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Case 1 - Luxury Hotels — profit improvement Business Situation Our client is a small chain of luxury, five-star hotels located in New York City. The hotels are independently operated and the chain promotes itself as an exclusive, premier accommodation for tourists and business professionals. Despite intense new competition, the hotel chain has been able to maintain its popularity and prices. Each hotel features a rooftop pool, retail space (some of which is currently vacant), a restaurant and meeting facilities. Roughly 80% of its customers are tourist families who often do little planning before their trip. For many years, the business enjoyed an annual profit greater than $10M, but profits have started to deteriorate over the past three years. Pressure has been mounting to reverse the trend during this upcoming year. While revenues and operating costs have remained steady, some costs have increased recently. Specifically, the hotel chain has incurred significant costs to support + Launch of a mass market advertising campaign. + Purchase of more office supplies. Relevant data + 5 independently operated hotels in the chain 100 rooms per hotel (500 rooms in the chain). 75% average occupancy rate (per hotel and across the chain). $400 average room rate (per hotel and across the chain, including tax). 500 guests/night across the chain during weekdays (M-Th). 1,500 guests/night across the chain during weekends (F-Su). $20/guest per night average on other services. Question 1 What do tourist far ilies consider when booking a hotel in NYC? Our recommended Answers Good Answer A good answer will address basic factors that all people consider when booking hotels in NYC: + Price. + Safety of hotel and surrounding neighborhood * Quality of accommodation (ie., cleanliness, fumishings). * Services offered (.¢., pool, gym facilities, day care, room service, restaurants, spa, business center, Intemet service, concierge, transportation to/from airport, etc.) Great Answer A great answer will address considerations for tourist families: + Proximity to tourist attractions, + Flexibility of accommodation (¢.g., suite rooms for parents and children, multiple beds, cots). Your Answer Question 2 How would you estimate the hotel chain's revenues on an average night? Our recommended Answers Good Answer Agood answer accounts for room revenues’ + Total number of hotel rooms = 5 hotels X 100 rooms/hotel = 500 rooms. + Occupied rooms = 75% X 500 rooms = 375 rooms + Total revenues = $400/room per night X 375 rooms = $150,000 per night $400/room per night X 375 rooms = $150,000 per night Great Answer A great answer accounts for other revenues (food, otc.) + Avg # of guests per night = (500 guests/night X 4 nights + 1,500 guests/night X 3 nights)/7 guestsinight + Non-toom revenue from guests = 900 guests/night X $20/guest = $18,000 + Total revenues = $150,000 + $18,000 = $168,000 900 ‘Your Answer Question 3 For many years, the business enjoyed an annual profit greater than $10M, but profits have started to deteriorate over the past three years. Pressure has been mounting to reverse the trend during this upcoming year. While revenues and operating costs have remained steady, some costs have increased recently. Specifically, the hotel chain has incurred significant costs to support + Launch of a mass market advertising campaign. * Purchase of more office supplies. ‘What are some of the ways the client can reduce its costs? What type of research and analysis would you conduct to make these recommendations? Our recommended Answers Good Answer A good answer will address each of the teo initiatives mentioned, and will describe the type of research or data used to derive the recommendations. A good answer might describe opportunities that reduce the spend in each of the two areas, such as: (1) scaling back marketing spend to focus on the most effective channels based on analysis of spend vs. return, and (2) implementing policies around who can order office supplies based on analysis of spend patterns. Great Answer Agreat answer might address optimizing the spend and improving its effectiveness, such as: (1) increasing return on spend through targeted marketing campaigns (as opposed to mass market) that target specific audience segments based on a customer segmentation analysis and information collected from focus groups, surveys, etc., and (2) centralizing the purchasing function for office supplies and strategically sourcing from a few vendors to obtain volume discounts based on detailed spend analysis by department and analysis of suppliers. Your Answer Question 4 Looking more broadly at the entire business, what other recommendations can help the client increase revenues? Our recommended Answers Good Answer A good answer will address increasing the revenues generated for each individual visit, and will focus initially on tourist families, which is their largest customer group (80% of customers). An example is to partner with premium NY tour companies to offer bundled tour/hotel packages to customers, extracting some revenue from the sale, or another creative solution to increase ancillary revenue. This can help the hotel better serve its wealthy, albeit poor planning, clientele as well Great Answer A great answer will also address increasing the revenues that might be generated from the property itself. For example, make better use of the vacant space to generate new revenue (noting that renovations will result in initial capital investments that will impact profits) and consider re-pricing rent on the vacant retail space, and example, make better use of the vacant space to generate new revenue (noting that renovations will result in initial capital investments that will impact profits) and consider re-pricing rent on the vacant retail space, and engage in profit-sharing arrangements to lure new retailers to fill empty space. Your Answer Question 5 The client decides to maximize revenues from its existing space by renovating one of its vacant retail spaces to attract a new tenant. If renovations begin in January, how long will it take to generate $2 million in profits? (Assume revenues from the tenant = profits for the client [client does not have to assume the operating costs of the tenant.})(Assume no impact from time value of money.) Our recommended Answers Good Answer A good answer will take into account the potential monthly rent after renovation and the capital investment required to renovate. + Profits = Revenue — Costs + $2M = (S50K X # months) - $1M renovation costs + #months = S3M/$50K = 60 months Great Answer A great response will take into account the number of months needed to renovate before $2 million in profits can be achieved. + # months from January = 60 months + 6 months to renovate = 66 months Your Answer Case 1 tips 9: Consider all sources of revenue Questions like this assess your ability to think creatively and recognize all potential sources of income of a business. Additionally, the interviewer will evaluate your ability to make reasonable assumptions and perform basic math calculations. Tip: Need more information? Advertising investment has been significant with no impact on growth. A process is in place to ask how customers learned about their resort and the ad campaign is rarely mentioned. AS for office supplies, anyone in a non-service position can order supplies when needed; they are ordered through catalogs available to those in non-service positions. Tip: Need more information? The client will incur $1 million in capital expenses to renovate. The project will take 6 months to renovate and we assume the tenant can't move in until renovations are complete. Expected rental income is $50K/month after renovations.

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