Back to the fundamentals
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- Published Date
- Written by Michael Bains, MANZ
We need to start going back to the fundamentals. In business, if you attract more money than you spend, you make a profit and stay in business. You divide your spending in to have to, need to, and want to.
Have to is your operating expenses; the things you have to pay to keep your business running such as power, rates etc. Need to include those things that enhance your business; like marketing, repairs and maintenance.
Want to is those things that you add to the business to make it better; like refurbishment, added amenities etc; the value added components.
We have had a few rough years in a row so the better we manage the businesses the better. We have, over the last two years, seen capacity in accommodation continue to rise at a time when room nights sold has diminished. This has created increased competition in the market and has played havoc with profitability.
We have seen pressure on pricing as the less professional, or perhaps less accountable, have discounted the industry. You can call it dynamic pricing or whatever – I am sure there is a management jargon term for it –but again it is arithmetic, it is discounting prices to drive occupancy, at the expense of profitability.
The die is now cast. We can grizzle and moan about it all we like but it is those who are good business people who will now return some measure of profitability to the industry.
We need to keep an eye on capacity. For some time it hasn't been a demand driven thing but rather a property investment model. The creation of new rooms in the industry does nothing for those already in the market. It actually creates a downward spiral. More capacity, more price competition, less profit, less available for re-investment and repairs and maintenance and degradation of the existing capital base!
We, as an industry, need to not only understand the arithmetic ourselves (this is not a size problem; a lack of management talent is evident in all sectors!) but we need to educate the policy makers and politicians, both national and local, about how dumb policy decisions have dangerous ramifications.
The policy makers will have a hard job relating to this because "the skin they have in the game" is far removed from the coal face. Before they start suffering personally there will have been a lot of damage caused, and it will be our fault, not theirs!
The politicians and policy makers need to take a long term and more strategic view and go back to what they learnt at primary school. They need to do the adding, subtracting and multiplication, but only long division if absolutely necessary. They are capable of doing it!
