Case Study of Daily Luxury

Question:

Case Study

Daily Luxury is a 200-room hotel within the central area of Singapore. It is easily within reach of the iconic Singapore landmarks such as Orchard Road, Marina Bay Sands and the Central Business District.

Daily Luxury has the following amenities and facilities,

  • Spa and massage services
  • Meeting and event services
  • Award winning restaurants and bars
  • Gym and fitness studios
  • Tours of the city

The hotel’s target customer profile are middle-class business and leisure travellers. This has been the average room rates and spend per day from hotel guests.

Item

Average Rate / Spend Per Day

Hotel Room Rate

$250

Spa & Massage

$100 per person

Restaurant and Bars

$70 per person

The Daily Luxury is being approached by an investor, Mr Chan, who wishes to explore buying a majority stake in the hotel. Mr Chan believes that improvements can be made to its partnerships and strategies, so as to boost its profit.

Required:

Answer the following questions, making sure to reference academic journal articles and current trade journals. Include a reference list at the end.

Q1.

Discuss the aspects that the Revenue Manager will look at so as to determine a competitive set for Daily Luxury. Create a competitive set of 3 real-life hotels to Daily Luxury and justify why they deserve to be in the competitive set.

Q2.

Discuss how the scope of the Revenue Manager’s portfolio will go beyond rooms revenue of Daily Luxury.

Q3.

The potential investor, Mr Chan, believes that Daily Luxury should have partnerships with Online Travel Agents (OTAs). Discuss the benefits and disadvantages of such a partnership for Daily Luxury.

Q4.

Mr Chan would also like to understand if Daily Luxury engages in any unethical practices for Revenue Management. Identify and discuss potential ethical issues that Mr Chan may examine.

Q5.

Daily Luxury has customarily filled its hotels using direct bookings and specialist travel agents. Due to Mr Chan’s urgings, it is now in touch with an Online Travel Agent to explore a partnership.

The hotel is well booked during the weekends and most of the weekdays. However, there are gaps in the Mondays and Tuesdays of the month of October 2021.

As of August 2021, there are 80 rooms on the books, each Monday and Tuesday during October 2021, at $250 per night with 75% double occupancy.

Fixed costs are $50 per room night and variable costs are $20 per guest. For each day, these guests are expected to spend an additional $100 on Spa & Massage and $70 on F&B per person.

To resolve this issue, there are 2 options to boost the occupancy:

  1. A series of corporate promotions with the expectation of 100 booked rooms at $220 single occupancy (net of commission), with $120 on Spa & Massage spend and $90 on F&B spend per person. It is expected that 20 rooms will go empty.
  1. Passing the 120 vacant rooms to the OTA. The OTA is highly confident that it can fill up the rooms at a 90% occupancy rate. The guests will pay a room rate of $230 based on double occupancy. Expected spend is $30 on Spa & Massage and $20 F&B spend per person. The commission that OTA’s charge on booked rooms is 20%.

Assume that the costs of providing the spa, massage and F&B to guests are already covered within the initial fixed and variable costs.

Required:

  1. Create a table outlining the options and their profitability (with metrics such as RevPar, ADR, ADR Yield).
  2. Recommend to Daily Luxury the best action to take and why.
  3. For the recommendation in (b), highlight 2 key assumptions made and how they could go wrong due to the COVID pandemic.

Q6.

Mr Chan is also considering a large renovation of Daily Luxury, with the room count staying the same.

His consultants have given the following details for a renovation:

  • Capital investment needed will be $15,000,000
  • Profit required after tax is 25%
  • Tax rate is 20%
  • The interest payable on the loan taken to pay for the work will be $1,200,000
  • Administrative expenses will be $1,500,000
  • Annual fixed costs will be $2,000,000
  • Variable costs per occupied room will be $40 per room
  • Operating income from F&B is expected to be $2,000,000 and from non-rooms departments to be $2,500,000

Required:

  1. Assuming occupancy of 80%, what will be the additional room rate Daily Luxury needs to charge to achieve the required return on investment for a year? Use the Hubbart room rate formula and show calculations.
  2. What room rate will be needed if occupancy were 90%? Use the Hubbart room rate formula and show calculations.
  3. Explain why the Hubbart formula is relevant for the situation that Mr Chan faces.
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