Friday, 6 April 2012

Surviving the Great Recession - Lessons from a Caribbean Hotel

I am going to go a little off topic with this addition to my blog and go back a little bit to my accounting and finance routes. Yes, online marketing is more fun to talk about but the fact of the matter is we are in the midst of a recession that just does not seem to be going away. According to The Economist, 2012 is likely to be the year of "self-induced sluggishness" for the world economy. With the sovereign debt crisis in Europe, the erratic pace of the job recovery in the US and the potential damper on summer and fall travel that may be brought about by the Summer Olympics and the US Election respectively I think most of us in the Caribbean hospitality industry agree that 2012 will another difficult year.

Our situation at Bay Gardens Resorts is no different from anyone else's. Many persons who are on the outside looking in marvel at our high year round occupancy and see us winning bids for catering for major international events (CHTA Marketplace, St. Lucia Jazz Festival, World Cup Cricket etc etc) and assume that we are doing well and generating substantial profits in the midst of this recession. What they don't realize is the level of discounting that is needed to generate such occupancies or the effect of rising commodities and energy costs on our margins. When you experience a reduction in revenue along with a dramatic increase in costs in a recession, the result is predictable: a constant flow of red ink that starts around late April/May and lasts well into mid December (our slow season here in the Caribbean)!

This has been extremely difficult on hotel owners and our owners at Bay Gardens Resorts have had a hard time dealing with it at times as even they have never seen a situation like this one in their 30+ years as entrepreneurs (including 17 years in the hospitality industry). Having owners with uncanny business instincts and vision, hiring great management and staff, offering a superior, personalized service and simply being best in class at anything that they did has worked flawlessly for our owners (my parents) over the years but even that has not been enough to generate any profits from our 3 hotels for the last 3 years.

Yet in spite of all of this, I remain extremely optimistic about the future and actually believe that the recession has been good for us in some ways. Maybe my optimism stems from youthful inexperience and naivete that comes from being directly involved in the industry for a mere 3 years. Or maybe its simply the fact that all I have known for most of my short working life is this dreadful recession and I have learned to adjust my expectations accordingly.

For in the midst of all of this I have seen one clear advantage of coming into a leadership position in an environment like this: people are much more willing to rethink their way of doing business when things are difficult and new ideas that would not have been looked at before when the business was profitable suddenly make more sense when you are faced with losses.

Embracing new ideas has allowed us as a small, locally owned hotel chain to find new sources of business especially online (as you can tell from the more traditional online marketing articles on this blog) which has been great but what we have also been able to do is find over $0.7 million (about $250,000 USD) worth of annual cost savings without changing our longstanding policy of not laying off staff no matter how difficult things get and without sacrificing quality or customer satisfaction. These savings will be there when the world economy turns around (which in all likelihood will start to happen sometime in the first half of this decade) and we will be better off for having put in the effort to uncover these savings during the recession.

How does a small business achieve savings of this magnitude without cutting headcount? Here are a few of the lessons learned:
  1. Get buy-in from owners and management - I have the distinct pleasure of working daily with a former CHA President and Caribbean Hotelier of the Year (Berthia Parle), a former SLHTA Hotelier of the Year (Waltrude Patrick) and of course our owner, Joyce Destang O.B.E. These are three very successful ladies with a almost a century of business and hospitality experience between them (see I make this point to illustrate that there is only so much that they have not seen or tried before so convincing them that your new cost cutting scheme will work without sacrificing guest quality is not easy. The fact that I share the same last name as the owners is no licence to force my ideas and will upon the company. You need to get buy-in (or at least a willingness to consider something new) starting at the top! If you aren't able to make your case successfully to the owners, management and in many cases employees, then any change effort (cost cutting or otherwise) is doomed to fail. That is why every new major initiative that I propose is accompanied by a robust business case followed by lots of discussion and asking for feedback from the key players and decision makers and polling others in the industry who have tried it. I spend a lot of time researching any new idea and I suppose my accounting/finance background dictates that my business case is accompanied by a robust and thoughtful financial analysis (how much will the program cost to implement, how much will the company save, what is the payback period, impact on other aspects of the operation etc). Moreover, you should not just start a project and not report back on its performance. I believe that I should be held accountable for anything that I implement so I report frequently on how we are performing and what's working and what isn't. 
  2. Use competition to your advantage - No supplier relationship is so sacred that you should not entertain a competitive quote from a reputable competitor (locally or internationally) who is able to match the incumbent in terms of quality and reliability of service. Note how I qualified my statement as cheaper is not always better! But we have successfully used increased competition in the telecommunications, banking and insurance industries to negotiate savings of upwards of $250,000 EC per year on these three items alone. Never mind the constant search for the best combination of price and quality from food and beverage and general suppliers. In this recessionary environment, smart suppliers are willing to work with you as they cannot afford to lose business and in many cases we have been able to negotiate savings just by showing a willingness to switch if our demands are not met. Are we playing hardball a bit? Maybe. But our guests do the same on a daily basis which has led to a reduction in ADRs in the global hospitality industry so you have to excuse me if I don't feel sorry for our suppliers as we are all learning to live with less for now until the economy turns around. 
  3. Go after the big expenditures first - avoid the tendency to be "penny-wise" but "pound-foolish". Sometimes we go after savings of a few hundred dollars a month and ignore the low hanging fruit that can save you tens of thousands! That was why our approach over the last 3 years has been to focus on the areas that will make the biggest impact: utilities, insurance, debt service, food and beverage purchases, general supplies among others. 
  4. But realize that the little things count - notwithstanding what I mentioned above, you can't lose sight of some of the smaller expenditures either as sometimes with one policy change you can save a little on several smaller expenditures that leads to thousands in total annual savings. 
  5. Use the experience of your team - remember what I said about getting buy-in? Recently I held an emergency meeting with some of my managers and basically reminded them that they have all seen many more recessions than I have and challenged them to think of cost cutting measures in their own departments. The result? Some very good and clever ideas (rechargeable LED tea candles instead of lamp fuel, making canvas linen bags instead of using garbage bags) and approximately $30,000 in annual savings after one meeting!
  6. Bring certain functions in-house - usually the consultants encourage you to outsource to cut costs but some things make more sense to do in house. Without any significant increase in our payroll we have able to save about $120,000 annually by bringing payroll processing, management of OTA extranets, graphic design and pool maintenance in-house. In addition to cost savings a side benefit has been greater quality control over all of these items as our in-house employees feel a greater sense of ownership for getting the job done right! That being said some attempts to do things in-house have not fared as well and one has to have the humility to admit when a course of action is not working and cut your losses. 
  7. Look out for hidden costs - there are some silent killers that don't show up in your profit and loss but are costing you nonetheless and you have to attend to these as well. In our case the biggest one was a booking engine on our website provided by a tour operator who through their net rates were essentially charging us a 20% commission on every booking that came through our website. A 20% commission for doing nothing and benefiting from our online marketing efforts! That was something that I changed almost immediately and the result has been an increase in ADR (or reduction in commissions, however you want to look at it) that contributes hundreds of thousands in incremental profit to the bottom line as online bookings (through our commission-free booking engine) make up the largest source of our business. 
  8. Realize that your suppliers are hurting too - I have been truly amazed at the sudden willingness of several suppliers to get into deals that they would never have considered when the economy was booming. We have seen this especially in the advertising world (print and online in particular). We have been able to take advantage of several well-priced last minute opportunities as a result and many advertisers are more than willing to negotiate or even consider barter (which is not free but is certainly cheaper than paying cash!). Some suppliers are also cash hungry as the recession has led to them experiencing an increase in bad debts. I am always surprised what kind of discount can be negotiated when one offers to pay cash upfront or within a week! One supplier offered us a 5% discount on all invoices paid within 7 days. This has led to approximately $1,000 in savings per month from this one supplier. Well worth it! Wish others would offer the same terms. 
  9. Look beyond your shores for the best prices on products and services - I know that I am going to get into trouble with someone for this. Why don't the hotels support the local suppliers? They import virtually everything from overseas and only call on us when they are in a jam! They don't buy from us but expect us and our employees to patronize their restaurants, conference facilities, local events etc. And on and on. I just want to be clear that Bay Gardens Resorts is 100% St. Lucian owned and managed and every single one of our 225 team members is a St. Lucian or Caricom national. More than 85% of our purchases are from local suppliers and we support local farmers and fishermen by not just buying hundreds of thousands of dollars worth of goods from them annually but by actually paying them not just on time but very quickly (within a week or two and in some cases within a day or two if we get a good deal). But we live in a globalized world and we in the hotel industry have to deal with global competition from the rest of the Caribbean and other sun, sea and sand destinations daily. But some local suppliers have gotten lazy in their procurement and in setting their markups. The common example that I like to use is ink cartridges. If I can bring in an ink toner cartridge for a price of $210 EC landed (duties, shipping and brokerage included) how does one justify a wholesale price of $400 EC from a local supplier for the exact same item? Surely if we can bring the item in from overseas for $210, a local supplier can source a better price and benefit from economies of scale and bring the same item for maybe 10% cheaper at least. If that same supplier then charges $250 for the item one can live with that and pay an additional $40 for the convenience and service, but $400? Pure madness! The suppliers who work well with us are aggressive in their procurement and are able to bring items in from overseas or make them locally for prices below or very near our cost. We have analyzed the potential of bringing maybe 60 different items at some point or other and most good suppliers are able to come up to prices very similar to our cost. So these are the suppliers who we continue to work with. 
  10. Cash flow is king (or is it?) - I am a big believer in the primacy of cash flow over profitability (there is a difference, but that is for another show) but I have seen some business-people make some very short sighted decisions due to cash flow considerations. It is better to make an upfront investment of say $10,000 and buy a (non-perishable) item in bulk so long as you have the storage capacity if it will yield $20,000 in savings within a relatively short time period (in this recessionary, fast changing environment I generally look at a payback period of 1-2 years or less for such investments). The same applies to other cost saving investments such as purchasing energy-saving LED bulbs which are very costly ($45-$70 EC each) but cut your lighting costs by about 90% and have a 6-12 month payback period. Concerned about going into overdraft? So long as you are not pushing your business to the brink of bankruptcy a temporary dip into the red-zone for major savings in the near term is not a big deal from my standpoint so long as the interest on the overdrawn balance is less than the savings at stake. 
Notice that I did not tackle some major expenditures above. In my opinion, there are some things that you just do not sacrifice, not even during a recession. If you have to cut these down to bare-bones then you have to consider whether it is worth being in business at all! What not to cut back on:
  1. Headcount - payroll and benefits is our biggest expenditure ($5-$6 million EC a year) and it is the one area I have been guilty of not cutting back on substantially or at all. In fact in some areas it has actually increased. It always amazes me how successful companies who engage in cost cutting (re-engineering, right-sizing whatever you want to call it) always go after this area first when looking for savings. That's the easy way out and shows a lack of creativity and initiative when it comes to cutting costs! If you have hired well and have not over-hired then there is no need to do this! Now if you have an employee who is not performing well then they don't belong there in the first place and should be dismissed, recession or not! But laying off a strong employee is not a smart long term business strategy. We don't send talent, knowledge and years of investment in training out the door. It makes no sense. If things are slow in a particular department, rotations (shorter work weeks) or reassigning to another department are a better option until things improve. Our hard working staff are appreciative of the level of job security that exists at our family-owned business and it pays dividends for us now in the recession and will pay off even more when the economy turns around. 
  2. HR, Training and Employee Relations - again, I have been ridiculously lenient in this area and have actually used the savings generated in other areas and have tripled the staff relations and training budget, only to see that increased budget exceeded! Staff birthday breakfasts, quarterly and annual "Grammy-style" employee awards gala celebrations, staff parties, management dinners offsite have all been introduced or resurrected in the last few years at the suggestion of many of our employees and while some staff (like our guests) may never seem satisfied, the majority of our staff have responded very well to these initiatives and we have seen a reduction in turnover in certain departments. It is a simple equation from our perspective. Happy staff = happy customers = increased profits = happy (happier?) owners. 
  3. Marketing - we have used the savings generated elsewhere to increase our expenditure on certain types of marketing (online marketing and PR in particular) which is already paying off this year in terms of increased direct bookings. We are of course more careful now when making marketing decisions and more keen to measure the results of our marketing campaigns but simply cutting the marketing budget without consideration for the short and long term benefits of the marketing activities only leads to a downward spiral. 
  4. Anything that would sacrifice service or product quality - if you want to lose credibility and customers this is the way to do it! The last thing that should be sacrificed is the customer experience. There may be more efficient ways to achieve the same result but cutting back on anything that would affect customer satisfaction or lowering your property's maintenance and service standards is a recipe for long term disaster and clients will notice the difference!
We certainly can't wait to see the back of this recession. Even now there are some promising signs in the US that give one hope and in Saint Lucia we have seen double digit growth in our tourist arrivals for the winter so far. But there is still a lot of uncertainty and while occupancy is coming back and we may be at least two to three years away from seeing our ADRs recover from the rampant discounting that started a few years ago. 

So in the meantime we continue to use this difficult period as a learning opportunity and as an opportunity to get leaner for when the rebound inevitably occurs. 

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