Friday, April 23, 2021 /07:00
PM / By Proshare Research / Header Image Credit: EcoGraphics
Hospitality from Summer Dreams to African Heat
"Great companies are built
by people who never stop thinking about ways to improve the business".
J. Willard "Bill" Marriott
The global hospitality business has been in a mixed (as distinct from mixed-up) mind. African economies have been harmed by the consequences of COVID-19-induced economic restrictions on the hospitality industry leading to what economists have referred to as 'economic scarring'.
Economic scarring refers to the breaking of traditional links in economic relationships such as between borrowers and lenders, between suppliers and buyers, and between hotels and their customers. High contact service sectors were the hardest hit by the COVID-19 pandemic and have been victims of high levels of operating uncertainty. This has meant that airlines, transportation companies, air travel agencies, restaurants, and hotels have suffered downward spiraling revenues and profits since Q1 2020. It has also required that for sustainability service sector companies need to plug into new corporate realities as COVID-19 fears and actions begin to wane. As consumers ran up savings in the heat of the pandemic, a rebound of global and national economies may likely involve the unleashing of pent-up demand and an increase in local spending.
However, the new spending realities will differ somewhat from the pre-COVID-19 era as the nature, size, and timing of demand begins to shift. The demand for hospitality services would require more than short-stay real estate, it would require a whole new service delivery experience that sits within the new lifestyle habits of a hotel, restaurant, and airline patrons. For example, hotels should envisage a future of more flexible short stay pricing. Patrons of hotel rooms between Monday and Thursday may pay between 10% to 15% less per room than those booking rooms between Friday and Sunday.
Business visitors to hotels may require add-on service deliverables such as thicker note pads and jotters, longer-lasting pens, and pencils, stick-on notes, and high-speed broadband internet access. Hotels may do well to upscale staff skills by making it a policy for staff to be bilingual in at least two foreign languages such as English and French or Chinese Mandarin or Swahili.
A hotel that provides backup executive support such as an interpreter and a staff that could help with excel-based templates and business modeling tools would be a nose ahead of competitors, the marginal cost increase may be compensated by marginal revenue growth. Besides, with more individuals likely to be homebound with workers commuting and running their operational functions digitally, hotels may need to be creative in plugging into the new digital lifestyle. For instance, hotels could have arrangements with homebound executives to hold meetings at hotel meeting rooms on a membership basis.
The hotel would schedule meeting rooms for members while providing visual aid support and snacks and other refreshments. The hotel could even provide secretarial support with a secretary to take minutes and circulate resolutions. The problem would be that of confidentiality which could be handled through a non-disclosure agreement (NDA) signed by the hotel and staff requiring no electronic or non-electronic storage or transmission of information obtained at the meetings. Hotels would in months to come, put themselves at the centre of a patron's life experiences and support customers to smoothen the rough edges of their travel, work, or leisure journeys. The user interface and experience (UI/UX) of hotel customers must be raised significantly post COVID-19 if brick and mortar service providers hope to see a hockey stick rise in revenues and profits.
Illustration 1: Customer Value Experience (CVEx) Redefining a Journey
Scarring A Recovery
Without adjustments to old business models and approaches in 2021 economic scarring could be devastating. One channel of business destruction is the loss of jobs as old skills become near useless in a changing market with new skill requirements. For example, if hotels experience smaller farmgate supplies used by their chefs in preparing guest's meals then the hotels would need to scale back their operations, firms that transport the food would need to cut trips thereby causing job losses along the supply and support service value chain. The outlook would appear dim as the local economy's bounce-back would be without added job creation leading to a jobless recovery. The scarring process could lead to people losing their skills and motivation during the downturn, a situation that might persist even with renewed growth.
Another channel where scarring could hurt economies like Nigeria is lower investment commitments and reduced spending on research and development (R&D) as falling revenues lead to smaller investment outlays. Even with large public sector expenditures designed to spur stronger economic growth, lower investment and higher COVID-19-induced savings could push down the size of expected growth multipliers. For example, lower investments in the hospitality business (hotels, airlines, restaurants, night clubs, and cinemas) would pull back growth in the agriculture sector (a fall in food demand), airline sector (a smaller number of passengers per flight), and surface transportation (less intracity commute). These businesses and their respective backward and forward-looking value chains may be hurt by smaller investment inflows in 2021 and 2022 as economies continue to tackle the uncertain impacts of the coronavirus pandemic.
The third possible channel where economic scarring could be a pain in the neck for the hospitality business in Nigeria is rising costs. The headline inflation rate in Nigeria was 17.33% in February 2021 up from 16.47% in January and following a sustained rise throughout 2020. The rising inflation rate despite slow economic growth serves as a double whammy for the country's service sector as rising costs face down falling demand. Even in a post-COVID-19 era are going to have to walk the fine line between customer service expectations and their real disposal incomes. As the inflation rate rises, real disposable incomes fall and demand for goods and services takes a nasty hit.
The new economy would require companies to find opportunities for greater efficiency and effectiveness within the complex arithmetic of optimizing customer experiences at affordable costs. Bigger companies are likely to use their scale advantage to gradually outcompete smaller rivals leading to greater industry concentration in 2021 and 2022 with a raging river of complaints from customers who would see themselves paying much more for goods and services than would exist in more competitive markets. This would put pressure on the Federal Competition and Consumer Protection Council (FCCPC) over the next two to three years as mergers and acquisitions (M&As) pick up steam.
Illustration 2: Economics Scarring: The Hospitality Bust
The Scenario Buggy Wagon
Hospitality firms that are hoping to be around for a long time must begin to strategize around alternative scenarios. Q1 2021 is likely to see slow economic growth with analysts predicting a mild contraction despite the +0.11% gross domestic product (GDP) growth in Q4 2020 and the revised International Monetary Fund (IMF) outlook of +2.5% for Nigeria for 2021 (this was up from the earlier +1.5% forecast).
The hard break recession of 2020 is not likely to reoccur in 2021 but a blistering Nike swoosh growth would also not happen. Demand for hotel and hospitality services would grow steadily over the next three quarters of 2021 and pick up steam in Q1 2022.
Companies like Ikeja Hotels Plc, Capital Hotels Plc, and Transcorp Hotels Plc should see stronger topline earnings in 2021 compared to 2020 but profitability may take a while longer in catching up as supply chain disruptions take time in being reestablished at favourable market costs.
The report on page 32 notes that "Amongst the listed companies on the NSE, Transcorp Hotel Plc recorded the highest percentage decline in its profits by -1,122.80% while Ikeja Hotel plc recorded a decline in its profit by -905.8%, Capital Hotel Plc -160.2%. On the other hand, Tourist Company of Nigeria Plc recorded an increase in its loss position by +439.67%. The losses incurred by the various hotels were the following: Ikeja Hotel Plc N6.72bn, Tourist Company of Nigeria Plc N6.53bn, Transcorp Hotel Plc N6.28bn, and Capital Hotel Plc N241.86m".
The authors of the report also observed that "the firms also recorded a decline in their revenue in 2020 with Tourist Company of Nigeria Plc recording the highest decline of -64.31% while the other hotels also saw the following decline in revenue; Capital Hotel Plc -62.36%, Ikeja Hotel Plc -59.5%, and Transcorp Hotel Plc -50.25%. Transcorp Hotel Plc recorded the highest revenue of N10.15bn in 2020 while Ikeja Hotel Plc recorded a revenue of N5.07bn, Capital Hotel Plc revenue was N1.95bn, and Tourist Company of Nigeria Plc N1.31bn".
The three hotels should, all things being equal, see both revenues and profits rise in 2021, although the rise would be unequal depending on the hotel size. Smaller hotels may see slower recoveries in revenue and profit compared to their bigger rivals. A major feature of the post-COVID-19 (or with-COVID-19) economies is that recovery would see industry consolidation as larger corporations withstand the scarring of corporate growth more effectively than their smaller counterparts. How well hotel and hospitality activities rebound from the 2020 recession will depend on the actual scenario that plays out over the next three quarters of 2021 (see Illustration 3 below).
Illustration 3: COVID-19: Hospitality and its Several Trials
Hotels would need to decide on their responses to three core areas of operations over the next few months:
The different economic and business scenarios that could play out in 2021 and 2022 need to be broached by hotel management and the most likely scenarios need to be isolated and policies and action plans created to address alternative outcomes. COVID-19 may become less of an existential threat to persons but its material effect on corporate businesses will linger.
Section 1 of this hospitality report starts with an overview of the state of the hospitality business in Nigeria and globally and underscores the need for the sector to reimagine its business and restrategize operations to support sustainability. Page 11 of the report noted that "The hospitality sector in Nigeria was not left out of the global COVID-19 crisis. The lockdown and social distancing measures pursued by the Federal and various state governments affected businesses involved in the hospitality ecosystem. Hotels recorded declines in their occupancy rates, profits, and patronage in most of their business segments while tourist companies recorded low tourist arrivals both domestically and internationally. All the hotels listed on the Nigeria Stock Exchange (NSE) recorded losses in 2020".
The report in Section 2 takes a look at the transition of the hospitality sector before and post COVID-19's eye of the storm in 2020. According to the report's authors "The hospitality sector was initially projected to record significant growth in 2020 and 2021 stemming from a sustained upward trajectory in the past few years but the massive decline in the demand for hotel services, airline bookings, and tourist arrivals forced analysts to revise and dramatically reduce their 2020 and 2021 projection".
The section noted that the business ecosystem for the hospitality sector would involve some major repair work on value chain reconnections and the squeezing of economies of scale to bring about a cost-to-revenue reduction across service types. This may mean substitution of human work for digital algorithms that enable computers to deliver routine services. This could make unnecessary the need for human bookkeepers, door attendants, store managers, booking officers, and other ancillary staff. For individuals to retain jobs in the sector that may need to upskill and reskill for the new service promise and customer expectation.
Section 3 of the report reviews the 2020 financial performance of the three hotels listed on what used to be called the Nigeria Stock Exchange (NSE) but is now known as the Nigerian Exchange (NGX). The three hotels had a torrid time in 2020 with their top and bottom-line operating performances caving in as revenues tumbled and general costs climbed. The biggest of the triumvirate of hospitality service providers was Transcorp hotel which saw a COVID-19-induced slide in cash and patronage as the COVID-inspired government lockdowns and travel restrictions took their toll. Nevertheless, Transcorp showed keenness in its plans to reverse its corporate fortunes and reposition its business within the realities of a changing hospitality industry dynamic. A few recovery plans may include flexible service pricing, reviewed pairing of flexible rebookings and cancellation policies, addressing the health and safety concerns of patrons frontally by revising operating procedures, and practices and entering twinning arrangements with feeder markets to provide scaled-up service quality (see Illustration 4 below).
Illustration 4: Hotels: Planning a Recovery
The new look of the hospitality business in 2021 is captured in Section 4 of the report where the authors note on page 56 that "It is expected that the hospitality sector in Nigeria will record slow growth in 2021. Hotels that would remain relevant in 2021 and the future would need to adapt to their business operations in companionship with new trends and the emerging hydraulics of the industry".
They argue that "hoteliers who are interested in maintaining and attracting new customers would need to emphasize safety and hygiene in their operations. Furthermore, they should have sufficient knowledge of emerging customer needs to support their forward-looking service delivery promise and plug into an evolving customer-centric environment e.g., virtual reality tours, mobile check-in service and so on".
The last section of the report, Section 5, rounds up the review of how COVID-19 has affected the hospitality industry and provides an outlook on how the sector would survive and thrive after the virus has, to a large extent, been globally contained. The so-called 'new normal' would reflect accelerated changes imposed on global economies in general and the hospitality sector by the COVID-19 pandemic.
The faces of several businesses will undergo a remake between 2021 and 2022 as managements and boards work out new models for corporate sustainability which would consider the environment, society, and governance (ESG).
Businesses will need to filter old frameworks and customer service delivery templates and reshape them to meet the new customer service expectations (see Illustration 5 below).
Illustration 5: The Business Transformation Filter
Tomorrow's business environment would require a level of deliberate and concerted action, vision, and consistency that companies in the past only considered as a passing fad. The new business mandate would require companies to understand the customers' transaction journey end-to-end and plug into the critical parts of the customer value experience (CVEx) to deliver income earning value.
Hospitality enterprises may be honeypots of cash in cyclically growing economies but without a forward-looking operational structure and plan, the hospitality businesses will still suffer financial pain even in a recovery. The sustainable businesses of tomorrow are here today, or at least they should be.
Downloadable Version of Proshare Confidential: Hospitality Post-COVID-19: Making the Future Count
1. Full Report: Hospitality Post-COVID-19: Making the Future Count - Apr 23, 2021
2. Executive Summary: Hospitality Post-COVID-19: Making the Future Count - Apr 23, 2021
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