If there’s one thing we’ve learned from our 26 years of experience and involvement in the hotel industry, it’s how important a feasibility study is when opening a hotel, resort, hostel, or any other type of lodging. That’swhy, in this article, we’ll explain the steps involved in conducting a proper hotel feasibility study:
Table of Contents
1. Location Analysis as One of the Steps in a Feasibility Study
Location analysis is the first step in a feasibility study when planning to open a hotel or other hospitality establishment. In this case, you should consider whether the location you have in mind has a good transportation system and access roads in good condition.
In addition, you should consider whether the area is close to business districts, natural parks, tourist attractions, schools, universities, hospitals, restaurants, bars, shopping centers, and airports. All of these are important factors because they are the main drivers of demand.
2. Research local hotel supply and demand
Gathering information on hotel supply and demand in the area where your hotel will be located is the second step in a feasibility study for a hotel project. To do this, you need to gather data on the main hotels in the area—that is, your direct competitors.
Data on supply and demand can be obtained from statistical agencies, tourism agencies, tour operators, online booking platforms, and other tourism organizations. This information will help you make projections regarding occupancy rates and the prices of the services the hotel will offer.
3. Calculating the total costs involved in the steps of a feasibility study
The third step in a feasibility study is to determine the total investment for the project. This should include the initial costs of the business’s infrastructure or architecture. In addition, operating costs must be calculated to get the hotel up and running. These would include: taxes, licenses, and insurance; utility costs such as water, electricity, and internet; and costs related to human resources, technology, and facility equipment, among others.
Performing this calculation will be essential for projecting the return on investment and for seeking financing if necessary.
4. Setting Room Rates
Once the hotel’s location, local supply and demand, the establishments with which it will compete directly, and the total investment costs have been determined, you can proceed to set the prices for the services.
Room rates and their complementary services are established. Projections regarding demand trends (occupancy levels) throughout the year must be taken into account, as demand varies depending on factors such as the seasons.
For example, if we’re talking about a beachfront hotel, demand will most likely be high in the summer, and that should factor into pricing.
5. Make projections regarding revenue sources
Analyzing the different revenue sources for your hotel is another important step in a hotel feasibility study. In this case, your hotel’s main revenue will come from guest stays, as well as from the F&B (food and beverage) department and from the rental of meeting and event rooms.
Now, with projections of your hotel or resort’s annual occupancy rates, you can forecast sales for the property’s main departments.
6. Return on Investment (ROI) Projections
The final and most important step is to prepare projections for return on investment (ROI). To calculate ROI, you must use various financial performance metrics. For example, the IRR (internal rate of return) and DCF (discounted cash flow), as well as the NPV (net present value), among others.
Calculating this financial indicator will let you know how much money you’ll be investing. It will also help you determine whether the return on investment will be good, or whether you need to make adjustments to optimize the project—and even whether you need to seek out investors to carry it out.
Completing all these steps in your feasibility study will allow you to present a clear and detailed report. And having a clear understanding of the situation is essential to feeling confident about moving forward with the hotel project.
If you need help developing a hospitality project, please don’t hesitate to contact us. IHCS is a hospitality consulting firm with more than 215 successful international hospitality projects under its belt.
