Mene Kude Dr. Dixie Marketing 601 November 17, 2010 Amber Inn & Suites, Inc. Strategic issues and Problem Identification The Amber Inns & Suites, Inc. is a 250 property hotel chain, struggling with net operating lost since 2002, with fiscal year 2005 projected to be its fifth consecutive unprofitable year. The company has projected lodging revenue of $422. 6 million and a net loss of $15. 7 million for fiscal 2005.
Joseph James, the company’s new president and chief executive officer, wants an hour presentation that describes initiatives, expenditures, and outcomes for the past two fiscal years, and a planned initiatives and budgetary needs for fiscal 2006.
Mr. James goal for the company is to achieve profitability within two years. To this end, the V. P. of Sales and Marketing and the V. P. of Advertising has to corroborate on resource allocation in their respective budgets.
The company would use growth in Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) as a corporate performance measure and a basis for determining senior management executive incentive compensation.
It should be noted that EBITDA often disguises the financing effects of operations and allows allot of leeway in what is reported. This analysis looks at marketing strategies that best justify potential budgetary objectives that could lead to profitability. Industry Analysis The U. S. hotel industry recorded revenue of $113. 7 billion and grossed $16. billion in pretax profit in 2004. As of December 31, 2004, there were 4. 4 million hotel rooms in the United States. Approximately two-thirds of all U. S. hotel rooms were affiliated with a brand; the remaining one-third was independently owned and not brand-affiliated.
Although companies such as Cendant Corporation, Marriott International, Inc. , Hilton Hotels Corporation, Inter-Continental Hotel Group, and Choice Hotels International, Inc leads the industry in having the most hotel rooms in the United States, the hotel industry is highly fragmented, with no one company dominating the arket. Though difficult to compare, hotel industry do have wide range of offerings and recognizable areas of distinctive competencies that allow for differentiated offerings. Generally, the industry can be divided into two main markets, full service hotels, and economic hotels. The full service hotels offer rooms and services that include restaurants for meals, bars and sometimes gymnasiums or spas. They range from luxury to low cost hotels differentiated not only by the facilities but in service levels that are offered.
Economy hotels only offer a limited service, providing a room and few additional services such as a dinks machine and ice machine. They are generally lower in price compared to the full service hotels. The market is also divided into leisure travelers who are less price-sensitive and business travelers. The leisure market shows enormous rooms for growth as leisure travelers are only loyal to hotels that meet their respective needs.
The September 11th event caused declined in profitability across the industry; while other organization within the industry eventually bounced back and reported profitable operations following improved economic conditions, Amber Inns & Suites remain unprofitable. Organization Analysis and Positioning The corporate service mission of Amber Inn & Suites, Inc. is to provide principally business travelers with clean and comfortable guest accommodations in convenient locations at reasonable prices. The company is positioned as a limited service hotel between economy hotels and full-service hotels.
This positioning in the middle allows it to place its offerings in indirect competition with both full service hotels such as Holiday inn and Ramada inn, and economy hotels such as Red Roof and Motel 6. This positioning gives Amber Inn & Suites a strong competitive advantage through differentiation of offering that can be seen as premium by some consumers and cost effective by others. Taking advantage of this competitive advantage will require a greater degree of investment in positioning and education of potential customers of the benefits for the offerings.
Amber Inn & Suites, Inc positioning has always been highly targeted at the business travelers with 80% of the travelers staying at the chains being business travelers. The business travelers market is more stable, less price sensitive and has less room for growth as full service hotels compete aggressively for their business. Amber Inns & Suites locates its properties on premium sites, on major highways close to industrial, office complexes, and shopping centers for the most part in order to carter to its business traveler’s market.
This excessive catering to business travelers leaves room for growth with leisure travelers. Overview of Past Performance In 2002 and 2004 guest profile, Average number of nights stayed on most recent visits improved from 2. 4 average nights to 2. 6. There are improvements in the likelihood of customer retention in the extremely likely and very likely category. 2002 sees an average of 81. 6% favorability rate and favorability rate of 84. 5% was recorded for 2004. There is an increase in the average number of occasions a guest stays at Amber Inn, from 9. in 2002 to 10. 8 in 2004. In spite of these increases, 2005 still sees a projected net operating lost. As such Amber Inns & Suites have to rethink its strategic and make cost saving decisions like investments in technology so as to reduce direct labor cost. Improvement of energy efficient equipment could also help reduce utility cost. Another area of cut should be corporate employee compensation. Amber Inns & Suites have to develop a balance that will streamline corporate compensation while retaining good talented employee.
Alternatives The three areas that require immediate attention are as follows: First, allocation of media advertising dollars between the pleasure-vacation travelers and the business traveler market. Second, the frontier initiated of fiscal 2005, which have three objectives: (1) to increase overall occupancy in both guest rooms and suites, (2) to attract first-time guests, and (3) to increase the length of stay per visit. Third, use of weekend special as a replacement of the “free-night stay” promotion used in fiscal 2005.
This promotion would be used to increase weekend occupancy that is currently at 60 percent. Marketing Initiatives and Outcomes Access to markets is an important element of the marketing mix. Although there are gradual movement to increase the commitment towards the leisure market, majority of the effort is still aimed at the business traveler. For example, hotels are in areas that are easily accessible by business travelers. The company recognized this and made marketing efforts to attract leisure visitors that are merely looking for a bed on their way to a place of interest.
This was the underlying approach used in the “a place to stay while on the way” campaign that was launched in the Northwest Rockies area, which focused on the leisure market showing couples and families enjoying the amenities offered by Amber Inns as they travels in that area. This was a successful strategy, which lead to increased level of occupancy paving the way to the frontier initiated in fiscal 2005 ‘frontier areas’ of Texas. The 2005 inclusion of the internet marketing facilitated bookings with an estimated 20% increased in travelers making bookings on the internet will lower direct labor cost.
Notably, an aggressive marketing strategy will help educate customers to identify their needs while paving ways for increase profitability. It is noted in the case that some business customers are not happy with the families using the hotels. This is regrettable and needs to be addressed. Future plans has to reflect the need of adapting to a new environment of technological innovation and core customer sensitivity, many of whom are loyal with average of about 10 visits a year with 66. 7% booking rate. 2005 Lodging Expenses |Direct Cost/rental room |28. 5 | |Room units |26500 | | Occupancy Rate |65% | | Room used |17225 | |Suite Units |3500 | | Occupancy Rate |75% | | Room used |2625 | |Total Room Used |19850 | |Total
Unused Rooms |10150 rooms | 2006 Budget Plan The internet is cost effective and of increasing importance and has to be employed in developing the marketing plan for 2006. Placements of advertisements on web sites that travelers may frequent, effective listing of Amber Inn & Suites link with search engines (like Google and Yahoo) and the use of viral and social networking sites should be leveraged. The company should use banner advertisements differentiate Amber Inn & Suites focusing on quality and value of their offerings like accommodation for a reasonable price.
Such efforts may lead to high retention of the core business market and an increase in the target leisure market. Many leisure travelers tend to travel on the weekend a time when business travelers tend to be at home. As a result, the promotions used to attract the leisure market will be focused in the weekend night, Friday – Sunday, with leisure rates prices that are competitive. Such offer will attract families on the weekends when there are fewer business travelers and will help to increase the occupancy rates of the hotels.
The use of television advertising should be changed with the message that is more aligned to the branding and positioning of the hotel chain – a message that may appeal to both the business and the leisure market. The message should reflect quality rooms with a high level of reliability and value as well as good service. The use of increased levels of billboard advertising near the locations of the Inns, with similar message of value and comfort should be employed.
Once there is a noticeable increase in occupancy rate, an increase in room prices of $1 or $2 per night during the week, should be considered. The level spent on research should be lower, but needs to be ongoing. My propose budget for 2006 are as followings. |Figure 1b Marketing and Sale Budget | |Sales Budget |2006 |2005 | |Sales reps |4,033,470 |3,841,400 | |Sales and marketing admin 525,210 |500,200 | |Sales Materials |15,965 |15,205 | |Travel |331,013 |315,250 | |Sales and marketing research |20,000 |60,000 | |Total |4,925,658 |4,732,055 | Figure 1a Advertising Budget Advertising Media Budget | | |Media |2006 |2005 | |Magazine |3,300,000 |3,236,240 | |Newspaper |3,800,000 |4,096,965 | |Outdoor |540,000 |519,700 | |Spot television |2,300,000 |2,340,266 | |Cable networks |1,000,000 |1,048,589 | |Radio |260,000 |257,740 | |
Internet |1,700,000 |1,000,500 | |Total |12,900,000 |12,500,000 | Financial Performance of Amber Inns and Suites The increases in occupancy rate are counteracted by special offers culminating in a drop of in revenue between 2002 and 2005 projection. The rates for the room are well below the industrial average of $96 a night for business travelers and $89 for leisure traveler. For Amber Inns, the average daily rate has been only $57. 2, which leads to a revenue per available room of only $38. 60. With only a 79% occupancy rate there are a lot of empty rooms and revenue that can be realized with marginal costs; besides, the majority of the overheads are incurred whether the rooms are occupied or not. Increasing in revenues may help lower the overhead burden per room thus decrease contribution margin and increase net operating income. A projection for 2006 is included in the analysis below. Also, investment in technological upgrades will help lower both utility cost and labor cost culminating in my proposed 2006 projected income statement below. What is stated below indicates that cost cutting strategy most be employed.
This means cutting cost from corporate conpensation expense, direct labor cost via the use of technology, and efficient use of utility as well as energing saving utility equipments upgrade. Amid streamlining cost will be the use of the various low cost promotional tools discussed earlier. Doing all of this wil increase occupancy rate, lower fixed cost over time, lower contribution margin, and bring net operating income above breakeven point. Figure-2 Amber Inn & Suites, Inc. Consolidated Statement of Operations | | | | |2006 (proj) |2005 (proj. |2004 |2003 | |Lodging Revenue |$443,798 |$422,625 |$397,980 |$386,429 | |Variable Expense | | | | | |Direct Lodging Expense |$212209 |$211,239 |$194,887 |$192,069 | |Other Lodging Expense |$62462 |62,482 |54,672 |52,271 | |Sales, General & Administrative Expense |$45635 |44,941 |39,029 |36,201 | |Total Variable Expenses |$320,306 |318,662 |288,588 |280,541 | |Contribution Margin |$123,492 |$103,963 |$109,392 |$105,888 | |Fixed Expense | | | | | |Depreciation & Amortization |68,235 |70,135 |78,044 |69,190 | |Interest Expense |49,020 |49,520 49,786 |50,535 | |Total Fixed Expenses |$117,255 |$119,655 |$127,830 |$119,725 | |Net Operating Income |$6,237 |($15,692) |($18,439) |($13,837) | |Contribution Ration |0. 278261732 |0. 245993493 |0. 274868084 |0. 274016702 | |Dollar sale needed to attain a profit |$421,383. 85 |$486,415. 31 |$465,059. 45 |$436,925. 92 | Net Operating Income = Contribution Margin – Total Fixed Expenses ontribution Ratio = Total Contribution Margin / Total Revenue Dollar Sales to break even = Fixed expenses/CM Ration Recommendations
As discussed earlier, media advertising dollars should be increased for pleasure travelers. Although their core business is around business travelers, the opportunity for the most growth is with vacation travelers. Based on early projections, Amber Inns & Suites will be 7. 9 percent than fiscal 2004 on occupancy rates. During the summer months, when there is increased family travel, the hotels should make an effort to segregate business travelers from families. This should lower the complaints from the business travelers. The frontier strategy should be kept in place. Based on industry reports, less than 30 percent of families stay more than two nights.
This is an opportunity to increase a family stay and produce additional revenue when families do the most traveling. Finally, the weekend special should be initiated in fiscal 2006 as discussed in the earlier section. This special would require very little advertising cost and would potentially increase weekend occupancy. Beside, increased promotion for weekend special will have a spill over effect on the business market in that name recognition will be promoted. Also, some of the business travelers who stay may take there family there for a weekend together. Increase occupancy will also decrease contribution margin and sprread the overhead cost leading to net profit.