Fundamental reasons for Hotel bankruptcy

In Japan, several hotel under performance and bankruptcy cases have been seen since COVID-19 pandemic appeared in this Feb. However, a hotel consultancy mentioned that before COVID, hotel industry had already been saturated in supply even for the increasing demand and financial conditions of so-called budget hotels had been unhealthy.

I had a discussion with Mr. Yukihiro Kiriake, the president of Integrity Support　(http://www.integrity-s.co.jp/), a hotel consulting and revitalization company. He pointed out the root causes of underperformance are as follows;

1 High occupancy

Under “Welcome Japan” campaign organized by the government, the immigration loosen the VISA requirement and consequently, more and more inbound tourists come to Japan. Brand new hotel developments appeared in Japan and especially recent years, the supply of accommodation may have exceeded the actual demand.

Those hotel operators pursued a high occupancy and actually, according to the statistical data, 3-4 star hotels in greater Tokyo area has achieved the high occupancy around 95% or more. However, this caused the sever physical deterioration in facilities and hard assets. As a result, hotel operators/ owners had to spend much repair and maintenance cost to keep the operation as well as to maintain that high occupancy.

2 Maintenance and fixed cost increase

Not only the maintenance cost but fixed and variable cost had increased tremendously, as the occupancy rises. FFI, furniture, fixture and interior had been consumed a lot, their turn-over had been accelerated. Accordingly, other variable cost had negatively affected the financial status of operation companies.

3 Labor cost increase

Historically, hotel and hospitality industry has been said as harsh and unfavorable one for young people. Work hard, less day-offs, and low salary, all of them prevented younger staffs from working for hotels. When the workload increased, more younger staffs got stressed and left the hotel or even the industry. Longer working hours automatically increased labor cost as well as average salary to keep sufficient skilled workers.

4 Unmanageable seasonality

Usually, hotel and hospitality industry must face a sort of seasonality. In a year, there are top and low seasons and the vacancy as well as the average daily rate have been very much fractalated. Consequently, top managements tend to put less importance of monthly accounting result, how much profit they generate monthly basis. This allowed managements to postpone the financial check to the fiscal year end, not at end of month.

5 Accounting system

If top managements had been keen on analyzing monthly profit and loss with detailed items of expense, they must have been aware of the issue: the best balance of occupancy and ADR and importance of accumulating retained earnings. However, a few managements got aware of the necessity and the a few managements actually implemented the hotel accounting system which can deliver daily BS/ PL.

6 Management mindsets

Ultimately, the items mentioned above are issues of top managements’ mindset. Unless they wish to make their company more resilient against the unexpected event occurred in our world, the same spiral would repeat under the next crisis. Therefore, we could say that ultimate issue is the top management’s mind :how serious and sincere he/she takes his/her responsibility.

To sum up, the followings are the reason why hotels have been under performance even under the inbound bubble.

Among above, I think the most important is the mindset. Those who don’t want to learn from the basic, may learn nothing from the pandemic.

Further queries or doubts, please email to ytomizuka@abrilsjp.com

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