Bournemouth Budget Hotel to Offer Breakfast Service

Case Type: improve profitability; math problem.
Consulting Firm: Ernst & Young first round full time job interview.
Industry Coverage: tourism, hospitality, lodging.

Case Interview Question #00926: The Sky Hotel is a family-owned budget hotel located in the popular seaside town of Bournemouth, England. It has 22 bedrooms, a reception area, and an adjacent large reception room.

Bournemouth is a large coastal resort town on the south coast of England directly to the east of the Jurassic Coast, a 96-mile (155 km) World Heritage Site. According to the 2011 census, the town has a population of 183,491 making it the largest settlement in Dorset county.

Assume that the hotel market in Bournemouth is thirded equally between budget, mid-level and luxury. Assume that we have about 9 other competitors in the budget hotel segment. All have comparable hotels.

You have been engaged by Sky Hotel’s owners, a married couple Mr and Mrs Sky, to find ways to boost profitability. At present they do not even know their exact financial situation due to sloppy book-keeping, but they fear the hotel is making a small loss.

Case Objective: As quickly as possible, restore the Sky Hotel to a position of break even. By the end of Year 1, Mr and Mrs Sky want to see profits of at least £28,000. How would you go about it?

Possible Answer:

1. Revenue calculations

Revenues = £324,480

There are 22 rooms in the hotel: 8 are 2-Bed (16 people) / 8 are 3-Bed (24) / 6 are 4-Bed (24)
Maximum capacity: 16 + 24 +24 = 64 people
Price: £15 per person per night (equal to our competitors)

100% Occupancy on Monday-Saturday:
2-Bed: 16 * £15 = £240 per day
3-Bed: 24 * £15 = £360 per day
4-Bed: 24 * £15 = £360 per day
Sub-total: £960

50% Occupancy on Sunday:
2-Bed: £120 per day
3-Bed: £180 per day
4-Bed: £180 per day
Sub-total: £480

Weekly Revenues: £960 * 6 Monday-Saturday + £480 Sunday = £5,760 + £480 = £6,240 per week

Annual Revenues = £6,240/week * 52 weeks = £324,480

2. Cost calculations

Total Costs = £329,144/year

a. £294,200 Fixed Costs

Mortgage: £14,400 per month, £14,400 * 12 = £172,800 per year
Council License: £25,000 per year
Business Rates: £6,250 per month, £6,250 *12 = £75,000 per year
Utilities: £21,400 per year
Sub-total: £172,800 + £25,000 + £75,000 + £21,400 = £294,200

b. £34,944 Variable Costs

Staff: £3 per person * 96 people per week = £288 per week
£288 * 52 weeks = £14,976 per year

Cleaning: £4 per person * 96 people per week (£2 for Maid Services + £2 for Laundry) = £384 per week
£384 * 52 weeks = £19,968 per year

You can segment these further:

Maid Services: Labor £1.50 + Cleaning Products £0.50

Laundry: Bed Linen £1.00 + Towels £1.00

3. Scope for revenue increase

Candidate: There might be a way to increase existing revenue by looking at Sunday’s occupancy and price structure. At present Sunday generates £480 per week at a rate of 50% occupancy.

Do we have projections for revenue change if we look at reducing the price charged on Sunday in a bid to increase occupancy levels and overall revenue?

Interviewer: We project the following:

- £15 per night (current price), 50% occupancy (32 guests) = £480 per week
- £12 per night, 70% occupancy (45 guests) = £540 per week
- £10 per night, 80% occupancy (51 guests) = £510 per week

Therefore, if we changed the price from the current £15 per night to £12 per night, we would see Sunday revenues increase by (£540-£480) * 52 weeks = £3,120 per year.

4. Scope for revenue diversification

Candidate: Do we offer car parking facilities?

Interviewer: There are 12 car parking spaces outside the hotel. All are used all of the time due to high occupancy rates. At present no rate is charged for guests to use them.

Candidate: Do we have projections for the profit this could generate?

Interviewer: Yes. We think we could charge £5 per car per day.

Candidate: £5 per car per day * 12 spaces * 7 days * 52 weeks = £21,840 per year

Candidate: I remember that you said there was an empty reception room downstairs, of good size. At present do we use this to serve breakfast?

Interviewer: At present we do not offer a breakfast service, no.

Candidate: Do we have projections for the profit this could generate?

Interviewer: Yes. We think we could charge £5 per breakfast; costs would be £4 per breakfast.

Candidate: Do we have projections for the number of guests who would use this breakfast service?

Interviewer: We project that 70% of our weekly guests would choose to use this service.

Candidate:

£1 profit * 70% of 96 guests = £1 profit * 67 guests = £67 per week
£67 * 52 weeks = £3,484 per year

Note 1: If the candidate identifies the potential to increase Sunday occupancy, recalculate the number of breakfast consumers accordingly, which will see an annual increase in breakfast revenue of £468 p.a. (13 more guests on Sunday, 70% of which is equal to 9 breakfast consumers, equaling £9 extra profit per week * 52 weeks). This would increase the overall breakfast profit figure to £3,952 per year.

Note 2: This breakfast model could be rolled out to lunchtimes and dinnertimes, too, to see increased revenue streams — and thus overall increased revenue.

5. Scope for costs savings

With the exception of the mortgage, which may be changed to a variable rate product (albeit with inherent risks involved) at a saving of 1% per month in the first year (£144 per month / £1,728 per year), no other costs (fixed or variable) can be reduced.

As we are a budget hotel, it may be reasonable to ask guests when booking that they bring their own towels. If not, they may hire a towel at a cost of £1 per night (equivalent to the towels’ laundry cost). This would abolish one of our costs and would generate cost savings of £4,992 (thus, immediately breaking even).