How the Cornell Plaza Compares with Its Competitive Set

How the Cornell Plaza compares with its competitive set The Cornell Plaza is competing poorly against the other lodgings in its competitive set. We believe that with specific changes to the hotel’s product management and by implementing yield management techniques, the Cornell Plaza will outperform its competitive set by 15% within one quarter. Hotel performance is typically measured in four ways: ADR Index Occupancy Index RevPAR Index Department Income Each of these indices compares is used to compare one hotel to a competitive set of hotels. In this case, the Cornell Plaza is compared to five other properties. High performing hotels use these indices as benchmarks for decision-making, and they are used here to support the management changes herein. ADR Index (102%) The Cornell Plaza has an ADR Index of 102%. This means that the average daily rate of the Cornell Plaza is higher than its competitive set—in this case it is the highest of the competitive set. The new management plan—particularly through product management —is designed to lower the ADR Index to approximately 99% and increase total revenue by enhancing occupancy. Management sees a direct correlation between occupancy index and ADR in the competitive set. Table 1.1 is a scatter diagram that plots the relationship between ADR and Occupancy index in the Ithaca market. The plot reveals price sensitivity in the market that was unnoticed during the initial management period. With a high ADR of $81.11 the Cornell Plaza is struggling with the lowest Occupancy Index at 93%. The occupancy index is up to twelve percent lower than hotels in the market that offer an ADR less than eighty dollars. By reducing the ADR by $1.15 the hotel could increase its market penetration of total market demand by twelve percent. Because the Cornell Plaza rarely sells out its rooms, the increase in occupied rooms would go directly to the hotel’s departmental income. Occupancy Index (93%) Occupancy Index relates to more than merely occupied rooms. It represents the percentage of the total market demand that a hotel is receiving—that is how well the hotel is penetrating the market. Occupancy index is especially relevant to the Cornell Plaza because it shows that the Hotel has room in the market to grow and substantially improve revenue. If the hotel were already penetrating the market at more than fair share and still maintained a low occupancy percentage, than the argument could stand that the Ithaca market simply lacked the demand to improve the Inn’s revenue (regardless of management). Instead, the Cornell Plaza has received significantly less than its fair share of the total market, which suggests that changes in the management plan can increase that revenue. Table 1.2 displays the Cornell Plaza’s occupancy index in comparison to its competitive set. The graph represents the Cornell Plaza’s piece of the market’s pie. A 100% occupancy index means that a hotel is penetrating its “fair share” of the market’s demand. High performing hotels will have greater than 100% penetration. The new management plan is designed to increase the occupancy index to 110%. That is, management believes the Cornell Plaza is capable of attracting 10% more than its fair share of the market. RevPAR Index (95%) The Cornell Plaza’s high ADR index and low occupancy levels prevented the Inn from earning revenue on unsold available rooms. The empty rooms were in fact lost revenue. The RevPAR Index of 95% is nearly 10% lower than that of other hotels in the market. Managing the hotel’s product to satisfy the market’s demands will enhance the total rooms sold. Managing the rates at which the product is sold will increase the RevPAR. Department Income Another measure of the Cornell Plaza’s performance is by evaluating the hotel’s department income against those in the market. Unlike the other indices, which give us an idea of why the hotel is performing poorly, the department income standing alone infers little about why the income is low or high. It is, however, one of the quickest and easiest ways to track performance of the hotel over a period of time against the performance of competitors during that same period. Table 1.3 displays the Cornell Plaza’s performance during the month of February 2013 in comparison to other hotels in its competitive set during that same week. The graph shows that the Cornell Plaza failed to generate income at the same level of its competitive market set. More importantly, it shows that during week three only one hotel in the set managed to increase revenue—XXX Suites (shown in pink). Management believes that XXX suites was successful where the remainder of the competitive set was not because XXX did a better job at managing variable costs which allowed more revenue to fall to its department income. This theory is especially likely because XXX had a similar occupancy percentage, ADR, RevPAR, and penetration factor as hotels who lost income during week three, yet XXX still managed to produce significantly more income. The saving can be inferred to come from careful management that saved money by controlling variable costs. It’s believed that implementing a similar scrutiny to spending in the Cornell Plaza will enable the hotel to generate income in the future even when the general market falters. Revenue Management Strategy The proposed strategy for managing revenue is expected to increase department income from its current average of 63,500 per week to a new department income of no less than $70,000 per week. The revenue management strategy has four sections: customer segment strategy; expense setting strategy; rate management strategy; group management strategy. Each strategy outlines what management should know and/or do to enhance department income. Management believes that by implementing all five strategies the Cornell Plaza will gradually begin to outperform the competitive market set well into the future. Customer Segment Strategy By understanding customer segments, decisions can be made to help the Cornell Plaza sell the right product to the right customer at the right time. Choosing a target market and then meeting the target market’s demand is essential to high performance in the competitive set. Management has analyzed the customer segments in two ways: the Ithaca market mix compared with the Cornell Plaza’s market mix; the behaviors of the market segments. Table 2.1 shows that the Ithaca market is divided into three segments: The Ithaca market mix compared to the Cornell Plaza’s market mix The Ithaca market mix is 60% business, 25% Leisure, and 15% group. The Cornell Plaza’s customer mix is 43% business, 38% Leisure, and 19% group. The table suggests that there is a greater demand in the Ithaca market coming from the business traveler than from group or leisure travelers. Furthermore, based on the ADR of each segment, management believes the Cornell Plaza can generate significantly more revenue by targeting the business segment. The new customer segment strategy pursues the following market mix: Business 70% Leisure 20% Group 10% Even if the hotel were unable to increase occupancy, an occupancy composed of 70% business travelers as opposed to 43% business travelers would increase revenue. The behavior of the market segments (including rate sensitivity) makes that possible. The behavior of the market segments Each market segment has distinct behaviors. While the Cornell Plaza will focus on the business traveler, the business market alone will not completely satisfy the hotel’s potential revenue. The Cornell Plaza’s revenue management strategy essentially begins by looking at the behaviors of the customer segments. Three customer segment behaviors guide the Inn’s revenue management strategy: segment demand fluctuation segment rate sensitivity segment booking patterns By capitalizing on the behavioral differences between each segment, the Cornell Plaza will be able to better serve the Ithaca market as a whole. The segment behaviors strongly influence the variable cost structure of the hotel (presented in the following section). Maximizing revenue will ultimately depend on the Cornell Plaza’s ability to manage the behavioral differences of the market segments. Segment demand fluctuation Table 2.2 displays the percentage of rooms occupied by each segment during an average week at the hotel. The two market segments complement each other. To maximize revenue, the new business plan must focus primarily on the business segment Monday through Thursday and on the leisure segment Friday through Sunday. Segment sensitivity to price In addition to demand, each segment differs in price sensitivity. The business traveler is typically willing to pay more than the leisure traveler for the same room. However, the business traveler is also a more seasoned guest and expects more in the form of amenities for each visit. Table 2.3 shows the ADR of each segment. The graph shows that unlike demand fluctuations, the ADR of each segment is stable. In nearly every instance, the Inn will be able to achieve a higher rate from a business traveler as opposed to leisure or group traveler. For this reason, focusing on the business segment directly impacts revenue and department income. Segment booking patterns Another reason business guests are willing to pay a higher ADR is because of their booking patterns. They rarely book rooms in advance. Business guests have a short planning horizon. They tend to need a room on short notice and are inflexible on the destination and date that the room is required. They are not typically rate sensitive, and often their expenses are company paid. Additionally, business travelers have a shorter stay preference and do lots of back and forth traveling from one point to another. Unlike the business patterns, leisure guests typically book in advance and have more flexibility in the destination and date of their travel. Leisure guests have a large planning horizon and will generally shop around for the best possible rate. They tend to be extremely rate sensitive. Additionally, Leisure guests have a longer length of stay preference and tend to book at least two nights—usually on the weekend. Expense Setting Strategy Management proposes an expense setting strategy based on the behaviors of the market segment and the variable cost structure of the Cornell Plaza. Seven contribution statements located in the Appendix display how the expense setting strategy will enable the Inn to conservatively earn $70,000 per week. To enhance department income variable expenses will be approximately equal to 18% of the Cornell Plaza’s ADR. Management has reviewed all of the hotel’s expenses to achieve 18% variable costs. Six expense categories will remain constant throughout the week: Operations and maintenance Training and compensation Housekeeping: Rooms per attendant Laundry and linen Supplies Agency commissions Operations and maintenance: $2.00 per day. Two dollars per day in maintenance will provide the Inn with a standard level of routine maintenance. It’s anticipated that in the future larger maintenance expenses may occur. As the hotel becomes profitable, a special projects fund will be created to deal with extensive repairs or renovations. Training and compensation: People are the greatest resource and the largest expense of the Cornell Plaza. Payroll is a sensitive issue. Overstaffing strips revenue away from department income. Understaffing results in fewer return guests, which results in lower revenue. Management will attempt to carefully balance the two. Reception and other room divisions will receive a standard competitive wage. Supervisory positions will receive an above standard wage. With good training from supervisors, the Cornell Plaza will attempt in the future to promote from within. Overtime will be limited. Unions and collective bargaining agreements could be an issue for the hotel in the future. Management intends to work very hard to satisfy our external as well as internal guests (employees). Hopefully, sound management will prevent the need for employees to unionize and will help sustain the Inn’s profitability well into the future. Reception $6.00 per hour Other Rooms Division $5.50 per hour Supervision $10.50 Housekeeping: Rooms per attendant Business guests travel more and will expect a higher level of service attended to their rooms. Therefore, housekeepers are given the lightest load of business rooms, a greater load of leisure rooms, and the greatest load of group rooms. Monday through Sunday Business 15 rooms Leisure 16 rooms Group 18 rooms Laundry and Linen: The hotel will provide standard laundry and linen services. Business rooms may require additional linens and/or turn downs. Occasionally, business guests may have meetings in their rooms or may expect a higher quality linen than other travelers. Business: $4.50 per room Leisure: $3.00 Group: $2.00 Supplies: Guestroom amenities can be particularly important to the business traveler paying a premium rate. The leisure guest who doesn’t travel often might be satisfied with a clean and well-organized room. Still, the group traveler receiving the lowest possible rate expects the least amenities—but certainly space for guests and conversation. Business: $2.00 per room Leisure: $1.00 Group: .50 cents Agency commissions: Most reservations are made directly through the Cornell Plaza. Therefore, the hotel is eliminating agency commissions from the group and leisure reservations, which the hotel does not plan to aggressively target. A small commission will be given for the target business market. Group and Leisure 0% Business 5% Three expense categories will fluctuate with customer segment behaviors: Entertainment Staffing Advertising Entertainment: The Cornell Plaza will target entertainment primarily towards the leisure market. Because the leisure market peaks on weekends, the hotel will offer the most lively entertainment on Friday and Saturday. No entertainment will be offered on Sunday through Wednesday and only mild entertainment will be offered on Thursday. Sunday – Wednesday: no entertainment Thursday - $150 Friday & Saturday $200 Staffing: Staffing levels will change with forecasted occupancy. The Cornell Plaza will plan to be particularly well staffed on Tuesdays and Wednesdays when business demand peaks and on Fridays and Saturdays when leisure demand peaks. Sunday-Monday Tuesday-Wednesday Thursday-Saturday Reception: 9 Reception: 12 Reception: 11 Other Rooms: 7 Other Rooms: 10 Other Rooms: 8 Supervision: 3 Supervision: 5 Supervision: 4 Advertising: In order to compete with the competitive set, advertising is essential. Leisure groups tend to book in advance so the most effective advertising is three to four days prior to their arrival. Business travelers book rooms quickly. It’s important to be visible to the business market on the evening or day that they actually book the room. To reduce expenses, management has chose to cut unnecessary advertisement to the group market. Monday through Wednesday: Business $600 Leisure $800 Thursday through Saturday: Business $400 Leisure $200 Sunday: Business $150 Rate Management The Cornell Plaza offers five rates: A, B, C, D, E. The E rate is premium, and the A rate is reserved for rate sensitive guests. Rate management determines which guests can be accommodated when and at what price. Rate management includes three strategies: Realizing revenue potential Implementing fences and closing rates Overbooking Rate management strategies will allow the hotel to maximize its rate revenue without turning away rate sensitive customers or groups that would boost occupancy. Realizing Revenue Potential Seventy percent of the Cornell Plaza’s total market will come from business guests. To realize revenue potential, management believes that demand is great enough for the business segment to pay no less than the C rate for a given room. That is 70% of the Inn’s total demand should pay the E, D, or C rate. The hotel expects leisure and group travelers to primarily book at the A and B rates. Realizing revenue potential will require the Cornell Plaza to sell the right room at the right price to the right customer. Table 3.1 shows the approximate % of rooms sold that the hotel expects to achieve within each rate. By limiting the two least expensive rate categories to 30% of the hotel’s total market, the Cornell Plaza should be able to balance the temptation to sell to early demand with the assumption of risk needed to wait for premium rates. A large part of the balance will come from fences. Implementing Fences and closing rates Management will use fences to prevent non-rate sensitive guests from obtaining the lower rates. Fences will include cutting off rate categories or placing restrictions on rate categories. Table 3.2 outlines the guidelines for managing Inn’s five rate categories: Over booking In order to accommodate for no-shows the Cornell Plaza will overbook on certain days to maintain a profitable occupancy. Overbooking will be based on the forecasted demand for particular days of the week and year. The Cornell Plaza plans to establish the data necessary for effective overbooking during the next quarter. During the previous quarter the hotel did not overbook because the previous management plan could not reach 100% occupancy. Group Management As the hotel increases its occupancy index, it will likely become a more prominent target for groups or small conferences. Implementing a strategy for managing groups will be essential to the long-term profitability of the Cornell Plaza. Transient displacement calculations can help create guidelines for accepting or declining groups. Transient displacement calculations look at three pieces of information: the total number of reservations currently on the books the number of reservations wanted by the group the number of transient demand that will be displaced When the amount of revenue lost through transient displacement exceeds the revenue earned from the group, the group should be declined. While it is always best to perform a transient placement calculation before accepting large groups, management has proposed some simple guidelines to assist the receptionists in their group management techniques. These group restrictions represent a simple guideline for the majority of group requests that the Cornell Plaza receives. Groups that wish to begin their stays between Wednesday and Saturday can likely be accommodated. Groups requesting to begin their stay on Monday cannot remain at the hotel on Tuesday if they are larger than one hundred. In most cases, a Monday group larger than one hundred will displace excessive transient demand for the group to remain profitable. Groups are important. Effective group management requires evaluating not only the logistics of a group—that is length of stay, number of rooms, and transient displacement —but also the past history and character of a group. Some groups may attract outside audiences to the Inn. Other groups might be notorious for washing down or for leaving late. Still, others may abandon their reserved block all together. Inasmuch as different groups have different “personalities,” the proper management of groups will take time. Since the demand in the Ithaca market is high and the location is well situated near an airport, management believes that group management will play an increasingly significant role on the hotel’s revenue in the future.