Backgrounder Canada reached an all-time low. In 2004, the industry rebounded and tourism grew at a faster rate than the rest of the economy. By the end of 2007, there were more than 15,000 travel accommodation establishments in Canada, generating in excess of $13 billion in operating revenues (see Exhibit 1). Airport hotels experienced the largest gains in demand, followed closely by downtown hotels. The average occupancy rate for large hotels (i. e. those with more than 200 guest rooms) reached 70% in 2007 and the average daily room rate for these hotels reached $138 (see Exhibit 2). A four-scale system is used to classify hotels: 1.
Economy – Basic accommodation provided with few or no amenities and guest services, and the only facility provided is usually a swimming pool. 2. Mid-scale – Basic accommodation provided with some amenities, but limited guest services and facilities (e. g. breakfast service, selected business services, fitness centre). 3. Upscale – More comfortable and attractive accommodations provided with a broad range of facilities, amenities, and services (e. g. spa, business centre, concierge, recreational facilities). 4. Luxury – Highest standard of accommodation that offers an extensive range of amenities, guest services, and facilities (e. g.
first-class restaurant, extensive entertainment facilities). In general, business travellers tend to stay at upscale and luxury hotels, as well as the better mid-scale hotels. Leisure travellers tend to stay mainly at mid-scale and economy hotels. The Internet’s increased popularity has had a major impact on the tourism and accommodation industry over a relatively short period of time. Major on-line travel sites (e. g. Expedia. com®, Travelocity. com®) offer Internet-savvy consumers booking options that go beyond simple transactions such as point-to-point air and hotel reservations. The “book-it-yourself” traveller is becoming more prevalent.
Consumers are taking greater control over their travel plans by using the Internet to not only gather information, but also to compare prices and options to locate the best deals available, make reservations directly, and arrange for payment directly. Another industry trend is the increase in hotels that are associated with a brand name chain (e. g. franchises). Industry reports show that these hotels perform better than hotels that are not part of a chain. Associated hotel chains generally have more rooms, charge higher daily room rates, and have higher occupancy rates than independently owned hotels.
A major contributing factor for this superior performance is the use of a central reservation system (i. e. a guest booking system using a centralized computer and/or telephone answering service). As well, many hotel chains of all sizes offer frequent guest or other points programs to generate repeat business. CMA Canada 3 Backgrounder Sample Case for Video Storyboarding Exercise Certain government regulations impact hotels in Canada. These regulations cover such areas as real estate zoning, food preparation, liquor licensing, elevator safety, and property taxes. GR Hotels Corporation – 2007 Management and Organizational Structure
The company’s current summarized organizational chart is found in Exhibit 3. The structure involves a head office management group and the management of each hotel. The President and CEO of GR is Andrew Mayd. He was hired in 1997 by the board of directors to replace Arthur Gemron after an extensive search by a well known executive recruitment firm. Mayd is a hotel industry veteran. After graduating from college with a major in hospitality management 29 years ago, he gained experience working for three major hotel chains and one independent hotel, beginning at the front desk and working his way up to his current position with GR.
Walter Rames is the company’s Vice-President, Bookings and Promotion. He worked in sales and marketing with several different organizations before joining GR last year. His responsibilities include promotion and advertising for all GR hotels, as well as the central booking system. Caly Leblanc is the Vice-President, Services and People. She holds an MBA from a prestigious university and has worked her entire career in the hotel industry. Leblanc is responsible for overseeing the service levels at both hotels, focussing on generating and implementing new ideas for improvement. She also provides overall human resource management.
Matt Gleeson is the Vice-President, Facilities. He held positions with a number of property management companies before joining GR in 1991. Gleeson is in charge of maintenance and improvements of the two hotel buildings, properties, and facilities. As well, he is responsible for the purchasing function for both hotels. Manny Bluenose, Vice-President, Finance, joined GR in 2001 as the controller and was promoted to the vice-president position in 2006. He has a B. Comm. with an accounting major. Prior to joining GR, Bluenose worked for four years as a senior financial analyst with a community college.
His current responsibilities at GR include overseeing both the finance and information technology functions. Each of the vice-presidents is paid a base salary of $100,000 plus a bonus if corporate pre-tax income exceeds $2 million. They also receive other incentive benefits if personal objectives for the year are met. The other key people in GR’s management structure are the two hotel general managers: Luc Lavioli – Montreal hotel; and Sue Sutton – Toronto hotel. The hotel general managers are responsible for all hotel operations, including the front desk, 4 CMA Canada Sample Case for Video Storyboarding Exercise
Backgrounder housekeeping services, banquet services, restaurant, gift shop, and facilities. Lavioli started working at the GR Montreal Hotel in 1993 as a general labourer in the restaurant while he was attending college. After graduating with a three-year business administration diploma, he worked his way up through almost every department of the hotel until he was promoted to his current position in 2007. Sutton is a hotel industry veteran who joined GR in 1999. Each hotel general manager receives the same base salary of $85,000, plus a bonus equal to 0. 3% of the pre-tax income of their respective hotel.
Central functions, such as purchasing and bookings, require the hotel general managers and their staff to work closely with the head office staff. For example, the hotel general managers work together with the booking department staff to set the hotel rates for their individual hotels. At each hotel, all hotel staff report directly to the hotel general manager for on-site accountability and indirectly to the respective functional vice-president at the head office. For example, the head chef at the Toronto hotel restaurant reports directly to Sutton and indirectly to Leblanc, and the facilities manager reports indirectly to Gleeson.
Promotion and Booking GR advertises in the Montreal and Toronto telephone directory yellow pages and airports, as well as in certain national tourist magazines. GR also purchases pop-up advertising on the Internet with google. com® at a cost of pennies per view, where the GR advertisement pops up when a person uses the GoogleTM search engine to find a hotel in Montreal or Toronto. These advertisements are capped, so that once the authorized limit for the month is reached, GR advertisements stop. Some billboard advertising is used within two kilometres of the hotels, each of which has good highway access.
The company maintains a simple, user-friendly website, which allows online bookings at a small discount, as well as a central booking phone line at the head office. Table 1 describes the various modes that guests at GR hotels use to make bookings: Table 1 Mode of Booking Directly through the GR website Directly through the GR 1-888 central booking phone line Indirectly through travel agents who receive a small commission Directly at the hotel front desk, i. e. walk-ins with no prior reservation Indirectly through third party websites Indirectly through third party convention organizers
CMA Canada % of Bookings 37% 24% 22% 8% 4% 5% 5 Backgrounder Sample Case for Video Storyboarding Exercise In 2007, GR polled all guests with regard to their purpose of travelling and staying at GR hotels. The poll revealed that approximately 65% of guests were staying at the hotel for pleasure and 35% for business. Of the business guests, 3% were attending conferences held in the hotel. The poll also revealed that the average length of stay of all guests was three days. Board of Directors and Shareholders The board of directors of GR is comprised of five individuals.
Three are Gemron family members: Arthur (who founded the company), his eldest son Arthur Jr. , and his eldest daughter Genevieve. The other two members of the board are Mark Welly and Julie Saab. Arthur Gemron is a wealthy individual who owns a number of commercial and residential real estate properties through various corporations, in addition to the GR hotels. He serves on the boards of directors of the companies but is no longer directly involved in their operations. Both Arthur Jr. and Genevieve Gemron were active in running GR from its inception until 1997, when they retired at the same time as their father.
Arthur Jr. currently enjoys a life of leisure and Genevieve is a philanthropist in the area of children’s learning disabilities. Mark Welly, who retired in 1999, was the first general manager for the GR Toronto Hotel. Julie Saab is a long-time friend of the Gemron family and a lawyer. The board meets at least every second month to review progress reports, financial results, and major proposals presented by Mayd and selected members of the management group. In early 2007, the board prepared the following formal vision and mission statements: Vision: GR Hotels are the hotels of choice for travellers in Canadian cities.
Mission: GR Hotels provide clean, comfortable rooms and good quality services to business and pleasure travellers in Toronto and Montreal at competitive prices. Table 2 provides a list of the shareholders, who are all members or friends of the Gemron family: 6 CMA Canada Sample Case for Video Storyboarding Exercise Backgrounder Table 2 Shareholder Arthur Gemron Arthur Gemron, Jr. Gemron family trust J. E. C. B. Gemron Genevieve Gemron Julie Saab Eileen Poltski Total Less issue costs Recorded on financial statements Number of Common Shares 5,000 5,000 5,000 5,000
5,000 5,000 5,000 35,000 Price Paid per Share $4. 00 $4. 00 $4. 00 $4. 00 $4. 00 $4. 00 $4. 00 Total $ 20,000 20,000 20,000 20,000 20,000 20,000 20,000 140,000 5,890 $134,110 Description of Operations The company has a December 31 fiscal year end. The first quarter of the year is the weakest and the third quarter is the strongest. GR hotels strive to provide guests with as many small customer “touches” that a midscale hotel can afford. Although valet parking is not provided, each hotel has ample guest parking and bell staff are available to help carry luggage.
Upon checking in at the front desk, each guest is asked for their preferences in terms of such things as room location relative to elevators and floor, room decor, and smoking versus non-smoking (smoking is permitted on a few designated floors in each hotel). When possible, such preferences are accommodated. In addition to standard hotel room furnishings (bed, desk, chairs, television, clock-radio, etc. ), each guest room has a coffee maker, free coffee and related supplies, a hair dryer, an iron, and an ironing board. In each bathroom, complimentary soap, shampoo, and hair conditioner are provided.
Each evening, two complimentary fresh cookies from the hotel’s restaurant are placed in each occupied guest room. GR hotels do not have a concierge, but special inquiries (e. g. recommendations for nearby restaurants, shows, etc. ) can be made at the front desk. Although dry cleaning services are not offered by GR hotels, guests who require dry cleaning are directed to a local dry cleaning depot located within two blocks of the hotel. Express checkout service is provided, whereby the guest’s invoice/receipt is placed under the guest room door at 2 a. m. on the last day of the guest’s stay.
The total invoiced amount is automatically charged to the guest’s credit card, removing the need for the guest to check out at the busy front desk in the morning. If the guest does not CMA Canada 7 Backgrounder Sample Case for Video Storyboarding Exercise agree with any of the itemized charges on the invoice, the guest must visit the front desk where hotel staff will make the appropriate inquiries and adjustments. Each hotel has one restaurant and a very small gift shop. Approximately 80% of the revenues generated at the restaurants and stores are from hotel guests and 20% from local walk-in customers.
The restaurants, like the hotel, are value-oriented, providing basic family-style meals of good quality from 6:30 a. m. to 9:00 p. m. at reasonable prices. Although they do not provide room service for the guest rooms, the restaurants offer catering services for the events held in the banquet rooms. The purchasing department negotiates bulk purchases of supplies (e. g. hotel furnishings, linens, towels, toiletries, stationery, room card keys, maintenance, food, and other supplies) for both hotels and the head office. Occasionally, mutually beneficial special arrangements are made with suppliers.
For example, in early 2007, an arrangement was made with a foreign consumer products manufacturer that was introducing its inexpensive products in the Canadian market. The foreign company would supply GR with free soap, shampoo, and hair conditioner for the guest rooms and, in return, GR hotels would provide free advertising for these products by placing a flyer in the guest rooms that would indicate where these items could be purchased (e. g. Wal-Mart®) and their retail prices. This arrangement worked successfully in 2007 and negotiations are taking place for a similar arrangement for 2008.
Competition The Canadian and international hotel industries are very competitive. Competition within each of the four classes is based on numerous factors, such as ease of booking, room rates, location, room quality, housekeeping services, food and beverage quality and service, availability of additional facilities and services, and attitude of the hotel staff. The first quarter of the calendar year is generally the weakest across the industry in North America. Toronto and Montreal have a plethora of competing accommodation alternatives in all four hotel classes.
Some of the mid-range hotel chains that compete directly with GR are Wonderful Inns, Budget Hotels, and Home-Away-From-Home Hotels. Human Resources GR has at total of 221 full-time equivalent employees. Many are long-term, loyal staff and the average length of service is 12 years. GR management has always followed the philosophy that keeping employees happy will result in their providing better service to guests. One practice used is to automatically give employees raises of 2. 5% to 3% per year. Another is to use mainly full-time staff and limited part-time staff.
As a result of these factors, employee turnover is lower than the industry norm. Total salaries and benefits in 2007 are approximately $7. 3 million, by far the largest operating cost. Employees have various backgrounds, with those in higher positions holding diplomas in hospitality disciplines from community colleges. Salaries are higher 8 CMA Canada Sample Case for Video Storyboarding Exercise Backgrounder in Toronto than Montreal due to market factors and the cost of living. All staff, including the executives, take vacations only during the slow periods of the year.
The breakdown of the number of full-time equivalent employees in the two hotels is set out in Table 3: Table 3 Function Executives and head office Restaurant Front desk, including bell staff Housekeeping Gift shop Facilities Banquet services Other Total employees Number of Employees 33 60 34 39 6 12 20 17 221 Gratuities are an important part of the remuneration of many hotel employees, such as the restaurant, housekeeping, and bell staff. Consistent with industry practice, wages of employees who receive gratuities are lower than wages of other employees in the hotels. Finance, Information Technology, and Financial Reporting
Manny Bluenose directs the finance, accounting, and information technology functions of GR. The company uses the ENN™ accounting system and processes payroll inhouse using the payroll module of that system. All cheque processing and accounting are performed in the Toronto head office. The company’s financial statements are audited each year and have always been unqualified. Exhibit 4 provides summary financial information for 2005, 2006, and 2007. For simplicity, the amortization rates used by the company for accounting purposes are the same as the capital cost allowance (CCA) rates used for tax purposes.
Consequently, GR has no timing differences between accounting and taxable income. The CCA rates used by GR are as follows: CMA Canada 9 Backgrounder Sample Case for Video Storyboarding Exercise Hotel buildings Furniture, fixtures, and equipment Vehicles Computer application software, tools, tableware, kitchen utensils, and other small assets Computer hardware and systems software Parking lots Leasehold improvements 4% 20% 30% 100% 45% 8% straight-line Historically, the company has paid out most of its profits in the form of dividends to the shareholders, shortly after the year end.
A detailed line-by-line operating budget is prepared annually. Historically, the forecasted revenues and expenses used in the budgets have been fairly accurate in relation to the actual revenues and expenses. The budgeted amounts are entered into the accounting system and reports showing favourable and unfavourable variances are generated for management review each period. Banking GR has two chequing accounts and all its property mortgages with the Bank of Newfoundland. Over the past 16 years, GR has developed a good relationship with the bank.
Currently, the bank has only one restrictive covenant on the financial arrangements with GR – the company’s operating profit (i. e. earnings before interest, taxes, and amortization) must be at least 11% of revenues each year. 10 CMA Canada Sample Case for Video Storyboarding Exercise Backgrounder Exhibit 1 Selected Statistics for Accommodation Industry in Canada – 2007 Newfoundland Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Yukon Northwest Territories Nunavut Number of Establishments 425 220 571 487 2,965 4,302 664 831 1,569 3,277 167 99 37
Operating Revenue (millions) $ 164. 7 84. 6 327. 9 221. 8 2,346. 2 3,986. 9 647. 8 489. 6 2,214. 4 2,591. 1 73. 1 53. 4 32. 6 Operating Expenses* (millions) $ 138. 7 74. 3 279. 2 185. 3 2,025. 5 3,437. 0 570. 4 420. 2 1,791. 5 2,215. 0 66. 3 44. 9 28. 2 Canada 15,614 $13,234. 1 $11,276. 5 * Operating expenses exclude interest, amortization, and income taxes ** Operating margin percentage of sales = (Operating revenue – Operating expenses) / Operating revenue Newfoundland Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Territories/Nunavut Canada
CMA Canada Operating Margin % of Sales** 15. 8% 12. 2% 14. 9% 16. 5% 13. 7% 13. 8% 11. 9% 14. 2% 19. 1% 14. 5% 9. 3% 15. 9% 13. 5% 14. 8% Distribution of Revenue by Type of Service Meals and Rooms Alcohol Merchandise Service 62% 29% 1% 8% 73% 22% 0% 5% 69% 22% 1% 8% 68% 27% 0% 5% 62% 29% 1% 8% 63% 25% 0% 12% 36% 52% 3% 9% 52% 39% 2% 7% 57% 33% 1% 9% 61% 30% 1% 8% 51% 39% 3% 7% 60% 30% 1% 9% 11 Backgrounder Sample Case for Video Storyboarding Exercise Exhibit 2 Performance Metrics for Selected Hotel Groups in Canada for 2007 All hotels Associated chain hotels Independent hotels Large hotels (> 200 rooms)
Airport hotels Downtown hotels Upscale hotels Mid-scale hotels Economy hotels Mid-scale hotels – Montreal Mid-scale hotels – Toronto Average Number of Rooms 148 191 92 350 195 189 240 145 100 150 155 Average Occupancy Rate 66% 69% 62% 70% 70% 68% 73% 62% 54% 65% 64% Average Daily Room Rate* $120 $125 $105 $138 $110 $130 $160 $105 $78 $91 $100 Revenue per Available Room** $79 $86 $65 $97 $77 $88 $117 $65 $42 $59 $64 * Average daily room rate = Accommodation revenue per day divided by the total number of rooms sold ** Revenue per available room = Average occupancy rate x Average daily room rate