Essay on GR Hotel

From: Chris Mell, Controller
To: Board of Directors, GR Hotel
Subject: Strategic options for 2008Executive Summary
GR Hotels Corporation operates two large mid-scale hotels, one in Montreal and one in Toronto as one of the airport hotels. The future outlook for the hotel industry brought up new goals for the corporation: moving to upscale hotels and focusing more on business travellers. We have options to upgrade both Toronto and Montreal hotels, build conference center in Montreal and attract more leisure travellers. The recommendation is to upgrade the 2 hotels due to significant positive incremental cash flow, increasing need for luxury hotels, and board preference.

Introduction
GR Hotel is a recognized mid-scale hotel located both in Toronto and Montreal. Current performance metrics show that GR Montreal performing below average for mid-scale hotels; GR Toronto performing above average for mid-scale hotels; GR Toronto performing below airport hotels
Issues:
How do we improve occupancy rates and attract more business travelers given the profitability and funding constraints?
Alternatives:
1. Upgrade one or both of the hotels to upscale status
2. Exercise land option in Montreal to:
a. Sell immediately for quick profit
b. Build a conference center
3. Attract more leisure travelers
Analysis:
1. Upgrade one or both of the hotels to upscale status
GR already have good service to meet customer’s expectation for luxury hotels
Demand for upscale hotels is growing at a faster rate than mid. GR can use this opportunity to expand its business and mitigate the risk of a shrinking mid-scale market
According to the Industry performance metrics, upgrading to upscale hotels lead to higher occupancy, which is in line with the board’s target.
Return on investments after tax for both Montreal and Toronto are more than 55%. This is far beyond shareholders’ requirement of 15%.
Operating profits as a percentage of revenue are 27.5% and 24.4% respectively. Again meet the requirement from the bank.
Business travelers stay at upscale/luxury hotels. So upgrading would appeal to their preferences.
The location GR occupies are good enough to attract business travellers.
However GR does not offer room service dry cleaning, internet access etc. These services are deemed as must for most travellers going to upscale hotels.
GR has a recognized mid-scale brand. This can be harmful in the movement to upgrade since people already have established image for GR as mid-scale rather than luxury.
Loyal stuffs who have been working for years at GR but not having the skills as for upscale hotels. The necessary training and rehires would increase turnover and decrease moral.
Big brands who already operates luxury hotels may compete aggressively.
World events can seriously impact demand for the industry. If anything happens in between the upscale, the investments would be jeopardised hugely and all the budgeted ratios would never be met.
2. Exercise land option in Montreal to
a. Sell immediately for quick profit
b. Build a conference center
Sell immediately for quick profit can improve GR’s liquidity especially if upgrading to upscale hotels is in process.
It’s expected that conference center will increase the average occupancy rate at the GR hotel to 65-70%, This is in line with the board’s goal.
Conference center is targeting on business travellers, which again agrees with the board’s intention to increase attract more business travellers.
Business travelers stay at upscale/luxury hotel. We would expect synergize between the upgrade and building conference center.
Montreal is popular conference and tourism center. The location advantage adds security to the success of conference center.
Quantitative Analysis (Appendix 5) shows that build a conference center generates more net gain using present value approach. (0.79M vs 0.046M)
Profits have been paid out in dividends vs. reinvesting in GR. However the investment in

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