Pandemic times and leisure
Back in 2019 prior to the Easter Sunday massacre, Lonely Planet rated Sri Lanka as the top country in the world for travel. However, today the world of travel has come to a standstill making a direct adverse impact on the Sri Lankan hospitality sector which generated the second highest foreign currency inflow to the country next to worker remittances making an adverse impact in the country’s economy. These adverse conditions made a heavy impact on the leisure sector starting with Airlines, Hotels, Destination Management Companies (DMC), Restaurants, Airbnb and other small timers resulting in heavy losses and making these businesses live on a thin line of survival anticipating a turnaround.
During pre-pandemic times hotels generated the majority of its revenue and higher margins through room sales apart from banquets and Food & Beverage (F&B) which does not result in higher margins compared to room sales. The Average Rate of Return (ARR) for a room is approximately around LKR 20k in a city hotel and hotels make a margin of nearly 80% of the same. Currently with zero inbound tourism and travel restrictions that are imposed within the country from time to time, room revenue has been silenced other than for few domestic bookings mainly in hotels which are used as quarantine centers.
However, both banquets and F&B have managed to keep things afloat to some extent under many restrictions and capacity constraints due to health and safety regulations and guidelines. With the current environment customers prefer to have small gatherings in private mainly in their residences which assist to increase the demand for outdoor catering. With an average check of LKR 4K on outdoor catering the hotel will be able to make a margin of 50% easily where it helps the bottom line to be more favorable whilst assisting their employees to have a decent service charge for a month.
Furthermore, as a revenue drive hotels can also promote airport drops when there is traction for inbound tourism promoting more cars opposed to coaches on the road. This will help the customers to travel more safely than having to go in a coach with large numbers whilst assisting the hotels to make some revenue and living for the chauffeurs.
Hotels should further focus more on their cost structures and should always strive towards being more efficient whilst trying to be lean and mean when making decisions over any expenditure. Here the staff cadre becomes more important to manage as their salaries become a fixed expenditure for a hotel especially with the country’s labor laws. Therefore, the natural attrition of the cadre should always be considered as a positive and should work towards managing the operations with the existing staff unless otherwise the replacements are essential and imperative for the operations to continue. However, hotels should consider their cost structures more seriously and should work towards converting their fixed overheads to more variables so that they become stronger to face the current crisis or anything else in future.
Generally, hotels set their annual budgets three months ahead into a new financial year and there on the numbers set in the budget are validated either quarterly or by annually and then the numbers are fine tuned or rather forecasted to have an understanding about the year end, formulating strategies to achieve the best by the end of the year.
However, post pandemic has resulted in this process to be carried out more frequently and to have a rolling forecast month on month mainly due to the rapid changes in the MACRO environment. With this the budgeting and forecasting of a hotel has gone beyond its traditions to stay live and effective. Furthermore it’s also important that hotels start with zero base budgeting, especially stepping in to a new financial year rather than continuing from where it ended the previous year.
Meanwhile for hotels F&B being the only hope has made them sweat by having to be creative specially in catering to the customers and adhering to all health guidelines by way of home deliveries, home catering, regular promotions, higher discounts and to have more raving fans in order to ensure they generate enough revenue to cover the wages of their employees. Therefore it’s important that hotels focus more in terms of F&B & the expenses when formulating their budgets or forecasting.
With the current circumstances it is also important that the hotel management build several scenarios in budgeting and forecasting so that they could change their plans dynamically to suit the environment and to make the process more effective. Unlike in the past budgeting and budgetary controls has also become more crucial to navigate the business in the correct direction.
With this new process it is further important to be more creative to seek competitive advantage by means of product and service offerings whilst costs are kept to a bare minimum, achieving better margins to have a breakeven bottom line even without much support from room revenue. Therefore, the budgetary process has now become more important than it used to be to make better results for any business not limiting for hotels.
The Author is a veteran hotelier with a wealth of experience for over 35 years in more than 10 countries around the globe. He currently serves as a consultant with the Hotel Advisory practice of KPMG Sri Lanka, providing consulting services to leading hospitality and commercial establishments in Sri Lanka.