The risks involved with the hotel business are grouped as operational risk, political risk and market risk. Each of these are elaborated below;
- Failure to maintain key members of the management team
- Failure to maintain franchise agreements on favorable terms
- Failure to “compete effectively” against rival hotel chains
- Failure to “protect intellectual property rights (that) could have a negative impact on the value of hotel brands
- Failure “to keep pace with developments in technology (which) could impair hotels operations or competitive position”
- Failure to “anticipate cyber threats and the risk of data breaches”
- Failure to “comply with” a variety of laws including environmental regulations, the U.S. Foreign Corrupt Practices Act, and even international sanctions against rogue nations like Iran and Syria ordered by the U.S. State Department and White House
- Failure to maintain adequate insurance policies “which may not cover all potential losses”
The major risk to its international operations from this perspective is physical damage to its hotels and injuries to its employees which raises legal liability issues. Secondary political risks include appropriation of ownership of its physical assets, confiscatory national policies such as excessive taxation rates, the inability to move capital freely between foreign subsidiaries, currency devaluations, and onerous regulatory climates against foreign owned firms.
Prime hedge against market instability and its attributes such as declining revenue per available room (“RevPAR”) or total revenue per available room (“TRevPAR”) is the simple fact that restrict for hotel brand to own the vast majority of the hotels and resorts which operate under its brand names. For example, Starwood manages 1,175 hotels worldwide but the company itself only owns or directly leases just forty-seven hotels, or less than 4% of the total. Like most modern hotel chains, Starwood licenses its brand and management skills to real estate developers and owners who bear the financial responsibility of property updates, maintenance, and improvements, receiving a commission from the property owner on each room sale derived through its reservation system. Put another way, Starwood makes money if the hotel is half full despite the breakeven point on RevPAR being 70% or higher on any given night for a typical hotel. Even if a given hotel has only one guest and 999 vacant rooms, Starwood makes money that day. This lack of ownership may affect reported revenues which will fluctuate wildly in a cyclical market like hotels and resorts, but it is the perfect hedge against hotel capital costs, operating expenditures related to capital real estate operations, and local regulatory requirements which require costly improvements.
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