Should I go up market?

If you're about to throw a large sum into a hospitality project, we may be able to save you a lot of time, money and angst.

I’ve always been fascinated with the lemming-like behaviour of human beings and the amount of money people throw into ill considered projects that appear to be fashionable or exciting at the time. The hospitality industry seems to get more than it’s fair share, especially of late.

A disturbing number of people want to operate at the top

Take the building of four and five star hotels as a good example. A bit of basic research will tell you that we need more up-market hotels like a hole in the head. There are very few gaps in the Australian market for premium hotels in any of our major cities or tourism areas, but they keep on being built in disturbing numbers. If hotel operators are not careful they’ll all end up with 40% occupancy rates or average room rates below the $150 mark.

Meanwhile there is a distinct lack of two and three star properties. Why? There’s no social or business status in operating a down market hotel, that’s why — and architects and builders don’t want to build basic, functional structures because there’s a low margin and not much kudos to be had.

Restaurant market levels

It’s the same with restaurants. Have a look at how oversupplied with top end restaurants our major cities are at the moment. They’re all tripping over each other for a share of a very small and rapidly shrinking market as our economy gets tighter and tighter. It’s easy to tell the ones that are struggling — $30 lunch specials, or similar discount promotions are a good indicator that things are not all that well.

Hospitality economy is cyclic

I can’t see an end to it, that’s what’s so frustrating. Despite the regular shakeouts at the top of the industry which seem to occur at roughly ten year intervals and should be a loud warning to all, people seem to keep repeating the same financial kamikaze patterns. In the period between 1989 and 1992, and during the GFC we lost nearly 30% of the industry. We’re bracing for similar carnage right now after Corona virus.

It’s a kind of ten year bubble cycle. The economy gets healthy and goes into growth mode and people jump on the bandwagon and put money into all kinds of projects they are not terribly familiar with — doctors into vineyards, accountants into restaurants, builders into hotels, etc. The grass always seems greener on the other side of the hill. It becomes a kind of self fulfilling prophecy in a way — the more new restaurants and hotels that are built become evidence to the uninitiated that the industry is booming, so they jump on the bandwagon themselves.

I’m not trying to preach here, or be self-righteous. It happened to me in a way — that’s what got me thinking about it in the first place. I got caught in the stock market bubble and took a fair old financial drubbing; despite the warnings from the professionals. In retrospect, if only I’d listened.

Seek advice before you start

Despite my own experience, I feel quite a bit of frustration that people won’t seek our advice before they embark on major projects. The irony is not lost on me. We’re forever seeing new projects that just don’t stack up to cursory, let alone detailed examination; but everybody involved seems to get emotionally attached to their creative ideas and then they go at it like a bull at a gate.

In thirty five years in this business I’ve only been asked to evaluate three new projects at the concept stage. I nailed two of them with some basic 

A modest investment in good advice could save you a fortune

forecasting and costing maths that the project initiator was blissfully unaware existed. Both of these parties were way out of their normal areas of expertise and were being seduced by logic that suggested that because there was a business like this on every street corner, they must be making money — ‘but they’re full all the time’ is a common cry, ‘When did you go in there?’ is the automatic follow-up question. ‘Friday and Saturday night . . .’

Bank lending is often naive

I even approached the banks at one stage and proposed we help them evaluate loan applications for hospitality projects because we were horrified at the number of people we were seeing who were throwing away their life savings and then defaulting on loans. We were underwhelmed with the response, yet at the time the banks were copping a good old hiding and were very gun shy about hospitality financing.

It’s not as though we’re talking sheep stations here. It would cost a flyspeck to do a proper project evaluation compared with the amount of money being risked in most cases.

Head vs heart
Use your brain, not you heart when you plan to start a business

Take a recent experience as an illustration of the frustration I get from this issue: The son of a Sydney hospitality family who had operated down market cafes successfully, came to me and asked me to have a ‘quick look’ at a mid level restaurant he was going into. I was concerned from the first moment I saw the restaurant and told him. It was very small, the rent was very high, parking was quite difficult, he wanted to do seafood and he appeared to lack some of the key skills to operate at this market level. I questioned his basis assumptions and recommended a proper feasibility study, complete with financial analysis of the project — for which we quoted. Our quote was a pittance onto a project that was budgeted to require $1,000,000 and where he was proposing $400 chairs. The family refused. ‘Too much money’. They lost the lot.

I’d much rather assist people going into new projects to get it right than to have them come to me when things are going bad and they are beyond redemption financially, or are so knocked around emotionally they don’t have the stamina to continue the fight.

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