Text | Wenlvpai Author | Guo Hongyun Editor | Lan Lan
Most hotel franchise managers are currently in the sinking market and are still using the same tricks to deceive people.A friend told Wenlv about his “troubles” in investing in and joining a hotel.
Previously, he ran a stand-alone hotel of his own brand in his hometown, a fifth-tier city in Henan, and combined it with catering, and his business was pretty good.
Later, when he wanted to open another hotel, he started thinking about joining a franchise. After some research, he was convinced by the promise of a mid-to-high-end hotel brand that would pay back the investment in three and a half years, so he signed a franchise contract. The hotel has 110 rooms and a total investment of 15 million. It is currently under renovation.
Although the contract for renovation has been signed, this friend is not sure about joining a hotel for the first time. He wants to know if he can really make money. Wenlv’s advice to him is that if he really wants to make a profit in 3.5 years, he should either quit or sort out the materials to prepare for a lawsuit. Even if the expected time can be extended, it depends on the specific location and customer flow of the hotel. If every store can have a high return and make a profit, the brand will not need to do franchise business, so it is better to do financial management.
Finally, out of a responsible attitude, Wenlv helped him to meet with several veteran investors who have invested in and franchised hotels for more than ten years, and the conclusions they reached were similar. If there are still brands that claim that a hotel investment of tens of millions of dollars can be recovered in less than four years, then it is basically a “scam” in order to win the contract.
The simplest way to identify is to see whether the brand dares to write the promised payback period into the contract. If it does not dare to write it, then there is nothing to say. It is recommended that investors shake hands, get up, and run away.
01
Hotels are not a quick-in, quick-out, high-profit industry
Generally speaking, no matter what level of hotel investment, the highest payback period will not be less than 4 years, usually 5 years, and high-end projects with large investment costs may take even longer.
As for the question of whether you can make money by investing in mid- to high-end hotels in small cities, the essence does not lie in where the city is located. The key lies in whether you have a clear understanding and judgment of the properties you hold.
That is, whether you have a full understanding of the property’s own conditions, geographical location and traffic flow, and whether you have also understood the operating conditions of surrounding hotels of the same level. Although many brands now claim that they can help investors conduct research, investors must grasp the real situation themselves to have a better understanding.
Take the above-mentioned investment case of a mid-to-high-end hotel under construction in a small city. Wenlv searched for hotels around the property of this investor friend on an online booking platform. A hotel of the same brand had already opened in 2023. Although it was not one kilometer away from the hotel he was renovating, it was not particularly far.
The room rate of this hotel during the upcoming National Day holiday is just over 200 yuan, while the regular price is around 170 or 180 yuan.
If his hotel cannot be sold at a higher price than this hotel, assuming an average room price of 200 yuan and an annual occupancy rate of 80%, the annual revenue would be around 6.4 million yuan. This also includes the room operation and maintenance costs, franchise management fees generated by subsequent brand operation and maintenance, hotel management system maintenance fees, store manager wages, as well as rent, utilities, other employee salary costs, etc. In the end, it would be very high if he could keep about half of the profit, which is 3.2 million yuan.
The total investment is 15 million, and it is clear how many years it will take to get back the investment. And the premise of this payback period is that the occupancy rate after opening can be maintained at 80%. If it is lower than this occupancy rate, it may take longer to get back the investment.
From the perspective of investment attributes, investing in hotels is not a highly profitable industry that can quickly pay back or allow for quick entry and exit.
Even though the return on investment cycle is long, from the current market environment, hotel investment is still a good business. The main reason is that the main cost of hotel investment is in the early stage. In the absence of debt, as long as the operation stage is stable and can maintain 60-70%, there will be no loss of money, the cash flow will be very good, and the security is very high.
More importantly, investors need to have the right mindset and understand that the standard answers given by the brand may not be applicable to every project.In the early stage, we should make good calculations on the property and geographical location, and do market research.It is the first lesson that every investor should complete seriously.
In addition, you must carefully analyze your product positioning, and even personally research and understand the project, including materials, and work with the brand with your knowledge and ideas to explore the most suitable project plan for yourself. At the same time, you must also manage your return expectations to make hotel investment a good business.
02
Brands keep changing their versions to get premium prices
It’s just a “self-congratulation” in the eyes of investors
certainly,Knowing how to invest in a hotel is only a sufficient condition for doing a good job in hotel investment and subsequent operation and maintenance.
Judging from the trend of brand refinement, there is a wide range of hotel brands to choose from at every level. Different versions of the same brand may have been upgraded from 1.0 to 5.0, with design concepts, color allusions, cultural connotations, etc. There are also many upgrades surrounding the guest experience that dazzle investors.
How to distinguish and choose among these increasingly diverse franchise information?
Zhang Jianjian, a senior hotel investor with more than ten years of experience, has been operating hotels with his own properties since 2009. He subsequently took advantage of the economy hotel investment boom to invest in 7 Days Inn and Vienna International, and now continues to invest in mid- to high-end hotel brands such as Mehao Lizhi. He told Wenlv that from an investor’s perspective, the frequent upgrades of brand versions are actually not important at all.
The version is defined and made by the brand and cannot truly represent the market’s choice.Whether investing in a hotel can make money or not essentially depends on whether the property itself, its location and its customer flow are up to standard.The branded version can only give the hotel more room for negotiation, make the accommodation environment more refined, and sell it at a slightly higher price.
In his opinion, nowadays the high frequency of hotel brand renewal and upgrade is more like the brand’s “self-entertainment”. Hotels do not focus on the latest fashion and functionality. As long as the core functions are well maintained, whether the bed can sleep well, whether the hot water for shower comes out quickly and enough, whether the TV can be watched, and whether the room service and hygiene can be cleaned properly and kept clean, the hotel business can be done as long as there are no problems.
As for other additional features, such as design style and decoration color, many guests will not care so much. If they see and experience them, they will definitely be surprised, but they are not the most important factors affecting accommodation choices.
“Everyone says that a hotel should be upgraded every five years, but if the early decoration is done well and the construction quality is solid, as long as daily maintenance is done to keep the hotel not old, broken or worn, it will still be recognized by consumers without major changes for eight years or even longer.”
Another senior hotelier, Wang Ji, who has worked as a brand owner and also invested in the first store of Fuya Hotel, also agreed. His point of view is more direct, and he believes that spending more money on project quality is worthwhile and necessary. For hotels of the same grade and different brands, both of which are mature brands with fixed construction prices, one single room costs 120,000 yuan, and the other costs 150,000 yuan. If the difference lies in the construction details, then you must choose the more expensive one.
The premium paid here is not for the brand, but for the future repair and maintenance costs after the hotel is completed and put into operation. This is the most critical thing.
He gave an example, he once worked in an international five-star hotel. At that time, he felt that the maintenance cost of the hotel was too high after a year of operation. But later, when he compared it with a domestic five-star hotel brand, he found that the annual maintenance cost of this domestic brand was higher than the total repair and maintenance price of the international five-star brand. The problem lay in the early construction. The equipment replacement rate of this domestic hotel can reach 80% in 5 years, which is not much different from reinstalling the hotel.
Speaking of this, he said frankly that it is difficult to invest in hotels nowadays, not because the hotel business itself is difficult to do, but because there are too many details that investors need to pay attention to. Just take the construction link as an example. If you don’t understand the project and the materials, you don’t know how many “pitfalls” will be buried. Now many so-called high-star brands have also changed their walls to wall coverings. At present, it seems to save costs, but there may be a series of hidden dangers and additional costs in the future.
03
The hotel bonus period has long ended
If you want to enter, please understand these three questions first
It is worth noting that the investment activity in the hotel industry has increased significantly this year. Monitoring data from AVC shows that 23,000 new hotels will open in the first half of 2024, close to 59% of the number of stores opened in 2023. It is also predicted that the total number of hotel rooms in 2024, including the annual increase and renovation of existing rooms, will be close to 4 million.
However, as senior investors who have witnessed the changes in different cycles of China’s hotel investment market, Zhang Jianjian and Wang Ji both believe that the investment dividend period for the hotel industry has long ended.
Compared to the present, 2010~2017 is the golden period for hotel investors. At that time, as an investor and owner, they had no idea about property rent, and the overall cost of investing in a hotel was not that high, but the demand for accommodation was growing rapidly. Basically, you could make money by opening a hotel. The fastest project investment return period could pay back the investment in 18 months, and the slowest was about 30 months. But now, such a return period is unimaginable.
Nowadays, not only the initial cost of investing in a hotel has soared, but also the various costs of subsequent operation, especially the labor cost, have also soared. There are more and more stores of different brands, and the competition is becoming more and more fierce.It has escalated from a price war to a war of service standards between brands.
From providing guests with a clean room and a comfortable bed, to now focusing on the quality and cost-effectiveness of breakfast, a cup of tea when entering the door, a bottle of water when leaving the hotel, gym, laundry room, sleeping room, etc., in the end, all these are additional costs that investors have to bear. But there is no way not to “roll”, when everyone in the industry is doing it, if you don’t do it, you will have no business.
As for those who are still waiting to invest in hotels, or those who have already invested but have little experience, Wang Ji, as an experienced person, gave a very sincere and practical suggestion, that is, when considering whether to invest in a hotel, you might as well think about the following three questions first:
First, are people ready?Are there really professionals who can work with you to determine whether the selected city, address, and property are suitable for use as a hotel? Can they help you research the market, analyze your competitors, and clarify the future?
Second, is the money ready?The general market trend in the past two years has been an economic downturn, and investing in hotels is a long-term business. Although many rental properties now have a six-month rent-free period, it is a long process for hotels to go from investment and renovation to later operations. The progress is often affected by funding issues. Do you have enough capacity to solve this problem?
Third, is the thing ready?The “things” here refer to whether the investor has the ability to control the product quality and progress. If not, whether there is a professional team to help control it. Secondly, there is the choice of franchise brands. Many investors make the mistake of investing in brands based on personal preferences, and do not really understand whether the brand has the human resources, supply chain system, product quality control and other enabling capabilities.
One of the most common ways he uses to understand the strength of a brand and the support capabilities of the system behind it is to choose the most remote hotel of the same brand in the project city and talk to the store manager to find out how long he has worked there, how many times the store manager has changed, etc. The store manager is the most important part of the brand’s talent reserve. If the owner cannot solve the talent problem when joining a brand, then there is no need to have too high expectations for other operating system issues, standardization issues, and channel issues.
Zhang Jianjian also said that the cooperation between investors and brands should be a two-way effort, and both parties should show enough sincerity and trust. If one party is not honest and trusting, then the cooperation will not last long, and there will be no win-win situation.
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