The Urban Legend

2015

Hotel and Restaurant AnalysisANNA M. HILL

Grand Valley State University | 1 Campus Drive, Allendale, MI 49401

Table of ContentsExecutive Summary...............................................................................................................2

Introduction...........................................................................................................................2

Financial Reports for the Urban Legend...............................................................................3

Conclusions............................................................................................................................5

Recommendations..................................................................................................................7

Works Cited.........................................................................................................................10

Appendices...........................................................................................................................11

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Executive SummaryNestled snuggly in the upscale urban neighborhood of Sea Cliff in San Francisco stands the esteemed Urban Legend hotel. This boutique hotel offers 25 lavishly furnished and charming rooms, each room with a different theme. In addition, the Urban Legend is also home to the Green Restaurant certified restaurant, the Millennium. There are two small meeting rooms available for rent at $75 per four-hour segment with a capacity of 20 people. The hotel has a well-established and esteemed customer base, targeting primarily business clientele. However, the hotel is also a common hot spot for older couples interested in sightseeing and enjoying the breathtaking view of the Pacific Ocean.

The purpose of this report is to review and confront the financial state of the Urban Legend hotel and the Millennium restaurant. Throughout the report, the hotel and restaurant’s finances will be discussed and analyzed.

There will be several significant points that will address in this report. First, the Urban Legend itself will be discussed and its finances analyzed. Secondly, the Millennium restaurant’s financial situation will be evaluated. Third, the two meeting rooms will be discussed and reviewed. Fourth, registration fees for the conference will be mentioned and analyzed. Finally, the investment appraisal will be included and discussed. The analysis of the items previously mentioned will be followed by conclusions drawn from the information presented in the analysis, recommendations will then be made based on the conclusions drawn. The appendices will be at the end of the report following the recommendations proposed.

IntroductionThe Urban Legend is located in the Northwestern section of San Francisco near the picturesque Pacific coast. Guests wake up to the tranquil sounds of the ocean. With Baker Beach and China Beach visible in the distance and the amazing view of the famous Golden Gate Bridge, the Urban Legend is ideal for any business traveler’s stay. The hotel uses wide windows, typically kept open during a majority of the year, so travelers can take in the aroma of the fresh sea air. Each room offers guests a different experience, offering varying themes from underwater to outer space. Each stay is a memorable one. The Urban Legend offers a wide variety of amenities and services. Our two professional meeting rooms are ideal for business get-togethers and meetings.

In this financial report, the Urban Legend Hotel’s financial information will be discussed first. Secondly, conclusions will be drawn upon what is found in the financial information section. Lastly, recommendations on how to improve the hotel’s performance will be determined and suggested based on what was drawn from the conclusions. The appendices will be attached afterwards.

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Financial Reports for the Urban LegendUrban Legend

The hotel’s main revenue source comes from its rooms, which is $600,000. Rooms revenue contributes 74.04% of the total revenue. The food and beverage department is the second primary source of revenue, contributing 24.69% of the total revenue. Profit from the food department is exceptionally low primarily as a result of the $173,255 food and beverage department expenses. The food and beverage department expenses are 86.63% of the sales for that department, while the rooms department is 30.33% and other operated departments are 32.50% of their departments’ sales.

In addition, when compared to the industry standard for hotel’s in the United States in 2014 (“Host Almanac Highlights 2014”), both the Urban Legend’s average daily rate and revenue per available room were much lower despite the Urban Legend’s higher occupancy. As shown in the graph below, there is an $59.84 variance between the industry standard and the Urban Legend’s average daily rate. There is a $36.11 variance between the industry standard and the Urban Legend’s revenue per available room. There is also a variance of 7.9% between the industry standard and the Urban Legend’s occupancy percentage.

Industry Standard 2014 The Urban Legend$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00 $148.88

$89.04

$107.34

$71.23 ADRRevPar

However, the industry standard number of rooms for a hotel was estimated to be 199, while the Urban Legend only has 25. This significantly reduces the amount of money they can potentially charge for rooms in comparison to the industry standard. For example, a typical 199 room hotel might be able to charge $150 per room in 143 of their rooms when taking into account the 72.1% occupancy, resulting in $21,522 in rooms revenue. Even if the Urban Legend were to charge the same amount for their rooms, $150 per room at the industry standard, the hotel would only be making $3,750 in rooms revenue, which is $17,772 less than the industry standard.

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Millennium

The total sales for actual budget was $250,000, which is $50,000 less than what it was budgeted to be. The gross profit was also significantly lower than what it was budgeted to be, going down from $180,000 to $137,745, a $42,255 decrease. Despite the salaries, wages, and benefits expense decreasing by $1,000 in the actual budget, the expenses’ percent of sales increased from 32% in the budget to 39.5% in the actual. The money spent in marketing decreased from $12,500 in the budget to $4,000 in the actual.

Liquor, beer, and wine sales are an issue. In the budget, Liquor and wine sales are estimated to be $40,000, both 16% of sales, and beer is estimated to be at $20,000 around 8% of sales. The costs of sales percentage estimates are liquor at 20%, beer at 25%, and wine at 30%. However, when compared to the actual budget, there is a significant difference. All alcohol sales are much lower than they were estimated to be at, liquor and beer having the highest sales at $24,500 each. The percentage for cost of sales in the actual for alcohol sales was higher with liquor at 22%, beer at 27%, and wine at 35%.

The breakeven point is $119,047.62, with a contribution rate 42% and a variable rate of 68%. The variable costs are relatively high at $145,000, while fixed costs are at $50,000 with sales at $250,000.

Meeting Rooms

The cost for equipment to be used in the rooms is presently $250. Further, at $75 per four hour blocks, there are only 134 events and meetings held in the two meeting rooms during the present year. The meeting rooms currently make up 1.23% of the total revenue, which translates to $10,000. Although this number is not overly high and there are few events being held, the meeting rooms have the potential to be highly profitable. The hotel also needs to update the space in the meeting rooms and providing additional more up-to-date amenities than what they are currently providing.

Registration Fee

The registration fee was estimated to be $672.83. The high cost is primarily due to the fact that they are targeting their top international clients, who likely have some money to spare. The high cost of the speaker, which was $4,500, and the $1,000 invested in marketing also played a part in the high cost of the registration fee.

Investment Appraisal

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The first investment, the Property Management Operation System, would have a higher rate of return than the second option, the Health Club or Exercise Room. The MIS return is 23.47%, which is 2.8% higher than what it would be for the exercise room. The MIS would have $11,400 more for average profit than the exercise room, as shown in the bar graph below. The exercise room’s investment costs $30,000 while it’s profit is $30,000, meaning that it resulted in only $1,000 in profits after paying off the investment.

Investment Cost Profit Average Profit$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

MISExercise Room

However, the exercise room only takes 1 year and 5 months to be paid back, while the MIS takes 3 years and 6 months. The investment for the exercise room is also $57,000 cheaper than the investment for the MIS.

ConclusionsUrban Legend

Since the expense are so high in the food and beverage department, little of the revenue is actually left over, leaving only rooms revenue as the main source for revenue. Poor service could be a leading cause for the lower food department revenue and increased food department cost of sales. The rooms do not appear to be an issue, since they are a leading source of revenue and have low cost of sales for their department. However, both the food revenue and meetings revenue are an issue. The potential for profitability in both departments is there.

The standard hotel in the United States has significantly more rooms than the Urban Legend, so it would be exceedingly difficult for the Urban Legend to make nearly as much rooms revenue as the standard hotel. However, the Urban Legend is a more upscale hotel that targets primarily business clients. The standard hotel likely targets more leisure travelers or has a mix. As a result,

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the Millennium can increase their profitability if they are able to tap into other revenue sources such as food and beverage as well as the meeting rooms.

Millennium

The reduced amount of total sales is likely a result of the reduced alcohol sales. While food sales are also lower by $20,000, which means that $30,000 is alcohol sales have been lost. Gross profit was reduced in part as a consequence of the lower alcohol and food sales. While the cost of sales did go down by $7,745, it did not go down as much as the total sales, which went was lower by $50,000. Both the slightly lower cost of sales and the much lower total sales resulted in the lower gross profit. Despite the salaries, wages, and benefits expense being reduced by $1,000, the expenses’ percent of sales increased by 7.5% likely as a result of the lower total sales. In addition, the hotel is spending $173,255 in the food and beverage department, as stated in Summary Year End Income Statement in the appendices, while the department only has $200,000 in revenue. When compared to how much of the revenue is retained from the other departments, the amount for the food and beverage department is significantly lower. The cause of this is that the Millennium is investing more of their money of food and beverage and selling much less.

However, why are the sales for food and alcohol significantly lower? The hotel only has 25 rooms, so it is likely not that there are fewer customers or that the occupancy is lower than what was forecasted. It is possible that fewer customers are dining in the hotel in the restaurant. A new upscale restaurant might have opened up nearby and could be stealing away potential customers from the Millennium.

Another possible cause is that the dining staff is poorly trained. The chef might not be following recipes right or the wait staff might be being rude to customers. The Millennium might also not be producing food that meets the guests’ standards. The Urban Legend is an upscale hotel, so the restaurant is expected to be upscale as well. Guests might choose to dine elsewhere if the millennium is serving foods that are not upscale, such as burgers and fries. The combination of the poor food and beverage quality as well as the poor service provided by the staff results in guests dining outside of the hotel.

In regards to the breakeven point, the variable cost is the issue. It is so high that only $14,625 in profit was left over after fixed costs. Very little can be done to reduce fixed costs, however, the Millennium has more flexibility to reduce their variable costs.

Meeting Rooms

The Urban Legend only hosts 134 events every year. This means that events are held only 48% of the entire year! Competition could be taking away some potential customers as a result of

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having more amenities or having those amenities better publicized than the Urban Legend. Marketing and advertising is the biggest issue. The hotel needs to, in order to attract more customers and retain current clients, develop marketing strategies to target the business segment of the market.

Registration Fee

The conference is aimed towards international clientele, therefore, they can expect that their clients are willing to spend a lot more to attend this conference. This is further proven by the fact that the conference is being hosted in the Urban Legend, an upscale hotel.

Investment Appraisal

If the exercise room will be considered a free amenity that is included with a guest’s stay than it should not be pursued. Business clients are the hotel’s primary customers, so getting rid of one of two meeting rooms in order to install an exercise room that comes free with every guest’s stay would be a waste of money. Money that could have potentially been made through hosting meetings and events in the meeting room would be lost.

Also, having an MIS installed would maximize the Urban Legend’s profitability (Sisson) and provides high standards of customer service. Furthermore, MIS would provide the Urban Legend with vital information in regards to day-to-day operations as well as optimize room rates and inventory (Sisson).

RecommendationsThere are several things that could be done in order to increase ADR to compete with other local or upscale hotels. Firstly, a revenue management strategy should be taken into consideration. With this particular strategy, the Urban Legend could consider charging a premium for popular types of rooms or consider analyzing present rack rates to determine if they could be raised during peak time during the year (“How to Increase ADR”). The second strategy that the Urban Legend could pursue is value selling their rooms. The Urban Legend would need to clearly differentiate them from the competition and highlight their selling points when marketing and advertising the hotel. Listing bundled pricing and cost savings on the hotel’s website is another step the Urban Legend would need to take with this strategy. Finally, clearly informing potential guests and customers of the benefits and amenities included with the hotel could lead to an increased ADR. The second strategy would be ideal, as it would market the meeting space as well as food and beverage department more to potential customers.

In regards to the Millennium, the food quality is the first thing that should be evaluated. This should be done through menu engineering to determine which menu items are dogs, puzzles,

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plow horses, and stars. If the food does not meet the recipe standards or if a majority of the items on the menu are dogs, then the menu would need to be revised in order to add in more high quality or more popular as well as profitable items. By eliminating unpopular and unprofitable food items, the Millennium would be reducing their variable costs. Following evaluating the food quality, the second thing in need of evaluation is the staff. The department manager should do performance evaluations for the head chef and the head server. Following the evaluations, additional training and performance evaluations should be used to train the staff. Over the course of the next quarter, sales should be monitored, as well as the competition within the area. Over that period, staff should encourage customers in the Millennium to complete customer service surveys after their meal in order to get feedback on what is being done well and what needs to be changed or improved. The food and beverage department manager should pay close to whether the customers complain about poor service or rude staff because it would negatively impact sales. By the end of the quarter, after taking into consideration some of the customer’s comments, the Millennium should make proper adjustments. If the issue is poor customer service, the current wait staff that has not improved after performance evaluations and additional training will need to be fired. This also applies to rude staff. By doing so, the Millennium will be able to lower their variable costs significantly since their salaries, wages, and benefits expense is $79,000. Afterwards, the Millennium should continue monitoring customer feedback to see if there is a change in satisfaction.

In order to make the meeting rooms more profitable, some additional amenities could be included in order to increase the overall value of the room, so that the room rental fee could be increased. A projector, HD television, and DVD player should be installed which could be used for presentations by business owners to potential clients or for other presentation purposes. By installing these amenities, investing the money once into purchasing this equipment, the Urban Legend would be able to get a return on their investment as a consequence of raising their room rental price. Since there are few meetings being held in the hotel, marketing the meeting rooms to companies that frequently stay in the Urban Legend could result in an increase in the number of meeting room rentals. There are several ways in which the Urban Legend can better market and advertise. First, the Urban Legend, in order to increase their revenue, could sell meeting packages, where business clients have the option to upgrade their package to include more things such as teambuilding activities on the beach. Secondly, the hotel could sell group value offers to guests that have used the Urban Legend’s meeting space in the past. By offering these packages, the hotel is giving clients the option to spend additional money to increase their overall experience. Thirdly and finally, the meeting room rental fee could even be reduced for certain clients, during slow periods of the year, or as part of a loyalty rewards program. By choosing to do one or all of these options, there is a better chance of increasing the yearly amount of meeting rooms rentals thus increasing the department’s revenue.

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In regards to the registration fee, while the fee is estimated to be $672.83, it could be rounded up to $700. Since this is only $27.17 higher than what it is priced at currently, the international clients would be likely to still attend the conference at a slightly higher cost, especially since the fee is already high. By doing do, the profit from the conference would be increased by $407.55!

The best option for the investment appraisal would be to go with the MIS since it would result in a higher profit not only from itself, but also from the potential profit of the second meeting room.

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Works Cited

Host Almanac Highlights 2014. (2014). Retrieved April 13, 2015, from

http://www.str.com/Media/Default/Samples/HOSTAlmanac_Highlights.pdf

How to Increase ADR. (2015, January 1). Retrieved April 15, 2015, from https://jacaruso.com/how-to-increase-adr/

Sisson, Lisa. Management information systems [PowerPoint slides]. Retrieved from https://mybb.gvsu.edu/webapps/portal/frameset.jsp?tab_tab_group_id=_13_1&url=%2Fwebapps%2Fblackboard%2Fexecute%2Flauncher%3Ftype%3DCourse%26id%3D_223315_1%26url%3D

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Appendices

The Urban Legend HotelWork Done By

2014 Year end Department Income Statement Anna Hill$ %

Total Revenues $ 810,000 100.00%Rooms- Revenues $ 600,000 74.07% Payroll & Related expenses $ 132,000 22.00% Other Expense $ 50,000 8.33% Department Income $ 418,000 69.67%Food-Revenues $ 200,000 24.69% Cost of Sales $ 62,255 31.13% Payroll & Related expenses $ 79,000 39.50% Other Expense-(Direct operating & Music only) $ 32,000 16.00% Department Income $ 26,745 13.37%Meeting Rooms-Revenues $ 10,000 1.23% Cost of Sales $ 2,000 20.00% Payroll & Related expenses $ 1,000 10.00% Other Expense $ 250 2.50% Department Income $ 6,750 67.50%Total Operated Department Income $ 451,495 55.74%

Undistributed Operating Expenses Administrative & General $ 20,000 2.47% Sales & Marketing $ 15,000 1.85% Property Maintenance $ 6,000 0.74% Utilities $ 15,000 1.85%Total Undistributed Operating Expenses $ 56,000 6.91%GROSS PROFIT $ 395,495 48.83%Management Fees $ 25,500 3.15%

Income Before fixed Charges $ 369,995 45.68%

Rent, Property Taxes, and Insurance $ 10,000 1.23%Interest $ 5,000 0.62%

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Depreciation $ 2,000 0.25%Net Income before Income Taxes $ 352,995 43.58%

Urban LegendSummary Income Statement

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Year End 2014Work Done By Anna

Hill

$ %RevenueRooms $600,000 74.07%Food and Beverage $200,000 24.69%Other Operated Departments $10,000 1.23%TOTAL REVENUE $810,000 100.00%Departmental ExpensesRooms $182,000 30.33%Food and Beverage $173,255 86.63%Other Operated Departments $3,250 32.50%TOTAL DEPARTMENTAL EXPENSES $358,505 44.26%

TOTAL DEPARTMENTAL INCOME $451,495 55.74%

Undistributed Operating ExpensesAdministrative and General $20,000 2.47%Sales and Marketing $15,000 1.85%Property and Operation & Maintenance $6,000 0.74%Utilities $15,000 1.85%TOTAL UNDISTRIBUTED EXPENSES $56,000 6.91%

Gross Operating Profit $395,495 48.83%

Management Fees $25,500 3.15%

INCOME BEFORE FIXED CHARGES $369,995 45.68%

Fixed ChargesRent, Property Taxes and Insurance $10,000 1.23%Interest Expense $5,000 0.62%Depreciation $2,000 0.25%TOTAL FIXED CHARGES $17,000 2.10%NET OPERATING INCOME $352,995 43.58%

250,000 The Millennium The Millennium The Millennium

45000 Budget 2014 Actual 2014 2014

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Est. Annual Sales $250,000P & L Statement

P & L Statement Variance Analysis

F/B 60/40 Work Done By Anna Hill

L/B/W 40/20/40

100000 Difference

Budget % Actual YTD % $ %G/B

SALES

Food 150,000 60.0% 130,000 65.0%

-20,00

0

-13.3

% B

Liquor 40,000 16.0% 24,500 12.3%

-15,50

0

-38.8

% B

Beer 20,000 8.0% 24,500 12.3% 4,50022.5

% G

Wine 40,000 16.0% 21,000 10.5%

-19,00

0

-47.5

% B

TOTAL SALES 250,000100.0

% 200,000100.0

%

-50,00

0

-20.0

% B

COST OF SALES

Food 45,000 30.0% 42,900 33.0% -2,100 3.0% G

Liquor 8,000 20.0% 5,390 22.0% -2,610 2.0% G

Beer 5,000 25.0% 6,615 27.0% 1,615 2.0% B

Wine 12,000 30.0% 7,350 35.0% -4,650 5.0% G

TOTAL COST OF SALES 70,000 28.0% 62,255 31.1% -7,745 3.1% B

GROSS PROFIT 180,000 72.0% 137,745 68.9%

-42,25

5 -3.1% B

CONTROLLABLE EXPENSES

Salaries, Wages & Benefits 80,000 32.0% 79,000 39.5% -1,000 7.5% G

Direct Operating Expenses 30,000 12.0% 24,000 12.0% -6,000 0.0% G

Music & Entertainment 7,500 3.0% 8,000 4.0% 500 1.0% B

Marketing 12,500 5.0% 4,000 2.0% -8,500 -3.0% G

Utilities 5,000 2.0% 6,000 3.0% 1,000 1.0% G

General & Administrative Expenses 7,500 3.0% 8,000 4.0% 500 1.0% B

Repairs & Maintenance 5,000 2.0% 2,000 1.0% -3,000 -1.0% G

TOTAL CONTROLLABLE EXPENSES 147,500 59.0% 131,000 65.5%

-16,50

0 6.5% G

OCCUPANCY COSTS 17,500 7.0% 14,000 7.0% -3,500 0.0% G

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TOTAL OCCUPANCY COSTS 17,500 7.0% 14,000 7.0% -3,500 0.0% G

INCOME BEFORE TAXES 15,000 6.0% -7,255 -3.6%

-22,25

5 -9.6% B

Taxes 375 2.5% 0 0.0% -375 -2.5% G

NET INCOME 14,625 6.0% -7,255 -3.6%

-21,88

0 -9.6% B

Conference Fee Registration CalculationsWork Done By Anna

Hill

Fixed Costs: Variable Costs:Remember 10% Rule!!!

Marketing$1,000.0

0Meals/Coffee $60.00

per person

Speaker$4,500.0

0$120.0

0Decorations $400.00 $12.00Promotion $700.00 BEP=FC/#Attendees+VCppEquipment $250.00 Fee w/ Profit=FC+P/#Attendees+VCpp

Rent $75.00per room $525.00

TOTAL FC:$7,375.0

0$8,112.5

0 TOTAL VC: $60.00 $132.00$737.50 $6.00

FEE $ 672.83

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ADR and REVPAR Calculations

ADRWork Done By Anna

HillRooms Revenue $650,000Rooms Available 25 9125Total Rooms Sold 7300Daily Revenue $1,780.82ADR $89.04RevPar $71.23Rooms Revenue $600,000.00Occupancy % 0.8

Breakeven Point Calculations for the Millennium Budget

SALES $250,000 Work Done By Anna HillVC $145,000CM $105,000FC $50,000P $14,625CR 42%BEP $119,047.62

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Investment AppraisalWork Done By

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Rate of Return Anna Hill

MIS Exercise Room

Profit $88,000.00 Profit 31,000

Years 5 Years 5

Average P $17,600.00 Average P 6200

Investment $75,000.00 Investment 30,000Rate of Return 23.47%

Rate of Return 20.67%

Cash flow Payback Method

MIS

Investment $ 75,000.00

Year 1 $ 14,000.00

$ 61,000.00

Year 2 $ 20,000.00

$ 41,000.00

Year 3 $ 25,000.00

$ 16,000.00

$ 2,916.67 Per Month

Year 4 $ 35,000.00

5.48571429 Months

Year 5 $ 38,000.00

3 Years and 6 Months

Exercise Room

Investment $ 30,000.00

Year 1 $ 13,000.00

$ 17,000.00

Year 2 $ 15,000.00

$ 2,000.00

$ 1,333.33 Per Month

Year 3 $ 16,000.00 1.5 Months

Year 4 $ 14,000.00

Year 5 $ 12,000.00

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2 Years and 2 Months

Net Present ValueMISYear 1 $14,000 0.8929 $12,500.60Year2 $20,000 0.7972 $15,944Year 3 $25,000 0.7118 $17,795Year 4 $35,000 0.6355 $22,242.50Year 5 $38,000 0.5674 $21,561.20

$90,043.30

$75,000original investment

$15,043.30 Positive Net Present ValueExercise RoomYear 1 $13,000 0.8929 $11,607.70Year 2 $15,000 0.7972 $11,958Year 3 $16,000 0.7118 $11,388.80Year 4 $14,000 0.6355 $8,897Year 5 $12,000 0.5674 $6,808.80

$50,660.30

$30,000original investment

$20,660.30 Positive Net Present Value

Industry Standard for 2014Percentage DollarsOccupancy 72.10%ADR $148.88RevPar $107.34Average Property Size 199.00Rooms Revenue 68.60% $39,043Rooms Expenses 26.3% $10,270Food & Beverage Expenses 68.50% $9,962Marketing 6.90% $3,903Administrative & General 8.20% $4,690Gross Operating Profit 37.90% $21,535

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