vital in a digital world”

Hoteliers should also consider that any renovations will likely result in changed online reviews and perceptions of their property if they are intending to trade through. Online perceptions of a hotel are vital in a digital world; a bad review on a prominent hotel review platform can turn a potential guest away from your property and send them over to a rival hotel.

A hotel’s online reputation will be impacted both during renovations (think complaints from guests about noise or availability of rooms) and post renovations (guests may or may not like the new rooms or could potentially stage a reputation revolt if they get an unrenovated room).

It is vital, therefore, that pricing should reflect how guests currently perceive their property, how this compares to their competitor set, how a partial shutdown (and subsequent building works) will impact a guest’s stay and what is the desired reputation for the hotel after the property is reopened.

A/B test to assess

One of the biggest choices a hotelier must make relating to a renovation is whether to partially shutdown the property, stagger building works and trade-through, or to undertake a full closure.

The answer to which approach is best for a property relates to whether your hotel needs to maintain a short-term cash flow, in which case a partial or staggered renovation is probably the best choice. However, if a hotel owner’s focus is long-term revenue or reopening to reposition the hotel at a different service or star level, a full shutdown may be the better approach.

There are downsides with both full and partial shutdown approaches; a partial shut-down can lessen brand prestige as guests have to stay at incomplete properties, while a full shutdown kills revenue and can result in high-performing staff leaving for competitors. To assess which strategy is best employed for a hotel’s renovation, property owners should run A/B testing to understand displacement of a renovation and help accurately weigh the cost to the business.  

Trading through a renovation

Should the decision be made to trade through the actual renovation process, detailed demand forecasts generated by revenue management systems can help improve hotel operational performance and control costs at a time when limiting unnecessary expenditure is key.

Accurate demand forecasting… the foundation of optimal labour scheduling”

Accurate demand forecasting to account for periods of higher or lower demand should be at the foundation of optimal labour scheduling and cost management during and post renovation. Once this data is made available, staffing managers can determine which areas are most affected by the number of guests staying in the hotel during the renovation.

For example, looking at how the number of occupants will affect the housekeeping needs, the number of staff needed on the front desk to check guests in and out, the number of servers who will be required in restaurants and valets to park cars.

Pricing correctly through any renovation can assist with generating favourable online reviews, or at least lessening the likelihood of a flood of negative commentary. This can be done via short-term promotional pricing to overcome negative reviews due to noise or inconvenience and offering packages for dinner at nearby restaurants should the property’s own kitchen be affected.

Shutdown, reposition and grow

Hoteliers looking to reposition their property in the market for the long-term may look to close their property entirely while building works take place. Doing so can help the hotel raise rate premiums as a result of positive online reputation scores from new room products.

Major renovations involving full-property shutdowns should always be accompanied by a repositioning exercise. If a hotel decides to carry on with business as usual following a renovation, then customer satisfaction may increase as a result of the newly redesigned property, but revenues and profits will not rise in line with customer satisfaction rates.

It is essential that a detailed repositioning exercise is conducted, examining the potential for more aggressive upward pricing based on the impact of renovations. This exercise should take place prior to any major investments focusing on a price versus value equation to help determine ROI of the renovation.

A renovation offers the potential for more aggressive pricing, changed segmentation and should include a new forecast methodology as a result of the impact of renovations in relation to the hotel’s new market position and competitive set.

“Consider if the renovation warrants a reclassification of room types”

To take full advantage of room renovations, hoteliers also need to look beyond trying to simply generate short-term positive guest feedback and consider if the renovation warrants a reclassification of room types. Often, this reconfiguration can create an entirely new room type and allows hoteliers to rethink their customer positioning.

Drive profitability following a renovation with revenue management

Part of realising and leveraging new room types and new product standards is the need to understand in granular detail the demand of each room type. The utilisation of sophisticated revenue management systems will deliver transparency to this process and additionally enables ownership to see key performance indicators such as net RevPAR by room type.

The deployment of advanced revenue technology will enable the full benefit of any property upgrade to be realised in the fastest time possible. This is achieved through more aggressive pricing and better forecast performance to drive profitability.

For more information, visit ideas.com

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