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Operations

Maintaining performance and profitability

Eric Omgba, Co-Founder of Alboran Hotels & Hospitality and Eric Viale, Managing Director, Southern Europe at IHG Hotels & Resorts, discuss the best ways to maintain margins and performance in this period of inflation and uncertainty.

When considering issues of maintaining profitability, one central element emerges as a prerequisite

Eric Omgba: The Covid period was quite trying for the teams. The prerequisite for maintaining our margins is to ensure the well-being of our employees. We are therefore currently looking at solutions to improve the ergonomics of workstations and levers to ensure sustainability for our teams. This is seen as an investment, but we have to take into account the fact that teams tend to desert our industry as well as other sectors. How do we respond to the desire for a better work/life balance and to the issues of compensation?

The first investment we made following Covid was the introduction of a four-day week. We are going to duplicate it because we are convinced of the benefits it brings after having tested it in two of our establishments. This has a significant cost, but it allows for a much higher retention rate. This subject of retention is key because it is obvious that each time a staff member is lost there is an impact on quality, on ratings and therefore on the average price.

Eric Viale: Our industry is based on people, so it's essential. It is one of the main assets of our sector. At IHG, we have totally changed our approach to training, including with our franchisees, to increase resources through training platforms. We have also focused on talent management by allowing our employees to really develop their skills, to be mobile and to evolve within the organisation.

When we look at the subject of profitability today, the question also arises of how to manage this important line in the operating statement. We therefore took advantage of this crisis to review our structures with the workforce optimisation tool. It was designed with two objectives in mind, the first being to take a step back and reflect on our current organisations in the hotels. We realised that we are a rather traditional industry with hierarchical levels and workstations that do not necessarily make sense today. We have reviewed the organisation in depth with multitasking and job sharing, and we are also giving our employees opportunities to progress within the company. The second objective is to provide our general managers with tools to better manage resources and schedules and thus continue to optimise from a cost management point of view.

How and where can costs be chased?

Eric Omgba: As a company director, we look at our business empirically by looking at the profits and losses and looking for the levers on which we can act with zero impact on the teams and on the client in terms of experience. Beyond the P&L, we looked at purely contractual elements such as intellectual services. Accounting and auditing, for example, where we have reshuffled all the cards. The question of insurance was also central (we all experienced difficulties during the Covid period), which was a strong lever for savings that we mobilised.

We then looked at what we could deal with at the operational level. One of the first tests that proved conclusive was laundry, a sector in which we have been experiencing inflation since before Covid, due to the increasing concentration of service providers. We are currently testing the internalisation of laundry services in two establishments. We are saving 20% on one of the establishments compared to renting linen and 22% on the second establishment. In theory, but this remains to be verified over time, this should enable us to extend the life of the linen over 20 years with the use of less harmful ecological products to treat it.

This internalisation approach makes sense for budget hotels, but it cannot be applied to all types of assets. The higher up the range you go, the more complex the issues become.

Breakfast is another lever. There are major consumption issues for small or very high-end assets. We have therefore decided to offer à la carte breakfasts and to put aside the buffet part. We have thus made significant gains in terms of goods consumed. This implies an additional service in terms of resources. If we look at the balance sheet, the customer is happy because they are increasingly aware of environmental issues and are becoming more and more frugal. Education allows us to put behind us the era of breakfast buffets with more food than we could fit in a dining room.

Eric Viale: On these types of expenditure, it is important to reinforce our vigilance following the crisis. From all crises come opportunities on the one hand and lessons on the other. As a group, an operator and a brand, we are putting in place initiatives to enable hotels to manage all the lines of their P&L.

The presence of the group and its scale now allows us to make significant savings, particularly through purchasing platforms for all the elements common to the brand. We realised that there were real opportunities to use our strong presence in price negotiations, terms and conditions, and also to deal with stock shortages. For example, we work with Entegra, which is the next largest player in France. Out of 1.3 billion euros of expenditure in Europe, this approach has generated 10% savings.

We are also currently working on a pilot that we will roll out to franchisees, we have generated 8% savings on food and beverages in France. It is the responsibility of an operator and brands to provide solutions, and to work with our owners' associations.

Coping with energy cost inflation

Eric Viale: There is another line in the operating statement that is very important, that of energy in what is an unprecedented context of inflation. At IHG, energy consumption has been a key focus for several years. For example, we created the Green Engage tool several years ago for hotels to create this culture of environmental impact within the accommodation units. This inflation is pushing the players to move up a gear. A Journey To Tomorrow is another of our CSR programmes with 10-year targets. For our managed and franchised hotels, we have implemented quantified consumption targets for each establishment by developing platforms to support this approach. For example, each establishment can compare itself in terms of energy consumption either per m² or per occupied room. Once the comparison has been made, we have added the solutions that enable them to act to reduce their consumption. There is also a return-on-investment calculator. This also allows you to prioritise your investments and CAPEX according to your objectives.

It is a platform that has been designed with our owners and hotels to take very concrete actions. Energy is CAPEX, but it is also the culture of our teams, with actions that enable us to reduce energy consumption. It is also a question of involving our customers in these good gestures, and not just simply meeting their expectations in this aspect.

Eric Omgba: The subject of energy is the one on which we have the least leverage in our establishments, which are for the most part poorly insulated. We realised in the middle of Covid that when we kept an establishment powered up, it consumed almost as much as when we had customers. Our main lever for optimisation is gas. In our catering establishments, we all have this habit of kitchen teams turning on the stove as soon as they arrive, whether there are customers or not to serve. The small things we have been able to improve come from raising the awareness of the teams.

On the CAPEX side, we have concentrated on those that have the greatest impact today, particularly in view of the inflation in energy costs. For example, we are currently renovating kitchens where we are switching from gas to electric equipment. For all our establishments that use gas, it is difficult today to limit the cost of this consumption. The only leverage we have on energy is in a pricing logic. The economic situation is favourable for us to apply more opportunistic pricing to compensate for these issues in the absence of any miracle solutions.

The other lever for profitability: increasing turnover

Eric Omgba: Pricing is an important subject that varies according to the type of asset. At Alboran, we have the particularity of offering budget and top-of-the-range hotels and price sensitivity is not the same. For economy assets, the price sensitivity will be between +3€ and -3€. As you move upmarket, the customer's ability to absorb price increases varies. When we left Covid, customers were waiting for safe rooms in terms of hygiene and were in a logic of displacement by necessity. We have kept the pricing inherited from 2019, which is now improving opportunistically.

We also have a change in our customer mix with, for example, more and more individual customers that allow us to have high pricing. We are all co-responsible in the markets where we are present. I would therefore recommend to everyone, as long as the market has an upward dynamic and is constrained, to maintain rates that correspond to those of the market. There will come a period of dearth when we will also have to remain consistent, but for the time being, pricing is probably the most important lever for us because it allows us to maintain the entire business model and to cover operating costs.

Eric Viale: One of the drivers of profitability and performance is of course the topline. The recovery is here, as Adrien Lanotte demonstrated in his speech, and in some markets we are even surpassing 2019. The average price is the essential element that generates our profit. There is indeed a catching up on the demand side with requests for different products. The revenue management support that we provide to all our establishments allows us to maintain this winning strategy. This price adjustment is what protects our margins today.

We have also developed other tools that will enable us to go even further, such as attribute selling. We have reviewed the inventory of our hotels and opened up new distribution opportunities in terms of the elements that make up a room. This will open up new opportunities for sales and average prices. We are leaders in this marketing approach which will be implemented progressively in the coming months within the hotels.

It's about us thinking about new opportunities. The brand also has a role to play. For example, we have transformed Holiday Inn with the Open Lobby with the logic of following this trend where each square metre must generate revenue. We have also worked a lot with our managed hotels on the levers necessary to pivot in their operating habits and seize opportunities. I am extremely proud of the innovation and creativity of our general managers, who have been able to transform a city centre terrace into a beach club, or meeting rooms into a kids' club, in order to constantly seek to optimise revenue from every available square metre in the hotel.

A new approach at Alboran Hotels & Hospitality

Eric Omgba: We created a brand to respond to several issues that are at the heart of the business model. Without having anticipated the economic situation and inflation, we asked ourselves how we could have a business model that would allow us to give more to the customer while rationalising costs.

Distribution is one of the first levers, particularly direct hotel. Today's customers are increasingly ready to seek out a hotel or a brand based on affinity. If we want to generate direct bookings and limit the impact of OTAs, it is important that we can embody this. After looking at the many brands available today, we decided to create our own brand. This corresponded to this logic of being able to embody the brand with the ambition being to be able to control the distribution. Of the hotels that we have under our brand name to date, we make 30 to 40% of reservations directly, and our ambition is to reach 40 to 50% directly.

This is an important topic that franchisors have started to integrate because we are seeing more and more collector brands appearing. They allow independent hoteliers to bring their DNA to life while having total control over their product and the concept.

The second challenge is related to service. We have created a brand that is positioned at the top end of the market and is aimed at generations X and Y, who work all over the place. As such, there is a vision of the hotel industry that is very concentrated between business and leisure. We therefore wanted a brand where people go to the essential when they go to the luxury sector. The main thing is to remove the "stuffiness” that can be found in some parts of the luxury hotel industry, which has a very statutory side.

This ranges from room service to the mini bar, for example. For us, it is a question of enhancing the rest of the services in the common areas and with a room that is as warm and inviting as possible.

Regarding this brand [Firstname], we have a very efficient business model on the entertainment part as well as on the life part in the room and the common areas but on which we decided all the same to make certain choices. For example on the mini bar, by looking at the usage of our customers, we have noticed that they no longer consume a mini bar but rather choose a place with a very nice bar. This calls into question the investment of €300 per mini bar to leave a few bottles of still water for a week. In return, we have made available on each floor a herbal tearoom where customers can have some soft drinks and snacks at their discretion.

The idea is not to give less, but to avoid individualising when we can mutualise. This brings more restraint so that everyone benefits, the customer, the planet and our margins.

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