In over ten years of helping hotels to open and remodel successfully, we have seen time and again at Xotels how indispensable a feasibility study is. We have also seen how many would-be hoteliers simply assume that their vision will succeed, without conducting any notable research on building a hotel business that will be consistently profitable and competitive. In this article we look at the steps involved in carrying out an effective hotel feasibility study.
What is a hotel feasibility study and do you need one?
As the name suggests, a feasibility study investigates your hotel proposal to see if it is feasible as a sustainable, profitable business model. It does this by considering its viability relating to market, location, costs and financing. A feasibility study forms the cornerstone of your preparations for your new or remodelled hotel. It shows investors how they will receive a return on their investment (ROI). It is therefore ill-advised to proceed without carrying out this crucial investigatory and illuminatory step.
Below you will find a template plan and approach the expert team of our hotel consulting company takes to put together a comprehensive validation report to determine the viability of a new hospitality project or lodging concept.
The key steps of an effective hotel feasibility study
1. Location analysis
Studying proposed sites for your hotel or resort aims to answer a number of questions critical to the success of your hotel project. What makes the location an attractive site? Is there a supply of labour sufficient in number and quality? What human resource costs can be expected? Is the hotel supported by easy transport links? What are potential risks and advantages associated with the local area?
2. Total costs calculation
This includes the development and architectural costs prior to opening the hotel. Then there are the operating overheads which the hotel will incur, including licences, taxes, equipment, furniture, insurance, human resources, inventories, electricity, water and more.
3. Local hotel supply and demand investigation
This involves analyzing all hotels in the local area, chiefly their competitiveness. Information can be found with tourist boards, tour operators and travel research groups. Knowing local hotel supply and demand helps in projecting occupancy levels and rates for your hotel, one of the key elements in establishing its economic feasibility.
4. Room rates and year-round occupancy levels
After establishing hotel supply and demand, your own hotel’s competitiveness, your projected operating costs, desired ROI, and crucially, benchmarking your competitor hotels, you can focus on room rates. Year-round projections for demand will go a long way to informing your pricing decisions.
5. Establishing and projecting hotel revenue sources
The main sources of revenue for your hotel will come from room stays, food and beverage, and events such as conferences and meetings. Using your projections for average year-round room rates and occupancy levels, you can project sales from different revenue sources, including food and beverage, leisure and events.
6. Hotel feasibility study projected ROI
One of the most important parts of your hotel feasibility study is the projected ROI. ROI is worked out by using a number of metrics, including internal rate of return (IRR), net present value (NPV), debt coverage ratios and discounted cash flow (DCF), as well as others. They help to show if the investment return is enough to proceed and if you will need to find financing from elsewhere.
If so, will the lenders of this capital be content with the projected ROI? If not, the hotel proposal can be abandoned altogether or it can be altered to make the return on investment attractive enough to proceed, such as changing site, tweaking room rates and reducing costs. A clear and comprehensive report is what banks, institutinal or privite investors (famliy offices) will be looking for.
Hotel Feasibility Study - The final word
As you can see, a hotel feasibility study is extensive, and with good reason. It gives you and all interested stakeholders such as other investors a much clearer picture regarding the costs involved, whether the return on investment is desirable, and helps in deciding how to proceed. A feasibility study is largely seen as an indispensable step for all serious hotel proposals and accompanies the business plan in forming a blueprint for success.
Patrick Landman @ Xotels