A drop in tourism coupled with a dramatic dip in Irish spending on luxury breaks means Matt and Sandra Reilly are feeling the pinch on their boutique hotel. Facing mounting debts and low-cost room offers by loss-making hotels, how can they compete?
MATT REILLY grew up in Galway where his parents ran a successful B&B. From a young age he took an interest in the business and by the time he started studying hotel management he had a good insight into the running a small hospitality business. Matt’s parents knew their son wanted to follow in their footsteps but they encouraged him to get experience of the tourism sector abroad before making a decision.
Matt spent almost 10 years abroad working in the US, Asia and Europe. He varied his time between large hotels in big resorts and small luxury properties in more out of the way locations. In 1999 he met Sandra Murphy while they were both working at a five-star resort in Mauritius. By this time Matt had decided that he wanted to open a boutique hotel in a city location aimed at the upper end of the market. He wanted the hotel to be located in a building of some architectural interest and it would have a bespoke fit-out that would reflect the best of contemporary design.
Matt knew this was going to be an expensive undertaking but he had saved hard for his dream and his parents had indicated a willingness to help fund the venture. On a visit home in late 1999 Matt had approached his parents’ bank and had been assured that a loan would be forthcoming.
Matt and Sandra married in 2000 and returned to Ireland with a tight schedule to identify, buy and fit out a property. They located a large four-storey, double-fronted Georgian building (then being used as flats) with potential for conversion into 20 spacious bedrooms. There was a sizeable rear garden which was suitable for off-street parking and they still had enough space to screen off the car park with a small Japanese-style garden. They could also add a conservatory that would run the width of the property.
The Reillys struck a good deal on the property and initially were comfortably within their budget. What subsequently put them under pressure was the cost of the refurbishment. They had built in a generous margin for contingencies but the property just seemed to eat money. Plans for the new conservatory building were put on hold and while they gutted the top floor and made it ready for use, they decided not to finish it until the business had started to generate some cash.
The end result of their labour was a stylish and meticulously-run small hotel. They focused on providing what they called “the ultimate bed and breakfast experience” and they ensured that everything – from the deluxe super king-sized beds to the fluffy bath robes and complimentary champagne – were the best that money could buy. Breakfast was a leisurely affair with an elaborate buffet that ran until midday. As the property had a wide choice of restaurants nearby the couple had decided that the cost of a chef and kitchen staff to run a full-service diningroom could not be justified.
Through their international contacts they attracted a steady stream of, mainly overseas, clients and the hotel was running at near full occupancy most of the time. It took a little longer for Irish people to start staying, but those who did were impressed and told their friends. By the end of year two the split between Irish and overseas business was roughly 50:50.
The brisk trade also helped the couple claw back some of the cost overrun on the refurbishment. Matt’s parents had not put a time limit on the repayment of their loan but Matt was keen to pay it back quickly.
As the hotel’s financial position continued to improve the couple opened up the top floor of the property which added capacity and also went ahead with building the conservatory. This gave them a space in which to start serving a traditional afternoon tea that quickly became such a hit with non-residents that a booking system had to be introduced. This continues to be a profitable revenue steam for the business despite the recession.
By 2004, the Reillys’ business had bedded down well but the couple were beginning to get a little concerned about the volume of new hotel rooms coming on stream. They were operating within a less cost-sensitive market niche, but with growing capacity driving down rates, they were not sure if people (particularly their Irish customers) would continue to pay a premium to stay with them.
The Reillys had not enjoyed any tax breaks on their initial investment but now their commercial landscape was being fundamentally changed by a combination of tax breaks, easy finance and the frequent inclusion of big hotels in mixed-use new developments. Unwilling to sit around and hope that things would improve, the couple decided to be proactive in tackling the challenges they now faced. The adjoining property had come up for sale and they approached their bank for an additional substantial loan to buy and refurbish it. They had no difficulty getting the money.
The couple’s logic was that adding additional bedrooms would help them achieve better economy of scale. They also decided to create meeting rooms and a large formal diningroom in the new property to attract small-scale corporate events and weddings. The second property had what at one time was a coach house and stables and this was ear-marked for development into a small spa.
What the Reillys had not planned for was the recession. Irish people who had spent heavily on hotel breaks during the Celtic Tiger years suddenly cut back and, with no growth in the number of overseas visitors coming to Ireland, the Reillys began struggling to fill rooms. They trimmed costs wherever possible but they also believed that with a luxury product there is only so far you can go before it begins to affect the integrity of the brand.
The couple are now under intense pressure and feel very aggrieved that what had clearly been a viable business is under threat because investors and the banks are unwilling to pull the plug on loss-making hotels either for tax reasons or because they are waiting for Nama to act. In the meantime the Reillys are servicing a huge loan on a property that has plummeted in value. In addition they are paying rates that bear no resemblance to commercial reality while costs such as energy have sky rocketed because of the cold weather. They are also finding it very difficult to raise working capital even though they have almost 10 years’ successful trading under their belt.
Despite mounting problems, the Reillys want to weather the storm. They are proud of what they have achieved and want to do whatever it takes not to be forced into a fire sale. Given the substantial investment they have made in both properties and the loans outstanding as a result – which amount to around €3 million – they suspect that selling would not raise enough to solve their current difficulties.
They are already considering if it might be possible to change the use of one or both buildings. Another option under consideration is closing during the low season. But whatever they do, decisions need to be made – and fast.
How can the Reillys adapt?
THE EXPERTS' ADVICE
"They need to focus on what exactly they stand for and deliver it. More structures, more space, more infrastructure will not save a hotel"
THE REILLYS' situation mirrors the economic realities faced by a very large percentage of hoteliers operating in Ireland today. Not only is their business competing with otherwise unviable hotels which are effectively being run by the banks but they are being crippled by excessive local authority rates and restricted access to raising working capital.
The Reillys developed a strong business initially with a predominately room-based operation that was attractive to the high-end boutique-style visitor.
Given the severe pressures the business now faces, the Reillys must carry out an in-depth examination of all the business's outlets to identify those that are contributing to profitability and those which are burning available cash flow. They must assess all cost drivers and renegotiate with all suppliers on a quarterly basis.
The addition of the conservatory provided the hotel with a day-time business that continues to be profitable; however, it is safe to presume that the hotel's formal dining room is not profitable as many hotel restaurants find it difficult to achieve profitability. Change of use to a bistro/bar outlet should generate better return than formal dining.
Labour costs are likely to exceed 40 per cent, so it is imperative that rosters are monitored and costed against business forecasting to eliminate waste and excesses in manpower. The Reillys need to consult their team on the difficulties facing the business and they need to secure their buy-in and participation in devising the restructuring plans.
The luxury element of the hotel's offering should be reassessed with a view to toning it down while not alienating the existing customer base. The breakfast operating hours should be shortened to 10am and champagne should be charged for as an extra, etc.
The Reillys should engage with their lender and seek advice on the possible options available in terms of capital repayments and working capital.
A 24-month holiday from capital repayments could give the business a much-needed breathing space to devise and implement a new strategy. Sale of the old coaching house would contribute to a reduction in the overall debt of €3m.
As an independent hotel, the business would be well served by joining a marketing group of similar operators to tap into new markets that the Reillys clearly cannot afford to target on their own. A strong web presence is also a necessity.
Finally, the Reillys would benefit greatly from the advice of an industry mentor or a consultant who could forensically assess all aspects of the business without the personal baggage that clouds an owner's perspective.
– Paul Gallagher, president, Irish Hotels Federation
THE REILLYS have a vision. They have energy. They have courage. They have experience, international exposure and understand the guest experience. They have just one option – survival. Survival comes first; success always lies on the far side of failure.
Cash and cash flow are life blood. This is the first priority. That means talking to their bank about their plans, not just "looking for an overdraft". They need to sell their dream, stabilise their support and maintain constant contact. Banks work on relationships, relationships are built on trust. The Reillys must have a really clear message for their target market, assuming they have already defined it. They need a plan to communicate their offer and, most importantly, their difference.
Telling the market that you are all about price will return just that – a price-aware consumer. There will always be someone cheaper and the race to the bottom will end in death. The guest must be seduced by the experience, the adventure, the indulgence, the fun and the people. The Reillys need to understand what makes them different, what their unique message is and to find the marketing tools to take them to their market in an agile alternative way.
At the moment the couple run the risk of being all things to all men. They need to avoid competing with large hotel brands and offer all the ancillary services only an intimate hotel can deliver. For example, tailor-made weddings will appeal to a niche market whereas offering bedrooms at reduced rates will kill any sense of being boutique and it is difficult to compete with the big brands on meeting space.
They need to focus on what they stand for and deliver it. More structures, more space, more infrastructure will not save a hotel.
A key issue is what will bring customers in? Word of mouth and a great guest experience. While hotels are cutting costs, cutting must eventually be replaced by planting, nurturing and growth. Product is fine but it is people who create the experience. The Reillys need to spend time infusing their staff to be great salespeople, ambassadors and creators of wonderful simple memories. Too often money is spent on product yet the "actors" create the mood. Most importantly, they must avoid panic and confusing urgent with important.
The hotel business needs to return to basics. Great service, great people and great effort will reward and forgive a multitude of cuts. The opposite is not true.
The Reillys must constantly innovate, try new things and listen twice as hard. If they remember that great experiences come from simple ideas and super people, their beautiful hotel will weather the storm.
As Alfred Dunhill said: "Quality is remembered long after price is forgotten."
– Conor Kenny, principal, Conor Kenny & Associates, sales and marketing consultants to the hospitality sector
SACRED COWS make great hamburgers and the perceived wisdom of continually adding vaguely related products to generate incremental gross margin should be outlawed.
Long-term success comes from having a clear and enduring set of values which, in turn, form the basis for innovation and execution year after year in good times and in bad. Being successful is a grind with vision and purpose and in a sense the Reillys already know this.
The Reillys are exactly what Irish tourism needs – they are second generation hoteliers with hospitality and service imprinted on their DNA. Unlike many hotels now destined for Nama, this hotel was built with real vision and purpose by real hotel keepers. This, in itself, is what will ensure its eventual success.
The Reillys should trust their instincts and keep to the initial plan, to create the "ultimate BB experience" in a unique setting. The market does not need more formal dining rooms, spas or meeting rooms. The emphasis now needs to be on providing experiences which are not ostentatious but centre on uncompromising quality. The afternoon tea product is a perfect example of this.
The first step should be to stem losses and take the pressure off working capital. Will the bank re-negotiate the loan with an interest-only repayment schedule backed by a revised business plan? Or grant a moratorium? Alternatively, the Reillys might consider an equity partner, preferably someone who could add value to their business. Maybe Matt Reilly's parents might provide a further preferential loan? Once the pressure is off the monthly repayments then other action may be taken.
Next might be to find a trading partner such as an upscale boutique caterer with whom functions, particularly weddings, could be jointly operated.
Finally, the Reillys should focus on marketing. Co-operative, destination marketing with like-minded brands should definitely be explored, particularly in relation to the overseas market. The Reillys could join or, indeed, establish an international marketing consortium of city centre boutique accommodation.
– Pat Delaney, managing director, Ovation destination marketing consultants
