Thanksgiving is perhaps the best Holiday at a Country Inn. It is the one time that the Innkeepers get to really share their Holiday time with the guests and neighbors and to show their thanks for both a bountiful season and the joys of Innkeeping. I know that we looked forward to this Holiday every year at our Inn.
It is a great time to share an amazing, traditional Thanksgiving meal with the community. Often we welcomed both lodging and dinner guests to the Inn whose families were far away. This gave us all a chance to celebrate a great Holiday as a kind of substitute family. The spirit of Thanksgiving permeated the air as the fantastic smells from the kitchen provided a welcoming touch to the Fall decorations at the Inn. A moment to stop to give thanks for all that has been given to us, and then a traditional meal served family style with seconds passed until no one could ever want more. Good cheer, great food, good music, and the laughter around the dining room was reward enough for this very special day. For those guests staying over at the Inn, we always brought out the leftovers that night for home-style sandwiches and pie. This was always a very special treat for our guests.
In this year of changing times, we give thanks to what we have, and renew our energies for the work to come.
Happy Thanksgiving to all!
Wednesday, November 26, 2008
Wednesday, November 19, 2008
Operating a Bed & Breakfast - Complacency Spells Trouble!
The most recent news from the Hospitality Industry is not good for Innkeepers. Hotel REIT giant, LaSalle Properties announced it was cutting 20% from its hotel staffing (mostly run by large hotel management companies) and has rescinded its 2008 guidance to the stock market. LaSalle reported that its Revpar (revenue per available room) decreased by 11.4 % in October; a huge drop! While the Innkeeping Business does not use Revpar as a measurement, it is fundamentally the same as saying that average daily rate and occupancy combined dropped by that amount. LaSalle is an important bell- weather for Inns because it is comprised of mostly luxury and higher-priced hotel properties. For the full story, please see: LaSalle Orders 20% Cut in Hotel Staffing - WSJ.com.
We hear anecdotally that many Inns and Bed and Breakfasts across the Country have had good years in 2008, at least until the end of October. Now is not the time for Innkeepers to rest on their laurels. A sea change is coming, in the form of a recession, the likes of which we have not seen in our lifetimes. This is also not the time to just burrow in fear of what is to come. As we have said many times before, when there is a downturn, those Inns at the top of their game can improve market share as against the competition. A bigger piece of a smaller pie may save the day after all.
So this is the time to be countercyclical and increase your spending on marketing, especially electronic marketing through your website, blog, and by email. Create attractive packages rather than discount, and spend all of that extra time you have due to declining occupancies to come up with creative and imaginative ways to get your repeat and referral guests to the Inn. Most of all, just lowering the price will not work, and may make things worse in the long run (see previous article on Discounting).
Most of all, have heart. The biggest reason that they come back to the Inn is because your have created a refuge and a respite from all of the problems the guests face at home and in the real world. Remember that this is exactly what the guests need in these troubled times, and they will pay you for this experience.
We hear anecdotally that many Inns and Bed and Breakfasts across the Country have had good years in 2008, at least until the end of October. Now is not the time for Innkeepers to rest on their laurels. A sea change is coming, in the form of a recession, the likes of which we have not seen in our lifetimes. This is also not the time to just burrow in fear of what is to come. As we have said many times before, when there is a downturn, those Inns at the top of their game can improve market share as against the competition. A bigger piece of a smaller pie may save the day after all.
So this is the time to be countercyclical and increase your spending on marketing, especially electronic marketing through your website, blog, and by email. Create attractive packages rather than discount, and spend all of that extra time you have due to declining occupancies to come up with creative and imaginative ways to get your repeat and referral guests to the Inn. Most of all, just lowering the price will not work, and may make things worse in the long run (see previous article on Discounting).
Most of all, have heart. The biggest reason that they come back to the Inn is because your have created a refuge and a respite from all of the problems the guests face at home and in the real world. Remember that this is exactly what the guests need in these troubled times, and they will pay you for this experience.
Monday, November 17, 2008
Buying A Bed And Breakfast? SBA Loans In Trouble
The SBA Loan Programs in 2008 have shriveled up, and that has caused both buyers and sellers of Inns real problems in making deals happen. The SBA has this week taken steps to make loans available again. Now we have to wait and see if these very important changes will solve this problem. Without this solution, and SBA loans once again being made, the purchase and sale of Bed and Breakfast Inns will continue to be slow and difficult for buyers and sellers alike. Here are the details:
The SBA 7(a) and 504 Loan Programs have for many years provided an excellent source of mortgage lending for the acquisition of Bed and Breakfast Inns across the Country. In fact, these are the programs of choice for many Inn buyers. The SBA 7(a) Program provides a bank or other lender a loan guaranty of 75% of the overall loan. While costs are high and paperwork detailed, this is a good way for banks to be more secure in their lending, especially to borrowers who have not been in the bed and breakfast business before.
The SBA 504 Program, on the other hand, can provide below market interest rates on a portion of the overall secured mortgage loan to acquire an Inn or Bed and Breakfast. The 504 loans between 30% to 40% of the overall package on a second mortgage basis, and a bank or other lender provide takes the top 50%, leaving the buyer putting up 10%-20% equity (most bed and breakfast inn acquisitions will require 20% equity). The SBA portion of the loan is done on a fixed rate 20-year amortization basis, and because certain expenses are included in the interest rate, it actually decreases a bit every five years to maturity. There are some prepayment penalties involved in the SBA portion of the loan, and the costs of securitization and sales of the loans on the market are high (but includable in the loan). However, overall, this financing vehicle has in the past worked very well for Inn buyers. Until now . . . .
Last month we learned in the Wall Street Journal that overall SBA lending was significantly down in Fiscal Year ending 9/30/2008 over FY 2007. The 7(a) loan program was down over 30% from FY 2007, while the 504 Program dropped almost 17%. The reason was two-fold. First, related to the overall Economic Financial Crisis, the interest rate on SBA loans was based on the prime lending rate which has been decreasing as the Fed has sought to reinvigorate the credit markets. Most bank lending today has been based on the LIBOR which is much higher, thus making the SBA loans difficult to sell. Second, there were many issues for packagers of the securities to deal with based on the SBA rules. For more information see the full article SBA-Backed Loans Dry Up - WSJ.com.
Now we learn that the SBA has finally taken action to solve some of these problems. As of November 13, 2008, the SBA lending programs will now be pegged to LIBOR, and the SBA has also by regulation fixed other technical issues in the securitization and sale of the SBA loans. For the full story, please see: Independent Street : SBA Amends Lending Program to Help Small-Business Borrowers.
The SBA 7(a) and 504 Loan Programs have for many years provided an excellent source of mortgage lending for the acquisition of Bed and Breakfast Inns across the Country. In fact, these are the programs of choice for many Inn buyers. The SBA 7(a) Program provides a bank or other lender a loan guaranty of 75% of the overall loan. While costs are high and paperwork detailed, this is a good way for banks to be more secure in their lending, especially to borrowers who have not been in the bed and breakfast business before.
The SBA 504 Program, on the other hand, can provide below market interest rates on a portion of the overall secured mortgage loan to acquire an Inn or Bed and Breakfast. The 504 loans between 30% to 40% of the overall package on a second mortgage basis, and a bank or other lender provide takes the top 50%, leaving the buyer putting up 10%-20% equity (most bed and breakfast inn acquisitions will require 20% equity). The SBA portion of the loan is done on a fixed rate 20-year amortization basis, and because certain expenses are included in the interest rate, it actually decreases a bit every five years to maturity. There are some prepayment penalties involved in the SBA portion of the loan, and the costs of securitization and sales of the loans on the market are high (but includable in the loan). However, overall, this financing vehicle has in the past worked very well for Inn buyers. Until now . . . .
Last month we learned in the Wall Street Journal that overall SBA lending was significantly down in Fiscal Year ending 9/30/2008 over FY 2007. The 7(a) loan program was down over 30% from FY 2007, while the 504 Program dropped almost 17%. The reason was two-fold. First, related to the overall Economic Financial Crisis, the interest rate on SBA loans was based on the prime lending rate which has been decreasing as the Fed has sought to reinvigorate the credit markets. Most bank lending today has been based on the LIBOR which is much higher, thus making the SBA loans difficult to sell. Second, there were many issues for packagers of the securities to deal with based on the SBA rules. For more information see the full article SBA-Backed Loans Dry Up - WSJ.com.
Now we learn that the SBA has finally taken action to solve some of these problems. As of November 13, 2008, the SBA lending programs will now be pegged to LIBOR, and the SBA has also by regulation fixed other technical issues in the securitization and sale of the SBA loans. For the full story, please see: Independent Street : SBA Amends Lending Program to Help Small-Business Borrowers.
Tuesday, November 04, 2008
Running a Bed & Breakfast Inn: Discounting Room Rates Does Not Work!
In troubled times like today, Bed and Breakfast Innkeepers have an overwhelming feeling that the best way through this downturn (say recession!) is to put their room rates on sale. Isn’t that just what the retailers do at Christmas time to survive a bad season? The answer is that discounting in the travel business not only does not work, it creates a pattern of customer behavior that will last for years, even when times are better. Let’s look at the specifics.
Following 9/11, the Hotel Industry reacted to the basic loss of corporate business by deeply discounting their rates and putting large blocks of unused inventory on third-party web sites. The result was $50 a night rooms on sites like hotels.com which set up a huge expectation with consumers that this was the right price to pay for hotel rooms, no matter what the differences were in quality between each hotel. Many subsequent studies showed that the hotels basically killed their business for several years after the original reason for the discounting had gone away. The PAII Industry Study for 2002 and 2004 shows clearly that while occupancy at bed and breakfast and country inns decreased somewhat over the same period, rates did not go down significantly. Innkeepers knew the value of their product and held their rates. The result was that the Inn Industry basically avoided the meltdown that the Hotels suffered during that time.
By the end of 2007, rates for both Hotels and Inns were higher than in 2001, and occupancy rates had climbed back for the most part to 2000 levels (the best year to date in the Inn business). It is hard to tell where we will end up in 2008, but it clearly will not be a growth year. More important, where will we be in 2009?
Let’s put this into perspective. What would be the impact of your Inn business if revenues declined by say 10%? For an Inn grossing $400,000, that would mean a decrease in sales of $40,000. If the Gross Margin for that Inn (net cash flow/gross revenue) was an efficient 46%, then the net cash flow will also go down by 10%. In this example, the net cash flow would decrease by $18,400 from $184,000 to $165,600. The expenses also have to decrease, and there clearly can be cost reductions since many of the Inn’s expenses are variable and related to occupancy. In other words, as occupancy decreases, certain expenses like housekeeping, amenities and other costs related to occupancy levels will decrease as well. Added to this are the discretionary spending that can be reduced or deferred, all of which leads to the conclusion that even a 10% decrease in revenue will not result in a calamity for a well-run Inn business. It is more like something that needs to be weathered.
Most Innkeepers have a good sense of what the true expenses of operating the Inn are, and can find the ways to reduce costs. More important, most of your personal expenses seem to be interwoven in the Inn’s finances as well, providing a really sound way of reducing expenses. Knowing what is the real cost of the Inn gives you a better way of knowing how much you have to charge in rates to make an adequate return on investment (i.e. to pay the mortgage and have some for yourself) at any level of occupancy. Once you do this, you do not have to discount, you need only charge a fair price to achieve a fair rate of return on investment.
The real concern then remains this nagging feeling among Innkeepers that the only way out of a downturn is to discount. This should be avoided at any cost, because, as described above, once it is done, your guests will never again feel like paying your full rates. It will take many years to climb out of that hole. A better approach is to sell well priced packages and have value-added specials to supplement your rates. This has always worked well for our Industry, and will work again.
Finally, a word about cutting costs. Marketing and maintenance are the two areas that are easy to cut, but have the longest negative affect on your Inn business. This is the time to do what you can to increase marketing, because while the overall travel business may be decreasing, by great marketing you can stabilize or even increase your market share of the business that exists. Deferring maintenance is also something that comes back to bite you, since the cost of making repairs will always be more in the future if something is deferred.
The long and short is that you can favorably impact your results, even in bad economic times. Have faith that this too will pass, but in the interim, cut costs and market, market, market!
Following 9/11, the Hotel Industry reacted to the basic loss of corporate business by deeply discounting their rates and putting large blocks of unused inventory on third-party web sites. The result was $50 a night rooms on sites like hotels.com which set up a huge expectation with consumers that this was the right price to pay for hotel rooms, no matter what the differences were in quality between each hotel. Many subsequent studies showed that the hotels basically killed their business for several years after the original reason for the discounting had gone away. The PAII Industry Study for 2002 and 2004 shows clearly that while occupancy at bed and breakfast and country inns decreased somewhat over the same period, rates did not go down significantly. Innkeepers knew the value of their product and held their rates. The result was that the Inn Industry basically avoided the meltdown that the Hotels suffered during that time.
By the end of 2007, rates for both Hotels and Inns were higher than in 2001, and occupancy rates had climbed back for the most part to 2000 levels (the best year to date in the Inn business). It is hard to tell where we will end up in 2008, but it clearly will not be a growth year. More important, where will we be in 2009?
Let’s put this into perspective. What would be the impact of your Inn business if revenues declined by say 10%? For an Inn grossing $400,000, that would mean a decrease in sales of $40,000. If the Gross Margin for that Inn (net cash flow/gross revenue) was an efficient 46%, then the net cash flow will also go down by 10%. In this example, the net cash flow would decrease by $18,400 from $184,000 to $165,600. The expenses also have to decrease, and there clearly can be cost reductions since many of the Inn’s expenses are variable and related to occupancy. In other words, as occupancy decreases, certain expenses like housekeeping, amenities and other costs related to occupancy levels will decrease as well. Added to this are the discretionary spending that can be reduced or deferred, all of which leads to the conclusion that even a 10% decrease in revenue will not result in a calamity for a well-run Inn business. It is more like something that needs to be weathered.
Most Innkeepers have a good sense of what the true expenses of operating the Inn are, and can find the ways to reduce costs. More important, most of your personal expenses seem to be interwoven in the Inn’s finances as well, providing a really sound way of reducing expenses. Knowing what is the real cost of the Inn gives you a better way of knowing how much you have to charge in rates to make an adequate return on investment (i.e. to pay the mortgage and have some for yourself) at any level of occupancy. Once you do this, you do not have to discount, you need only charge a fair price to achieve a fair rate of return on investment.
The real concern then remains this nagging feeling among Innkeepers that the only way out of a downturn is to discount. This should be avoided at any cost, because, as described above, once it is done, your guests will never again feel like paying your full rates. It will take many years to climb out of that hole. A better approach is to sell well priced packages and have value-added specials to supplement your rates. This has always worked well for our Industry, and will work again.
Finally, a word about cutting costs. Marketing and maintenance are the two areas that are easy to cut, but have the longest negative affect on your Inn business. This is the time to do what you can to increase marketing, because while the overall travel business may be decreasing, by great marketing you can stabilize or even increase your market share of the business that exists. Deferring maintenance is also something that comes back to bite you, since the cost of making repairs will always be more in the future if something is deferred.
The long and short is that you can favorably impact your results, even in bad economic times. Have faith that this too will pass, but in the interim, cut costs and market, market, market!
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