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Fijian Resort, Hotel property – A Changing Business Model

Fijian Resort, Hotel property – A Changing Business Model
InterContinental Fiji Golf Resort and Spa.
June 11
08:00 2016

The hotel industry business model has been undergoing significant changes in recent years.

The end of the second World War saw the birth of large corporations that built huge hotels in all of the important cities and the concept of a hotel brand burst onto the scene.

These properties offered the same service in every location, so people knew they would receive the same product no matter where they were intending to stay.

The introduction of the hotel chain took all the risk out of finding accommodation in a foreign country.

Each brand offered different price positions, different service standards and different extras, so it was easy to find a brand that suited each person’s needs.

With success the groups grew and in doing so one easy route was to buy other established hotels and change them to fit into the brand model.

As a result the smaller groups disappeared and the brand choices narrowed.

Eventually, the hotel groups realised they made their money out of operating the hotels, not out of owning the building.

They did need a building, but they could just as easily rent one and apply their brand model to it.

This way of operating also removed several risks that the marketing corporations had to face.

Most importantly, by not owning the building they had much more flexibility in managing the events that happen in every country, events that impact on the profitability of the operation.

These are generally events that are outside the corporation’s control, things such as political actions (revolution, violent change of government bringing changed attitudes to business), war or radical and violent activity.

Also economic disasters making the location unattractive for business, environmental events, changes in tourist patterns that have the potential to make the location unprofitable and medical events that cause severe disruption to normal life.

One example of the latter is the SARS pandemic, where a country’s borders were closed to tourists for quarantine reasons.

So the large hotel brands altered their business model.

They no longer owned the bricks and mortar, but provided a management service which established what is basically a joint venture between the owner of the building and the operator of the hotel.

This is the new model and there are benefits in it for all parties.

The commitment to this business model was demonstrated recently when the Starwood group sold the last property they owned (which happened to be in Fiji and performing very profitably) to become a hundred percent operator only, worldwide.

 

Local investors owning hotels good for Fiji

These changes hold both opportunities and issues for local investors. The new way the international management operators want to run their business also has interesting implications for the Fiji government.

The management groups now want to provide “services only” for the operation and have no interest in owning any brick and mortar assets.

In other words they will look after all aspects of the operation of the property but not the property itself.

Why do they want to run their business this way? The answer is reasonably simple.

They have come to understand that there is no  need for them to have the vast amounts of capital tied up in the building.

They understand it is easier and better to have someone else invest into the property side of the equation and carry out the task of running the business on a daily basis themselves.

They do what they do best and at the same time they don’t have vast amounts of capital tired up because they can basically run the business on their daily cash flow.

Of course occupancy does go up and down but the operational expenses follow the pattern fairly closely.

The management operation performs and controls all the things that need to be done to keep the hotel going.

They have accounting system developed within the operation over a number of years and they manage tight financial control in an industry that is notoriously leaky financially.

They run the food and beverage operations and the entertainment and other guest services.

They have a strong and experienced international marketing group that can promote each property internationally.

There is certainly a huge reduction in the brand advertising and promotion costs as the budget is spread across so many properties located around the world.

The hotel management group fees are low, averaging somewhere around eight percent of the net profit. And they generally do a very good job of the management of the property.

For some five years now, local investors have been moving into the ownership of hotels and resorts and having them managed by some of the leading international management groups.

 

Some management groups in Fiji

The management groups best known in Fiji are International Hotel Group (IHG), Starwood (currently the Sheraton and Westin brands are in Fiji) and Hilton.

These are three of the top operators internationally, although Starwood has been taken over by Marriot.

The Starwood properties in Fiji, which includes the hotels, golf club and a significant parcel of Denarau land is in the process of sale.

The purchaser has met all milestones and the sale is now unconditional.

The traditional landowners placed a caveat on the properties and a decision was due on June 4, but the Starwood legal team requested more time to present a submission and the Court granted a further 14 days.

For investors who want to get into the hotel and resort business, but have no experience in this type of operation, the management company will take all the pain out of starting up and will quickly deliver a good level of business.

For Fiji the concept represents a potential boost to the local economy as most of the revenue stays in Fiji.

This is not the case if the property is owned by an overseas operator or by a foreign investor, In either case a significant percentage of the money will be repatriated overseas as fees.

A local property owner will also work longer and harder when the industry goes through hard times, helping to protect Fiji tourism.

week decided keep in place the lane restriction and 18 tonne load limit on Tamavua-i-Wai Bridge for four more weeks.

The decision was reached following detailed examination by Engineers after the discovery of a crack in one of the structural beams.

While the authority saw no further critical issues, the recommendation to FRA was that further strengthening work is required elsewhere in the bridge structure.

FRA has already indicated the Tamavua-i-Wai Bridge was built in the 1960’s and was designed for use by vehicles within the current legal load limits.

FRA interpreted the regulations as restricting vehicles to 21.4 tonnes for a 10 wheeler, 26.8 tonnes for a 12 wheeler, and that no vehicle of any configuration should exceed 32 tonnes gross weight.

But it has established that information demonstrates these load limits are being exceeded, with vehicles now crossing this bridge at twice the legal weight.

The restriction on load limit has been put in place as a precautionary measure for public safety reasons and will mean workers can safely get on with the job under the bridge.unattractive for business, environmental events, changes in tourist patterns that have the potential to make the location unprofitable and medical events that cause severe disruption to normal life.

One example of the latter is the SARS pandemic, where a country’s borders were closed to tourists for quarantine reasons.

So the large hotel brands altered their business model.

They no longer owned the bricks and mortar, but provided a management service which established what is basically a joint venture between the owner of the building and the operator of the hotel.

This is the new model and there are benefits in it for all parties.

The commitment to this business model was demonstrated recently when the Starwood group decided to sell the last property they owned (which happened to be in Fiji and performing very profitably) to become a hundred percent operator only, worldwide.

 

Local investors owning good for Fiji

These changes hold both opportunities and issues for local investors. The new way the international management operators want to run their business also has interesting implications for the Fijian government.

The management groups now want to provide “services only” for the operation and have no interest in owning any brick and mortar assets.

In other words they will look after all aspects of the operation of the property but not the property itself.

Why do they want to run their business this way? The answer is reasonably simple.

They have come to understand that there is no  need for them to have the vast amounts of capital tied up in the building.

They understand it is easier and better to have someone else invest into the property side of the equation and the group carry out the task of running the business on a daily basis themselves.

They do what they do best and at the same time they don’t have vast amounts of capital tired up because they can basically run the business on their daily cash flow.

Of course occupancy does go up and down but the operational expenses follow the pattern fairly closely.

The management operation performs and controls all the things that need to be done to keep the hotel going.

They have accounting systems developed within the operation over a number of years and they manage tight financial control in an industry that is notoriously leaky financially.

They run the food and beverage operations and the entertainment and other guest services.

They have a strong and experienced international marketing group that can promote each property internationally.

There is certainly a huge reduction in the brand advertising and promotion costs as the budget is spread across so many properties located around the world.

The hotel management group fees are low, averaging somewhere around eight percent of the net profit.

And they generally do a very good job of the management of the property.

For some five years now, local investors have been moving into the ownership of hotels and resorts and having them managed by some of the leading international management groups.

 

Some management group in Fiji

iement groups in Fiji

The management groups best known in Fiji are International Hotel Group (IHG), Starwood (currently the Sheraton and Westin brands are in Fiji) and Hilton.

These are three of the top operators internationally, although Starwood has been taken over by MarrioT.

The Starwood properties in Fiji, which includes the hotels, golf club and a significant parcel of Denarau land is in the process of sale.

The purchaser has met all milestones and the sale is now unconditional.

The traditional landowners placed a caveat on the properties and a decision was due on June 4, but the Starwood legal team requested more time to present a submission and the Court granted a further 14 days.

For investors who want to get into the hotel and resort business, but have no experience in this type of operation, the management company will take all the pain out of starting up and will quickly deliver a good level of business.

For Fiji the concept represents a potential boost to the local economy as most of the revenue stays in Fiji.

This is not the case if the property is owned by an overseas operator or by a foreign investor, In either case a significant percentage of the money will be repatriated overseas as fees.

A local property owner will also work longer and harder when the industry goes through hard times, helping to protect Fiji tourism.

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