Mixed Use Projects: The New Panacea for Stakeholders
Is there a business case for this multiple business model investment?
By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | June 30, 2019
Stakeholders operate in an obsessive continuous growth nirvana state. For them, projects should be churning out incremental returns in all market conditions and at all times, never mind the seasonality of the hotel business. Having pumped in huge amounts of capital into projects, their psyche may well be justified.
However, reality is different and there is no choice but to embrace it. Customer preferences are incessantly changing, supply is on the increase and demand is under pressure. In this scenario, continuous growth cycles are a pipe dream. Is there a way out?
Vanilla Hotel Projects
In days of yore, traditional hotel projects (sometimes called vanilla projects) worked well. A combination of hotel accommodation and food and beverage business models brought home the bacon. The rooms and restaurant combination worked well. Rooms with an intrinsic ability to command upwards of 80% departmental profit were the bread and butter of hotel revenues. Restaurants with their much lesser departmental profits (from 30% to 50%), however produced traffic to the hotel. This combination worked excellently delivering good bottom line and generally keeping stakeholders happy. Over the latter part of this decade, millennial and Gen Z customer profiles have almost sounded a death knell to this vanilla project approach. How so?
The Saga of Stalling Returns
This potent mixture of young, mobile, urban customers have changed completely market segmentation techniques entrenched for about half a century. Their tastes and preferences have meant that traditional room and restaurant combinations are producing less incremental revenues and profits. This has manifested itself in falling room occupancies and plummeting average rates. In other words, the bottom line is dwindling and the returns stalling. Landmark trends like smaller hotel room numbers, shrinking room sizes and an obsession for personalized experiences has meant that the age old room restaurant model was slated to collapse.