Industry Insight: Pressing issues facing hoteliers right now

Meet the experts:

• Samir Arora, General Manager, The Retreat Palm Dubai MGallery by Sofitel

• Olivier R. Harnisch, Chief Executive Officer, Emaar Hospitality Group

• Patria Puyat, General Manager, Holiday Inn Dubai Festival City

• Siddhartha Sattanathan, General Manager, Radisson Blu Hotel Ajman

• Andreas Plum, General Manager, Aloft Al Ain

• Omar Souab, General Manager, Fairmont Fujairah Beach Resort

HOTELIER: Right, so what are some of the key issues you want to kick off the discussion with?

OLIVIER: Something I often speak about is efficiency: how to make our business models more flexible and more efficient going forward, because even though this is one of the most dynamic markets in the world and the healthiest, we will have more volatility in the future. We as an industry in Dubai are excellent in delivering quality. But we will have to learn to deliver quality with flexibility going forward. How will we continue to deliver outstanding quality while adapting our hotels to be more flexible?

SAMIR: The equilibrium of supply and demand of what is coming online and what’s beyond 2020; I know there a lot of initiatives being done already by DTCM. Going forward, how does the government plan to unify all seven tourism boards and promote the country as a tourism destination? That’s something which at some point the country will have to look at.

OLIVIER: It was a discussion at AHIC. There is still a perception that UAE equals Dubai, and we know that the UAE is much more diverse than that and by having a unified tourism strategy everyone will benefit from it.

SAMIR: If you look at the RevPAR there is a huge gap between cities.

SIDDHARTHA: We are looking at RevPAR, but that’s not what the tourism boards might be after because they are looking about making UAE and Dubai more affordable. Their target is visitor numbers.

OMAR: The approach is changing when it comes to tourism boards such as Dubai and Ras Al Khaimah. As you were saying earlier, most of the international clients would say ‘Dubai and Abu Dhabi’, but the infrastructure of Dubai helps the northern emirate.

OLIVIER: The other thing is the mix of tourists. The growth numbers are impressive. In Dubai it’s 7% per year which is amazing. The Dubai market gains over two million room nights every year in additional demand. Other Emirates like RAK have passed the mark of one million tourists. I assume that the other Emirates have similar growth rates. This growth also comes from non-traditional markets. Look at Dubai, where did the growth come from? Russia and China, India... These markets grow much faster than traditional markets. The question to us as hoteliers is not only how are we sustainable, but how do we prepare ourselves? The needs of Chinese travellers are very different from the needs of European travellers.

SAMIR: Does the kind of supply that’s coming online match the rate on offer from these markets? Growth is coming from these markets but they don’t appeal to all kinds of hotels. Dubai is primarily a luxury destination.

OLIVIER: For the foreseeable future Dubai will remain a luxury upscale destination. When you look at supply of rooms today, it’s four-star and five-star plus. But if you look at the pipeline, there’s a rebalancing. In the pipeline there’s a higher percentage of mid-market hotels. That is interesting because it changes the nature of the market in Dubai. There’s also a learning effect here because there’s a misperception about the mid-market traveller. They don’t all have less money to spend than our guests in our five star hotels. Some of them do, but not all of them.

SAMIR: They tend to spend money outside the hotel, so what kind of facilities must one have in the hotel to make sure they spend money inside?

OMAR: The business model has to shift. Do we want lots of F&B or less?

HOTELIER: What about occupancy and rates right now?

ANDREAS: Abu Dhabi has 20% more visitors than three years ago but less average spend coming in.

SAMIR: How do we deliver service standards and quality and luxury going forward because everything is getting squeezed; there’s very little margin to manoeuvre now. Efficiency — that’s a whole paradigm shift we have to bring.

ANDREAS: …while still meeting expectations. And that’s where the Rove got it right and I still don’t know how they’ve done it! But in many four-star hotels, customers are still expecting full bathroom amenities, slippers, mini-bars, 24-hour room service which you can’t necessarily deliver in an AED 150 hotel — the expectations are the same and that comes back to feeder markets. If you’re clear and upfront about it, very few people walk in and expect luxury. Lot of customers come in, and say it needs to be luxury.

OLIVIER: It’s also about educating the customer. Some people come to Rove Hotel knowing it’s a mid-market hotel and their expectations are in line with that. Others expect to find a valet service, room service and we don’t offer that. It’s really important that when you have a defined mid-market product you stick to it. Because you water it down and you end up having a three-star rate with a five-star product.

PATRIA: Guests come in from the other properties [InterContinental and Crowne Plaza] and ask ‘why don’t we try?’ They’re waiting for people to get their bags and bring them up to the room.

OMAR: You still see a lot of five-star and luxury products coming up but the owners are trying to eventually look at the mid-market and mid-scale segments. You actually have owners who are questioning business models in the luxury hotels saying, maybe we will go for a brand that requires less costs and expenses. The mindset of the stakeholders is changing nowadays.

PATRIA: Owners are getting incentives for building [mid-market] and we are opening Staybridge in the same area. Plus we have other mid-market brands like Hotel Indigo opening in Business Bay and Sustainable City. For rates, we have guests coming in, but I don’t think the rates are coming in. Are we going to expect our average rates going up next year? I don’t think so. Hotels need to be more stringent in the way they operate and we need to figure out how to get owners the profits they need.

SAMIR: The biggest cost is payroll and that’s where flexibility and efficiencies need to come in. We need to think out of the box because traditionally it was ‘one man one job’, which sorely needs to change. It’s pretty evident in Europe and the western world, where the learning needs to come from. The other learning is Abu Dhabi — they have really achieved how you deliver luxury with those kinds of margins, compared to Dubai.

SIDDHARTHA: Before we get to the payroll, perhaps we should talk about planning a property well. Sometimes we are setting up hotels for failure. That’s the responsibility of all operators and the technical services team.

SAMIR: It starts with the feasibility studies. That’s where things are inflated. Then the expectations are skewed as you go down the line.

OLIVIER: It’s a change of mindset. It’s about construction and operating efficiency. I’ve seen hotels that are really well run, great margins but the return on investment is really low because the hotel is over invested. When we value engineer, we value engineer at the right places — not in the commercial areas but in the back-of-the-house. There are a lot of learnings in this respect. I’ve seen the same mistakes over 30 years. Hotels are emotional investments. When it’s a hotel everyone wants to have a view. Hotels end up over budget and when the accountants wake up, the project is so far advanced that 80% of the spend is committed. So when the value engineering starts, the only area we can do so is front-of-house. You end up with oversized kitchens and cheap chairs in restaurants. It’s unfortunate because this is what the guest is paying for. When we plan for hotels we need to have efficiencies right from the beginning. BOH should be as small as necessary. Do we need 3-4 restaurants? Do we need a destination spa? Because if you look at the yield of hotel construction, the most profitable area for ROI is the rooms. The hotel business is very profitable with 80% occupancy but when occupancy drops fast because our costs are too fixed — we need to convert them from fixed to variable.

OMAR: You see a lot of projects that were designed earlier but the projects take a bit of time and you see a lot of F&B offer, which is now being cut down. You start either to see the outsourcing trend or cancellations of restaurants. The other thing is payroll. We have to find synergies between multiple hotels — you see a lot of clustering. Either in the marketplace or between Emirates that are close to each other. The high positions are being clustered, then you try to be as lean as possible in the payroll, shift the restaurants into outsource and get a return on investment that the owners are expecting.

PATRIA: In DFC we operate as a cluster. IHG and I put together a manning guide which we are rolling across AMEA and it’s called Manning 2.0 where we hire one person for several jobs and not just one job. This is where we have blended synergies in front office; we just need front office colleagues. For Holiday Inn, we have manned ourselves at a 0.5 ratio between the 508 rooms that we have in operation.

HOTELIER: Emiratisation was briefly mentioned at the start; can you talk more about that?

OLIVIER: We have an opportunity as an industry to take it on practically. What do we do as hotel companies to increase the number of Emiratis in the business? We need to do this collectively, because the image of hospitality is not great for Emiratis. There is a misperception about the business because — not just Emiratis — people everywhere associate the hotel business with four jobs, cooking, serving, reception and cleaning, whereas a big hotel has 50 different jobs so we need to convey that. We are going to schools and presenting the hospitality industry to high school students to show to them that it’s a super attractive industry. It’s more than cooking and cleaning, it’s much more. The percentage of Emiratis in the industry is so low. Tourists coming to the UAE expect to see UAE nationals.

PATRIA: IHG also goes into schools. Our owners also have schools, so we have a lot of the ladies and gentlemen come and train with us in internships for two months or a summer. We accept Grade 11 and 12, and they go into IT, marketing, sales; there are many options.

OMAR: I have one Emirati with me on the team and he is my link with the authorities and the local community, and they help a lot. It’s a great addition to the team and if we manage to get a bit more across departments…

SAMIR: Because there is a minimum salary you have to offer, is it feasible?

OLIVIER: Yes it might be a little more expensive but the difference is not as big as people say. To go back to your point Patria, we had a presentation at a school recently and from there we got 13 direct applications for internships this summer — they said they had no idea [about the industry] previously. So it shows we have work to do.

ANDREAS: You get a lot of credibility from having a UAE national.

OMAR: I agree that we should be pro-active because if we’re not, it will be imposed, and if it’s imposed then you don’t get the right talent.

HOTELIER: Let’s talk Expo 2020. Any challenges or opportunities you foresee during that time period?

OLIVIER: I don’t think filling rooms will be a problem; our concern is increasing room supply. Demand will be so high, the Expo expects 25 million over a six-month period, which is tremendous, so how can we accommodate all this demand? Some will come through apartments for sure. But that’s not going to be enough. The increase in number of hotels is also not going to be enough. Will we need to bring in cruise ships to provide rooms for short term demand? Six-month period, 25 million visitors, 70% international. We need to prepare for that.

PATRIA: The influx of tourists is not an issue. What are we talking after that? What occupancies are we looking at, what rates are we looking at?

SAMIR: We have good convention infrastructure in the city. That’s one area we should probably look at.

OLIVIER: My opinion is that the long-term impact of Expo 2020 is going to be good for the city. In many ways Dubai is still an emerging city since it’s the fourth most-visited city in the world. The supply growth has been as it has in the past. Talks of oversupply have been around for 10-15 years.

And look at the tremendous opportunity now provided by the transit visa; now that everyone can get a 72-hour visa at the airport and Dubai is the biggest transit platform in the world.

HOTELIER: What about the industry’s mergers and acquisitions? How has that affected the business landscape and operations?

OMAR: When AccorHotels acquired FRHI and then Mövenpick, you do feel the change. I’m sure Marriott and Starwood also noticed. The approach by Sébastien Bazin has been amazing.

ANDREAS: The market is big enough to absorb the change though. We’re changing in terms of two cultures coming together, sometimes creating a third culture. There’s a lot of systems integration and standards.

SIDDHARTHA: AccorHotels handled it very well, they did not rush it.

OMAR: We are very happy with the renegotiation of certain contracts. Today we are paying a lot less because of the strength of being part of a large group.

OLIVIER: What about owners? Because they are certainly asking themselves how do they benefit from these mega mergers? Some will see benefits, others will not. That’s an interesting thing to watch, and what is happening here in the UAE where owners are becoming more assertive towards branded operators is an interesting evolution.

SIDDHARTHA: All these mergers are going to leverage advantages of scale whether it’s lowering distribution cost or purchasing costs.

OLIVIER: One of the challenges of the mega operator is the ability to focus on individual hotels. It comes down to the GM. This is where smaller operators have it easier.