As we wait for the curve of new infections to flatten in India, the industry has now been asking itself how the re-opening will pan out. Prashanth Rao Aroor, CEO, Intellistay Hotels, says, we are going to have to dig ourselves out without any tools.
When the Covid-19 outbreak began affecting India in early March 2020, hotel chains scrambled to implement new measures and precautions to keep their people and guests safe. However by mid-March, a nation-wide lockdown pulled the shutters down on the industry. Every spoke of travel ranging from hotels to aviation, from adventure tour companies to standalone restaurants find themselves at standstill. After all ‘Travel’ is the polar opposite of a ‘Lock Down’.
Hotels and restaurants have jumped wholeheartedly into supporting the fight against Covid-19 by putting their assets free of charge into the hands of hospitals and government agencies for housing frontline workers, policemen and to quarantine returning Indians. In many cases there is not even a legal contract in place under which these expensive assets have been taken over without any staff in place putting them at great risk of damage and this has not stopped the industry from turning up to support the effort. Many hotels which had kitchens live have contributed supplies to frontline workers and migrants during this crisis.
In the last two and a half months, and post the lifting of the lockdown, there would be almost no revenues for the industry. Even with moratoriums on principal repayments and land/building rentals, hotel companies among other things are supporting interest payments on expensive assets built at Rs 50-200 lakh per key, supporting utility and ownership costs, incurring salaries of employees both at hotel and large central operations, and cost of digital assets and marketing platforms.
We are one of those industries who need to actually turn up at work and can hardly work from home. For an industry with high fixed costs, high cost of capital and aggressive expansion over the last seven to eight years, this is putting a lot of balance sheets under high stress and the industry simply does not have the capacity for absorbing this shock for what may well be a six month wipe-out of operations from start to finish.
I would say so far that India has done the lockdown right except some blatant cases of non-compliance by some elements of our diverse society. On sustenance, a bit has been done for the poorest of the poor on supplies but the state must do more for the salaried class. On bailouts it’s a big question if and what we can afford as a country. We should be prepared for 10 per cent fiscal deficit to kickstart the economy and afflicted industries. It’s the best balanced view so far on the way forward. Assuming most businesses run on 10-30 per cent operating margins, if 50 per cent of the year is lost in terms of time, then many businesses short of firing everyone and closing all assets, have made losses this financial year already. Government measures on finding a way to fund hibernation costs is the only way we can keep the economy alive.
Meanwhile the travel and tourism industry is nothing if not resilient. It’s hardly a bankable strategy to await a bailout. In a reflection of its dogged determination to serve and be hospitable, the industry has already gone to the drawing board on the reopening. As we wait for the curve of new infections to flatten in India, the industry has now been asking itself how this re-opening will pan out and I dedicate the rest of this narrative to the challenge of re-opening. This is not just a demand issue. This is now going to also be a huge supply issue and not many recognise the weakness on the supply side. We are going to have to dig ourselves out without any tools.
So when should hotels re-open?
Hotels first need to look internally at opening. At the best of times, hotels would make an operating profit margin of 30-35 per cent of revenue. After cost of rentals or finance that falls by more than half. For a hotel to open, it makes sense only if the operation at hotel level does not lose money for an extended period of time. That means such occupancy and rates that minimum fixed expenses are covered. There is no question that the underlying demand is intact. But occupancy will emerge when guests have the willingness and ability to travel. Willingness because they have confidence that the virus is under control and that hotels are managing last mile hygiene from airport to airport. Ability, when they have flight or train options to reach a destination or can drive to it.
Hotels must open quickly in such markets where this breakeven occupancy is visible and be more circumspect where the occupancies will take time to emerge. Examples of quick opening markets are ‘drive to’ leisure destinations near big feeder towns. Examples would be markets such as Mahabhaleshwar, Lonavala or Udaipur where a huge demand for ‘revenge holidays’ is expected to be at close driving proximity from a big feeder city or region. STR reports from China showed a spike in occupancy on weekends and drops on weekdays in early trends. The report also showed mid-scale and economy hotel occupancy coming towards 50 per cent in 6-8 weeks of opening although luxury hotels were still sluggish. China however has started transport hubs and spokes quite quickly and it’s unclear if India will be able to do that. Business hotels in captive business districts could also open quite quickly. Hotels located where the source markets feed by flights or trains must look at passenger traffic numbers and city wise demand before taking the jump to open. Examples of such location would be smaller business towns, pilgrim locations, off beat leisure locations far from their source markets that require a flight or train journey. The only thing worse than a lockdown is series of false starts and panic shutdowns.
The other consideration is partial openings. Some small assets would have enough demand to cover their inventory and may open sooner. Larger hotels may have to break their hotels into multiple smaller hotels as a strategy and open phase wise with fixed costs in ratio to the operating portion.
How do hotels ensure they stay profitable and sustainable over the re-opening + 12 months it may take for demand to reach earlier peaks?
There will be some new requirements emerging from the lockdown. Hygiene would be the topmost concern of potential guests and demonstrating adherence to best practice and communicating this to guests would be key. Because it is a distribution business, it’s key to make sure this message is at every counter where sales happen and also it must be verifiable by third party in an ideal situation. There will be new costs on hotels in order to ensure, hygiene in terms of cleaning material, safety material screening, testing and cost of third party audits. But that’s not a cost that can be short changed. The savings will have to come from dropping fixed costs. From chats with fellow hoteliers, the suggested methods were: Limiting public areas. F&B by operating dark kitchens offering contactless delivery in the room rather than in restaurants. Delivery focused F&B operation using platforms to serve the local community around the hotels. Multi skilled staff who can do more range of tasks between fewer people. Variable pay structures to employees and rentals as a function of revenue. Dedicated butler style floor managers to create familiar relationship with guests and reduce number of different contacts for guests during their stay. Digitisation of service requests and contactless pre check-ins and formalities in the room. The public spaces like banquets, conferences and restaurants may be re-purposed for alternative use as co working spaces with hygienic food and beverage on the ready, making them ideal for businesses looking for dedicated workspaces during the period of uncertainty.
Cash will be king during this period and any initiatives that trade uncertainty for fixed upfront payments can be prioritised. This may include voucher sales on deep discount, fixed rental of rooms for long stay, incentivising extended stays and early bookings and signing long term distribution deals on preference in exchange for an up-front commitment. Assets with debt troubles and located in leisure locations can look at sale and lease back of inventory to unburden the balance sheet.
How the keep teams motivated and driven?
Although beauty salons are closed, everyone involved in hospitality business has already taken a big haircut. Shareholders, management, associates. This affects everyone. Worse still when the re-opening happens, the demand will come slowly and at lower targeted manpower ratio. Jobs will be fewer and people could end up on the bench and be underutilised overall. Hotel associates are in for a most difficult time. The only way to deal with it is with the Truth. It’s important for brands to communicate what the issues are and how it’s affecting their ability to do right by their people. Admit the fears and concerns and demonstrate with numbers. They have to draw a roadmap of how we step back into the light and how long the said transition may take. Hotel people are driven. It’s not just a job for them and their ability to take personal hardships for their hotels and guests is beyond the ordinary. This is a great time for people to upskill themselves and learn to do more and do it more efficiently and make themselves invaluable to their organisations. With physical contacts being avoided, sales people need to learn to sell more via social and online and less face to face. This is a skill that needs to be acquired. Loyalty cuts both ways. It has to be both offered and received between organisations and their people and for every concession by people today, organisations must be prepared to reward when they are back on solid ground.
And if you can’t operate with your normal practices, change to The Mafia Model
Let’s be clear, the virus is going nowhere till a vaccine has been administered. The next 12-18 months has to be defined as a survival period. It is not yet a revival period. It affects everyone in the hospitality value chain from asset owners, banks, brands and operators, associates, vendors and guests. Anyone expecting hotels to open and continue like before the crisis has an unpleasant surprise coming their way. The only way to deal with the uncertainty is to move to a model meant for unpredictable operations which is the Mafia Model. The essence of this model is that revenue is sporadic and uncertain and instead of fixed costs against variable revenues, the costs are all pegged to revenue and everyone in the value chain takes their cut from each dollar received. Also gangs are more motivated than teams during times of threat to survival. They get things done without the necessary resources and protocols being available and they have an ability to hustle. Organisations that can implement such policies with all stakeholders over the next 12 months and ‘share the take’ will have the best chance to survive now and thrive tomorrow when stability is available and can revert back to their established corporate structures.