In today's Finshots, we talk about hotel chains.
The Story
A couple of days ago, Bloomberg had a rather interesting headline — "Nearly 1,000 New Hotels Are Still Opening During the Pandemic".
That’s right. Despite the grim outlook, the story claims that around a thousand new hotels are opening up all over the world. Hilton opened 60 new hotels in the second quarter of 2020. Marriott opened 163 properties this year. Even smaller independent hotels are making their debut amidst the pandemic and this begs the question — Why?
The Hotelier’s Dilemma
The prognosis here is rather simple. It takes careful planning, 2–5 years of development, and millions of dollars in investments to get a sizeable project up and running. So telling the world you are open for business is much like crossing the finish line after a long marathon. You can’t just abandon the race midway. I mean, you could, but there are practical difficulties in quitting.
Besides, once the project does take off, you’ll have to worry about fixed costs — maintenance, taxes, insurance, security, and electricity. If you’re paying for all this stuff, you might as well get something out of it. More importantly, putting the project on hold, could prove disastrous if your wager doesn’t work out as intended. As an article in Forbes points out —
Hotels, especially big, luxury, convention center, resort-style ones, take years to envision, design, and build. No one wants to make panicked decisions three months into a pandemic with an unknown endgame, because betting wrong on two thousand rooms, four pools, nine restaurants is a slow-moving ship that’s hard to right once it has momentum, and could prove financially disastrous if coronavirus is vanquished by a vaccine next year and the world moves on.
But that doesn’t mean the hospitality sector is off the hook yet. Granted, hotels are still opening up. But new projects in the industry— That’s a whole different ball game. Many companies are being forced to liquidate as we speak. Other companies are downsizing significantly.
Consider Hyatt Hotels. Recently, the company announced pay cuts for all its employees and stated that it was closing some locations temporarily. A tacit assumption here is that they are also putting the break on commissioning new projects. On the financing side, you have bigger problems. Hotel companies are trying to tide over the crisis by accessing short term loan options. They are accessing these funds in the hope of keeping operations alive even when their occupancy rates stay muted. Once again, it’s fair to assume that management will opt to save money instead of diverting these resources into funding new risky projects. In fact, if hotel companies do in fact consider investing someplace right now, they’ll probably try to future proof all the properties they own. Invest in new door handles, new light switches, germ-resistant fabric, tiles that can be easily cleaned — that sort of thing.
Meaning the true impact of the pandemic on the industry will only unravel in the years to come. Companies that have witnessed a crisis such as this one will likely be more conservative in their expansion plans. Projects that never took off in 2020, will probably never see the light of day. Like forever. Investors who bet on the hospitality industry last year will likely switch sides altogether. And the real pain might be felt long after the virus is gone.
The only silver lining perhaps is that companies that do make it out alive, tend to outperform.
As McKinsey writes —
Companies that came out ahead after the financial crisis of 2008 typically moved fast and hard on productivity (including cost reduction), rapidly reallocated resources, and made bold moves (including early divestitures and acquisitions in recovery) to prepare for the future.
Hopefully, hotel companies around the world can do the same.
Until next time…
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