Don’t Be Fooled by Market Growth Alone
By Sadi Farooqui, Vice Chairman Millat Investments
The local hospitality sector is finally seeing much needed growth due to a recovering tourism industry and increasing demand for leisure businesses.
However, investors looking to enter this sector should understand that achieving financial success goes beyond relying solely on STR data (a benchmarking tool that compares hotel performance in relation to a group of competitors) and market growth.
Simply operating a hotel in a growing tourism market does not guarantee satisfactory returns. To meet owners’ expectations and ensure a profitable venture, hotel operators must also focus on understanding the intricacies of the business and the specific market segments they target.
The Millat Group is a significant investor in hotels in South Africa through a successful partnership with the global Hyatt brand and we have learned some valuable lessons.
Before investing in the hospitality sector, conduct comprehensive market research to understand the local tourism industry, demand for leisure businesses, and specific market segments that align with your investment goals.
While STR data provides valuable insights, it should not be the sole benchmark for assessing top-line performance. Rather evaluate the hotel’s revenue targets per department, establish specific KPIs, and create an action plan to ensure the business is on track to meet its financial objectives.
Investors also need to consider the projected return on investment over a span of 10 to 30 years. Hospitality is not a quick ROI game.
We’d also recommend seeking guidance from experienced professionals in the hospitality industry who can provide insights and expertise to help you navigate the complexities of the market and make informed investment decisions.
Each hotel business has its own unique strategy and concepts that cater to different markets. Merely comparing the hotel’s average Revenue per Available Room (RevPAR) against STR data does not provide an accurate reflection of whether the top-line targets have been achieved.
This approach is often used by operators to showcase to investors that they are outperforming the market. However, it fails to address the crucial question: Do these numbers align with the owners’ budget and drive total sales?
Investing in the hospitality sector we believe requires a comprehensive understanding of the hotel business beyond STR data and market growth.
Get the other fundamentals right and the investment should be more profitable and sustainable.
