Financial Management for a 5 Star Hotel

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Middlesex University Dubai
MBA Module 4643 Financial Management and Economics
Individual Assignment
Toni Munns
Student ID: M00383523
February 2012
Module Leader: Dr Rajesh Mohnot

Word Count:
This essay provides input to the marketing strategy for the first half of 2012 for The McKenzie Hotel Group’s newest hotel, a luxury 5 Star property on the Palm Jumeirah in Dubai. The input provided has considered the service on offer, cost scenarios, target markets, supply and demand effects, market structure, pricing strategies and the impact of recession and currency effects. The service to be marketed is a 5 Star hotel with 380 luxury rooms supported by a range of food and beverage outlets. Located in Dubai, the domestic market will be considered to be the GCC, given the accessibility via short-haul flights and that currencies are broadly all pegged against the US Dollar, and therefore do not fluctuate against each other. The marketing strategy will cover sales in this domestic market as well as a range of global key feeder markets. Through analysis and comparison with economic theories, recommendations to guide the marketing strategy have been made. These point to focussing more strongly on the domestic market based on the higher levels of government spending, backed by a high oil price, the relatively low impact of cross elasticity with airfares and the lack of currency fluctuation risk for sales. Firstly I will consider the cost of production and some scenarios which may impact on the marketing strategy. The main costs in providing a hotel service are labour, rent and upkeep, energy and room servicing supplies (such as linen and tea & coffee). A summary estimate of the unit costs of these items is given in table 1 below.

Table 1 – cost items and estimates for providing a hotel room service| Assumptions:380 rooms open 365 days/year, budgeted at 75% occupancy gives380 x 365 x 0.75 budgeted room nights/year = 104,025 room nights/year| Item| Cost/AED| Unit| Rate AED/room/night|

Labour| 5,400,000| Total/year| 51.91|
Rent and upkeep| 3,500,000| Total/year| 33.6|
Energy| 2,100,000| Total/year| 20.19|
Room servicing| 100| /room/night| 100|
Total| | | 205.7|

In terms of predicting costs for the first half of 2012, it appears likely the cost base will stay fairly stable. All costs are incurred in the UAE, with all items sourced in the local market. The major items, rent, labour and room servicing, are on long term agreements which are already fixed. Longer term macroeconomic effects may impact these, for example expat labour from Asia may be available cheaper next year in the global employment market if the world economy slips into recession. Unit energy costs are variable and could be influenced by macroeconomic factors affecting the oil price. These are difficult to predict, however I have considered that a global slowdown in the period could lead to less demand, forcing the oil price to decline. At the same time, continued tension in the Gulf, particularly around the Straits of Hormuz, could lead to upwards pressure on oil prices. On balance, for this exercise I have assumed that energy prices in Dubai with remain broadly flat. In summary, the overall cost base for the hotel service appears to be relatively flat for the first half of 2012. To assess the service type, I have analysed the price, income and cross price elasticities for the hotel service. I have observed from personal experience in the hotel market in Dubai that a 33% reduction in room rates results in almost doubling of demand, suggesting a relatively high price elasticity of demand of -3. This provides evidence that demand in the hotel market in Dubai is very sensitive to room rates. Whilst the service is considered to be a luxury item, the global tourist market is highly competitive. The income elasticity of demand for such a service is likely to be relatively high, given a luxury hotel’s status as a...
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