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and so did the detailed due diligence of 7 Day Inn by a Big Four firm.
Lastly, Lis teams approach of experiencing the service being offered by 7
Day Inn allowed it to get an inside look on how the hotels are run, the
possibilities of improvement and any areas it was better at in catering
customer needs compared to other budget hotels.
Actis deal origination approach was focused on understanding the lodging
sector as clearly as possible. This is shown by the immediate relationship
they form with an former CEO of the budget lodge firm in South Africa.
The relationship plays a key role in the deal as it provides Actis with
information on how business is done in the sector. This would become
important later when Actis would have to prove to management of 7 days
Inn that they understand the business. For further understanding of the 7
Days Inn and its managers Actis appointed three consulting firms (Deloit,
Big Four accounting firm and Egon Zehnder) as advisory firms. The work
done by these firms would enable Actis to understand the risks of
investing in 7 Days Inn.
Question A2: What Strategies proved to be successful?
The first strategy that proved to be successful was the
The strategies that proved to be successful was Actis emphasis on
understanding what differentiated 7 Days Inn from other Budget hotels
which could enable Actis to get an understanding on how the business will
keep its high occupancy rate: firstly, 7 Days Inn adopted the use of
internet which would enable the firm to identify its customers. This would
enable Actis to focus future returns. Also the adaptation of internet would
enable 7 Days Inn to interact with its customers more efficiently. To further
7 Days Inn as a service provider Actis team visited the hotels to get to
experience the efficiency provided by 7 Days Inn.
To get the management on 7 Days Inn on board with Actis investment
plans, Actis engagement with a former CEO and interviews with China
Hotel Association proved to be critical as Actis leveraged on the
willing to pay for the service they got in the budget hotel which provided
an incentive for investment in the industry.
- Chinas fast growth: The Chinese economy had been the fastest growing
economy in the world. This meant that there was increasing number of
people moving into the middle class than anywhere in the world who
could afford to stay in the budget hotels since they were not expensive
and offered good service. In a booming economy like China one would
expect to find a lot small businesses whose management would not be
looking to stay in a 5 or 4 star hotel but a hotel in the middle with good
service like budget hotels.
Question b2: Was other information would you need to know before
making a decision to invest in the budget hotel industry?
Specific to the budget hotel industry, Actis should acquire information
regarding both external and internal factors: regarding external factors,
information on business cycles prevailing in the lodging industry must be
studied, to ensure that growth prospects sustainable.
Regarding the actual locations of current hotels is also a matter of
importance: in developing countries cities and towns are continuously
being extended and hence property rates, e.g. lease, renting or purchase
price, will increase in the future. Therefore, all overhead cost structures
should be observed to incorporate any drastic changes into forecasts.
Next, the market should be studied with regards to competition and
saturation in supply. Just as Actis is considering investing in 7 Day Inn, so
are other companies that see the growth potential in the budget hotel
sector. Forecasts should factor in increased competition.
Lastly, macroeconomic parameters of the country should be considered:
which business cycle is prevalent in the economy of the budget hotel and
those in economies that affect the host country, e.g. trade partners. There
is significant impact of change in economic conditions in one country on
its trading partners and hence that can lead to high fluctuations in
demand, specifically in the hospitality industry. Before investing in the
budget hotel industry, one would want to know about external factors to
the industry. These would include government regulations.
Question c1: Which was a better investment for Actis?
Membership program
7 Day Inn
Hantin Inn
membership
Ability
to
run No
schemes
that program
provide greater
Number of hotels
customer
satisfaction and
experience
to
existing
customers
Possibility
of
improving
customer
service.
High retention of
clients
153
(greater
than 111
Hantin)
Larger
area
coverage
Available
to
repeat
clients
that
either
voluntarily
(leisure travelers)
choose different
locations
or
those that are set
to repeatedly use
one location e.g.
for conferences
and
workshops
(business
travelers)
Better equipped
to fulfill needs of
customers
that
travel to multiple
destinations:
provide
standardized
service
across
regions
Develop
contracts
with
businesses
for
repeat business
travelers
at
High
concentration of
hotels close by.
discount rates.
Available
in
major cities.
CAGR
292.2% (greater than 277.8%
Hantin)
Aggressive
growth strategy.
Staff to Room ratio
0.26 (roughly 4 rooms 0.33(roughly 3 rooms
per staff member)
per staff member)
Lower ratio which
Possibility
of
then translates to
inefficiency
of
lower labor costs.
staff.
Lower
cost
Shorter cleaning
passed
on
to
and maintenance
customers
that
time of rooms.
Better
are
budget
attendance
by
conscious.
staff to customer
needs.
Number
of
active Greater than 700,000
None
members in loyalty
Dedicated client
program
base.
Dont need to
rely on walk-in
clients
In addition to the above, 7 Days Inn has a high EBITDA margin, shortest
payback period and lowest daily average rate. After considering all the
above, it can be concluded that 7 Day Inn is a better investment than
Hantin Inn.
The better investment target for Actis was 7 Days Inn. This was because
of lower room prices and lower cost model accompanied by 7 days Inn
better management efficiency, consistency and quality of service which
created higher value for money. 7 days Inn had a higher number of hotels
(153) compared to Hantin (111). The higher number of hotels for 7 Days
Inn may have been an indication that the firm was not very far from
slowing its growth which had kept the firm with negative profits. Finally, 7
Days Inn had identified its customers and could quantify them which
increased the predictability of future returns for an investment.
Question c2: What other critical information do I need to decide
which from is better for investments?
Comparison of the two companies is essential: this is done through
analyzing various ratios from the financial statements of both companies
for at least 5years. Next, qualitative information regarding client
experience should be collected. Investor perception of service being
offered and the brand itself is critical.
To make a well informed decision on which firm to invest in it is critical
that I get hold of both companys historical financial statements. This
would assist me identifying key investment signals for both companies.
These
investment
signals
include
profitability
of
the
companies,