The stories were everywhere: WeWork, the unicorn darling of the co-working space, valued at $47 billion, was a bleeder. And not just a small puncture, but a gaping gut wound from which some $219,000 came spewing out on an hourly basis, reports said.
It turns out that while the company was in expansion mode, the nominal co-working king was losing more money than it was actually taking in. In 2018, according to reports, the company's losses were $1.9 billion on $1.8 billion of revenue. Furthermore, it generated $1.54 billion in revenue in the first six months of 2019, yet posted a net loss of $689.7 million. A math genius one needs not be to see the problem there.
This kind of anecdote is not isolated to WeWork. It has befuddled many a startup company, where initial starting costs are traditionally much higher than incoming cash flow. That’s the life of a startup, and many early investors accept the trade-off for a rosier future.
What About a New Hotel?
But do hotels have the same luxury? Can an owner build and open a new property, then wait ... and wait ... and wait some more ... for profit? Moreover, what are the steps a hotelier can take to generate profit from the get-go?
Revenue is indicative of cash flow, but an owner is more interested in how much is left over after all the bills are paid each month. This means a trained eye on both revenue and expense, with the aim that the former outdoes the latter on a monthly basis. The notion that a hotel can’t be profitable from the start is inaccurate. True, a hotel does need time to stabilize, or ramp up: the shorter this period, the higher the return on equity and the lower the debt risk.
But there are myriad variables that predict speed to profitability, including location, sales and marketing and revenue management success and F&B contribution. Matthew Schupbach, assistant CFO at Dimension Development, likens opening a hotel to landing an airplane: It’s all about planning and timing.
“As a private pilot, I see the importance of completing the pre-landing checklist well ahead of making the final descent to the airport,” he says, adding that a new hotel can, indeed, be profitable from the start; however, this depends on many things.
A Profitable Start
In order to make a smooth landing, one of the most important aspects of achieving immediate profitability is preselling, or getting business on the books prior to when the hotel opens its doors. Hiring, then, is of paramount importance, and in many cases, filling sales positions before operational positions is not irregular. For example, a hotel’s head of sales vacancy is often filled before the role of general manager is.
According to Schupbach, planning ahead and developing a strategy and goals before the first sales call is made is key. “It is enticing to get reservations on the books right away; however, doing it without a firm strategy in place is like painting yourself into a corner,” he says.
His advice is to follow the “Is the jar full?” adage, whereby a large jar is filled first with large rocks, followed by smaller pebbles and then lastly by sand. This progression signifies how best to maximize volume (success); should the process be reversed, not everything would fit.
In practice, it’s advisable to first book large groups with profitable banquet/catering revenue; second, book other groups that do not interfere with the booking calendar, while keeping transient channels closed. This allows the hotel to first be filled with the most profitable groups. And third, augment occupancy with highly rated transient nights closer to opening.
Schupbach also urges hotels to separate pre-opening expenses from operating expenses. By splitting these two up, he says, “You are better able to measure and manage operational productivity and efficiency.” Lumping the two together makes it challenging to make deft decisions during the critical post-opening months.
A new hotel is like a new business operation, and a startup culture mentality is desirable in order to grow the hotel and deliver a great guest experience. But that doesn’t mean you have to lose money in the process.
Formulating a prior-to-open plan can help a hotel drive revenue and keep expenses in check, reaping profitability from the get-go. And although debt service and other startup costs are ubiquitous when opening a new hotel, owners focused on the bottom line from the beginning will be better set up for short- and long-term success.