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Expanding your business

03 May 2007
Expanding your business

Seasonality, poor staff retention and a narrow customer base can all limit the turnover and value of a hospitality business. But if you can get the funding, there are ways to increase those figures - and now is a good time to try it. Tom Vaughan reports

To a large chain, spending £110,000 is a regular occurrence. But to a small business it's more than just money it could be the difference between success and insolvency. So when Ramon and Karen Farthing, owners of restaurant 36 on the Quay in Emsworth, Hampshire, borrowed £110,000 in 2003 to add four rooms to their business, it was a bold move.

But it was a move that paid off. Within a year they had recouped their outlay and their turnover has since risen by more than £100,000 a year. The lesson, Ramon says, is that expansion need not be a scary prospect if you know the local market.

"Karen knew that the town lacked B&Bs and informal hotels," he adds. "There was a niche for our product and we took it."

That said, Ramon was initially sceptical. Life at the time was promising. As owners of the small 45-seat coastal restaurant, they had slowly been attracting attention - a fact that hadn't gone unnoticed by the Michelin Guide, and in 1996 they received their first star.

It was because of this success that Ramon initially rejected outright the idea of adding rooms to 36 on the Quay when Karen first suggested it. "We had done well so far and I thought that adding rooms would only distract us from putting food on plates," he says.

The pair lived above the restaurant and Karen's suggestion was to move out, buy a property locally and transform their former lodgings into four guest rooms. Ramon, who heads up the kitchen, needed a lot of convincing: "We already worked 13- or 14-hour days," he says. "I didn't see how we could fit in time to manage rooms, too."

Eventually he agreed - on the condition that the rooms wouldn't interfere with the restaurant. This meant no cooked breakfasts tying up the kitchen and a separate entrance. It also meant that Karen would take on the management of the rooms so as not to distract Ramon from the food.

By the time the four rooms were refurbished, Ramon had come around to the idea so much that the couple also bought the freehold of a neighbouring cottage and refurbished it as a separate property available to rent for short periods.

The demographic of customers changed hugely. Diners that beforehand visited only at lunch, because of the distance they had to travel, now came for dinner and stayed in one of the rooms. The rooms also attracted couples wanting a relaxing break with good food, while businessmen not wanting the formality of a hotel rented the cottage.

The knock-on effect is that covers are now more consistent than previously, but it was the extra revenue stream that the rooms could bring that initially convinced them to invest. "It was the final addition to the package," Ramon says. "Before, we were providing good food to customers of an evening. Now we can accommodate whole parties over a weekend: they block-book the rooms and rent out the private room of the restaurant. It has been a huge enhancement to the business."

The couple borrowed £110,000 to cover the cost of all the refurbishment work, excluding the freehold of the cottage. Karen's foresight proved invaluable, because within one year they were able to repay the loan and the business's turnover has since increased by about £110,000 a year.

Buoyant market

According to Chris Moore, director of hotel and licensed property specialists Colliers Robert Barry, now is a good time to add value to a business, whether it's a restaurant or hotel. "A buoyant 2006 market saw a 4.5% increase in average turnover per room, a growth that totals 60% over the past 10 years," he says. "So the incentive to increase capacity is definitely there."

On top of this, 2006 saw the average sale price of a hotel increase from 2.5 to 2.7 times turnover, up from 1.7 times turnover five years ago.

So not only will a proprietor profit from increased turnover, he will also be safe in the knowledge that, for the moment, the asset value, as a multiple of turnover, is steadily increasing as well.

And there's more good news, Moore says. Potential buyers of a business will always want to ensure that any recent additions or developments will increase turnover in the long run before they invest extra in buying them. But, with the market in such a healthy position, this waiting period is reducing because buyers need less convincing that the development will result in increased turnover.

With the return on investment currently standing at about 18 months, maybe less, Moore is adamant that payback has never been quicker than it is now. "With interest rates relatively low at the moment, people need less evidence that any new additions are working," he says. "All potential buyers want to see are the first year's figures following on from those additions."

There are two ways of adding to a business, Moore says. The first is to go for a greater market share of what you are already doing - for example, adding more bedrooms or more restaurant covers. The greatest advantage of this is that a business can enjoy improved profits without duplicating costs. For example, a hotel adding half its number of rooms again does not need to employ a second general manager or even many more housekeepers.

The second method is to target a different market, by adding a spa or conference centre, and bring in client­ele that wouldn't have used the hotel before. In this way it's possible to generate income through attracting a new customer base with the new facilities - and to use them as a lever to increase room rate and occupancy.

The spa's the star

When Peter and Deborah Hinchcliffe bought Alexander House in Turners Hill, East Sussex, in 2003, it was a 19-bedroom country house popular with smaller conferences but which struggled to attract customers in the winter months. Following on from the successful transformation of sister hotel Rowhill Grange, Kent, in 1995, into a hotel with spa, the couple invested £8m, some of which they borrowed, some of which was their own investment, into turning Alexander House into a destination spa.

They designed the spa themselves, keeping the cost of consultants to a minimum, with 25 treatment rooms, a swimming pool, two hydrotherapy pools and an outdoor hot tub, as well as dedicated manicure, pedicure and hairdressing studio. The extension also doubled the room numbers to 38 with the addition of 19 extra spa bedrooms.

Since the spa opened in July 2006, the transformation to the business has been remarkable, demonstrating Moore's strategy of using a new facility to attract a new market and leverage room rates and occupancy.

Whereas beforehand, most people who used the hotel were 40-plus, it now also attracts 20- to 40-year-olds. Results have shown that, since it opened, more than 70% of guests are visiting to use the spa facilities and the average stay at the hotel has increased from 1.2 nights to 2.7. Occupancy in the winter months this year sat at 70%, compared with 55% at the same time last year (when it had only 19 bedrooms). The average achieved room rate has also increased by £20. Peter Hinchcliffe says that initial indications for the year's figures following on from the spa's opening will see turnover increase by three or four times.

Low occupancy

Three years ago, the Bedruthan Steps hotel found itself in the same predicament as Alexander House. Set on the coast in Mawgan Porth, Cornwall, the hotel was seasonal, and, after the October half-term, would find occupancy so low that it would close from Sunday through to Wednesday. As a result, continuity of staffing tended to become difficult because many of the casual 140 staff required during the summer would be laid off, meaning new staff would have to be recruited for the next year.

The hotel management recognised that a gym and squash court, facing out over the coast, were under-used by guests, but it wasn't until local businesses started to book the dining room for conferences that the idea of replacing the gym and squash court with a 220sq m conference and events centre was hatched.

From there, says operations manager Jamie Alexander, the idea snowballed. "We talked to customers and to local businesses to gauge potential and there was such interest we decided to properly refurbish the area," she says.

The hotel closed in December 2004 and work started on the £300,000 project to add fully-equipped conference facilities with capacity for up to 200 people theatre style in the biggest suite, sound-proofed walls and a separate kitchen. The new facilities opened in March 2005 and the level of interest grew quickly. Not only were conference organisers making bookings, but weddings and parties were keen to use the new space because of its dramatic sea view.

Average occupancy, which sat at 44% in 2004, rose to 66% in 2006 and the hotel started to open year-round, retaining all its staff. Food and beverage turnover alone has doubled to £2.8m over the past two years. "It enabled us to create a sustainable business," Alexander says. "We needed something to keep us busy all-year round and the conference space proved successful in doing that."

Improved turnover

While increasing the asset value of a business provides security in the long-run, the improved turnover that results is equally vital for the continued success of a business. "Beforehand, if we had four people in the restaurant of a night I would worry about where the money was going to come from," says Ramon at 36 on the Quay. "Now we can have two people in the restaurant and we're safe in the knowledge that there's money coming in from the rooms."

Not only is it financial peace of mind for the proprietor, but the business can also be improved as a result. Greater profit and all-year trading means that there is more time and more reason to spend money on training staff, and more money with which to reward them. As Ramon says, it's a simple domino effect: the better staff, the better the business the better the business the more customers the more customers the more turnover the more turnover the better the asset value.

So despite his initial reservations, Ramon admits that expanding their business was one of the best decisions he and his wife made. "Make sure you establish how any new additions will work within the business first," he says. "But if you have the financial backing there, then do it. For the asset value and the turnover increase it is worth any teething problems that may arise."

For more information on market reviews:

Routes for expansion

Hotel industry consultant Melvin Gold gives some advice on what to consider before expanding your business:

• Make sure you understand the competitive environment for the proposed facilities. Review existing provision in the area and make enquiries with your planning authority - and, if appropriate, neighbouring authorities - to gauge whether others are planning something similar.

• Ensure that there is a market for the additional facilities - speak to existing customers and agencies, etc, that place business of the type required.

• Ensure that any additional business can also be accommodated in the existing hotel. For example, if a spa is likely to generate weekend bedroom sales then do you have spare bedroom capacity or are Saturday nights already full with wedding-related business?

• Also be sure that your hotel has the capacity to support the additional business.

• Consider the synergies between the additional facilities and the existing hotel and whether the business segments envisaged will work harmoniously alongside each other.

• Look at the incremental costs that might be incurred across the whole hotel rather than focusing only on the direct additional cost related to the new operation.

www.melvingoldconsulting.com

What they did

36 on the Quay

  • Emsworth, Hampshire, PO10 7EG
  • www.36onthequay.co.uk
  • Addition: four bedrooms and a cottage
  • Investment: £110,000
  • Turnover increase: about £110,000 a year

Alexander House Hotel

Bedruthan Steps Hotel

  • Mawgan Porth, Cornwall, TR8 4BU
  • www.bedruthanstepshotel.co.uk
  • Addition: 220sq m conference facilities
  • Investment: £300,000
  • Turnover increase: From £3.5m in 2004 to £5.3m in 2006
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