By Jochen de Peuter

Ever-changing market factors, including external economic forces, shifting demand patterns and changing competitive pressures, can all influence a property’s success and constantly require hotel property owners to re-evaluate their asset’s position to improve its image, profitability and value.

The Basics

Hotels are different from other types of real estate because they involve both a special purpose real estate and a daily operation business. Repositioning a hotel is therefore a complex process with many moving parts.

Repositioning hotel real estate involves many factors (market, economy, customers) and skills. There are several steps that can be taken to ensure smarter decisions when it comes to repositioning your hotel in the marketplace in the best possible way.

Steps to reposition hotel real estate

1. Market research
   Affirm the alternatives, understand the big picture and narrow down to the relevant alternatives.
2. Calculate the options
   A quantitative and qualitative assessment of the proposed business gives the owner or investor a basis for their decision making.
3. Real estate development
   Develop the concept, review the building plans with experts and complete the project.
4. Adapt and improve the operational model
   Either operate the property or find a third party operator; in any option the operational business model has to be reviewed.

Market research

Get the big picture first

What are the alternatives? Before diving into a selection of alternatives consider first the macro and micro economic trends, only then narrow down the options. The hotel performance and the long-term capitalization rate of hospitality real estate asset have a nearly 1-1 correlation with the macro-economic indicators such as Gross Domestic Product, Consumer Price Index or unemployment rate but as well with economic recessions, socio or geopolitical factors, currency rates, local politics, consumer trends, global disasters, technology disruptions, financial markets, flight routes, legislation, destination management, etc.

According to a report on macro-economic variables and hotel performance (2016) that measures the correlation between hotel market performance indicators (ADR, RevPAR, Expense and Profit), Gross Domestic Product (GDP), Unemployment, and Consumer Price Index (CPI) over a 60-year period, the results of the study conclusively demonstrate:

• A strong correlation of around 90% between unemployment or GDP and hotel KPIs.
• A zero lag time between macro-economics and hotel performance.
• A progressively strengthened relationship (correlation) over the last 60 years.

This has been amply demonstrated during the Covid crisis.

We may conclude that hotel owners and investors must be even more aware of the macro-economic environment and should be vigilant of how macro-economic changes impact the performance, especially in the current turbulent environment. Data also indicates that the role of the macro-economic impacts progressively hotel performance.

Understand your market and customer

What is the market size and who is the local customer? Understanding the available alternatives is a matter of fact-based research, starting from a customer point of view. A simple example would be to compare London to a ski destination like Zermatt. Both destinations have a different hotel demand, a different client profile and a different market-size. No need to say that London needs business hotels, while hotels in Zermatt focus much more on accommodation offering outdoor sport activities.

The level of analysis goes much deeper than the destination, market size, trends or performance. For example, the exact location plays a crucial role in the positioning of a hotel. To be investigated: what urban development plans are scheduled, what points of interest are more nearby than the competitors, where is the origin of the local hotel demand, what are the future consumer trends, etc.?

The final outcome of an extensive research should be a very exact description of maximum 2-4 potential buyer personas, eligible to future consumption of the services. Each of the buyer personas is unique in their behavior, budget, length of stay, on-site activities or values. A simple example would be to say that well-being, sustainability, vegan food and a natural setting are more important for a wellness tourist than connectivity, community and polyvalent spaces which are favored in a city center by a business traveler. This has to be well understood and elaborately described. We may conclude that the customers determine the alternative concepts to reposition a hotel real estate.

Obtain a very clear market positioning

Once we have investigated the market and customer, we need to fully understand the market positioning. This is a delicate process. The smallest detail impacts the client experience, profitability or hotel operations. Using the right benchmark and affirming a strong market positioning allows to be more cost-effective in client acquisition and hotel operations in the future, hence to be more profitable.

Calculate the options

Evaluating is more than just calculating

The return on investment and capitalization rate plays a major role in the decision-process of a hotel real estate investment, however this should not be solely considered by the owner or investor. Besides the numbers, a qualitative assessment per scenario enriches the discussions prior to making decisions. A qualitative assessment includes a SWOT analysis of the scenarios and contains all points of consideration. A final decision has to be made by the board in order to move the project to execution and should involve a consultation with a real estate developer or architect.

Case study: Opportunity study with an existing five-star city hotel asset

In a recent mandate, EHL Advisory Services performed an opportunity study to modernize a five-star city hotel into a lifestyle hotel for mid-segment or upscale or to transform the hotel into serviced apartments in part or fully, and introduce open office spaces or to consider a mix of these opportunities. In the creation of our final report, we calculated that beyond the work required was to understand the market and potential clients in order to justify and defend the numbers in our profitability projections for the different scenarios.

We investigated macro- and micro economics, the local market, the potential, client expectations and product description and benchmark properties. We looked into the future, anticipating trends. In addition to the numbers, a qualitative assessment per scenario enriched the discussions facilitating the decision making process. Each opportunity brought a series of consequences which were clearly outlined in the report.

Our key recommendations

• Validate the reality of the market and local buyer persona
• Full assessment of quantitative and qualitative variables, with several scenarios

Real estate development

Always ask for a second opinion from experts

Once the new concept has been decided, architects and project developers are consulted to make a proposal. We see that at this stage too many hotel owners and investors put their full faith in the one of both parties, whereas not every architect or developer has an extensive experience in building hotels or especially in operating them. Secondly, over-creative architects could set out own ideas without following up on the owners’ interests or client experiences. Understanding that a repositioning can cost (tens of) millions of euros, a second opinion from an hospitality expert is advisable.

The value of including hospitality consultants in the repositioning/renovation project lays in several opportunities:

• Validate the existence of a customer for the business case
• Reducing the final renovation costs without compromising on the client experience.
• Ensuring the client profile is respected and the willingness to pay increases.
• Ensuring the operational and client flows are optimal, back- and front of the house.
• Defining the most important investment priorities if the budget is limited.
• The investment is appropriate to the market demand and the NPV is positive.
• Countercheck the compliancy of plans to the regulations or industry standards.
• Prudency, defend the owners’ or investors interest towards third parties.

Case study: Owner representation to a hotel renovation

In a recent mandate, EHL Advisory Services assisted the client in guiding a hotel renovation investment of 25-35 million euros. Our in-house expertise allowed to optimize the renovation plans proposed by the architects; we reduced the final invoice, we optimized the operational flows, we secured the legal conformity and improved the client experiences. Our second opinion in such in an investment was cheap compared to the expected returns.

In the mandate we proposed solutions that reduced the renovation bill by 15%, reduced the number of rooms by 20% based on the market size and ensured conformity to future regulations for many back of house installations, which wasn’t in the budget. In addition, EHL Advisory Services included a gap analysis to ascertain that the owners’ ambitions were in line with the funds provided. We also studied and confirmed that the future customer would be willing to pay more after renovations.

In the end we concluded, with our net present value evaluation, that the calculations for the different scenarios should guide the investor or owner to the best option, in this case to go ahead with the investment, following the timeline and operational plan as outlined.

Our key recommendations

• Defend your own interest as an owner, investor towards real estate developers.
• Consult for expertise to optimize the profitability of the renovation project.

Adapt & improve the operational model

Strategic market positioning includes new standards of operation

Only a few hotels offer nothing more than just a bed, but most hotels offer a service to sell. It is not only the hardware, but the software as well. Repositioning a hotel includes re-inventing the operational business model. In particular when upgrading the product, the increased services level should follow accordingly.

This mostly concerns:

• Brand positioning: understanding of company mission, values, market positioning, benchmark, design, signature services, experiences, employees mind-set, brand standards, target clients.
• Operational standards: demonstrating an adopted and improved service level from pre-arrival to post-departure.
• HR policy: change company culture, objectives, expectations, values, trainings, competencies, management, leadership style.
• Organizational structure: New roles and responsibilities, creating new openings or vacancies were needed.

The risk is that operational standards are not supported by a new firm identity. In that case, the new positioning only will be superficial and not market competitive. The tricky part is to approach this step in a methodological sequence. New standards of operations cannot be defined as long as the long term mission or values are not defined; neither if the unique selling points, benchmark and client expectations are missing. A hotel repositioning brings a cascade effect and therefore must be part of full transformation project with adjusted and improved level of services.

Case study: Adapt the operational model to a repositioned hotel

In a recent mandate, EHL Advisory Services assisted the client redefine the entire operational model. The aim was to transform a small boutique luxury mountain hotel to a large high-end wellness destination. This did not only include an update of the tangible facilities on premise but the intangible service levels as well. The gap was significant in three domains: the amount of staff, the attitude, skills and competencies of existing staff and the absence of enough quality operating procedures. These three domains were the focus of the mandate. Our methodology consisted in first capturing the mission and values of the organization, together with the positioning of the brand and the customer base before we started to improve the three domains.

The new and clear identity supports the operational and organizational changes. All the recommendations are documented in a brandbook. The brandbook allows to communicate internally to employees or to future investors in order to scale up the business model. It is a complete document that goes from high-level strategical positioning up to the smallest operational client touch point.

Our key recommendations

• Develop a cohesive identity and strong market positioning.
• Reposition the entire organizational and operational model too.

Repositioning a hotel: A true challenge

Repositioning goes far beyond physical renovation for a property. Let’s say it’s one part to a comprehensive plan for attaining medium- to long-term financial, operational, and market strength. It is a very long process.

Repositioning is a conscious adaptation to a changing environment, which represents a fundamental change in the value of the business. It can also be described as a parallel to the recovery as both focus on improving the business value proposition.