FIVE STAR HOTELS IN HONG KONG: A BUSINESS PLAN
Abstract
Hong Kong is undoubtedly one of the best investment destinations in the world particularly those that are FDI in nature. This business plan found that HK is indeed a suitable and inviting investment destination of five star hotel investments. PEST analysis shows that political, economic, social and technological factors are conducive and less risky for foreign players. Porter’s five forces concede the attractiveness of the luxurious hotel industry even partially tarnished by high bargaining power of customers and tourists. SWOT analysis depicts the findings of PEST and five forces and suggests that weaknesses and threats are mitigated by strengths and opportunities.
Introduction
There are a number of five star hotels in Hong Kong that can relive the history of the industry. One is the old Peninsula Hong Kong which is noted as the oldest hotel in Hong Kong (2003) Built in 1928, supported by the idea of becoming the finest hotel east of Suez, its location alone serves as the key to its historical success (2006). The place is the last stop of the Siberian-European train as well as the port dedicated for Kowloon visitors. As a result, it took advantage of the traveling wealthy visitors and from then on its name became similar to welcoming rich and famous people around the globe. Currently, this tradition lives on as the hotel continuous to be a global setter in industry standards having the most spacious hotel rooms in HK, shuttle servicing using Rolls-Royce limousines/ helicopters, the state-of- the art facilities and modern standards (2006).
This paper will present a business plan for prospective five star hotel (FSH) investors who want to join the industry within HK borders. In addition, presently operating FSHs can also learn from this presentation as it may aid their decision-making. It will tackle important aspects in starting a business like PEST analysis, Porter’s five forces model and SWOT analysis including recommendation and conclusion. The example of Peninsula shows that a strategic location is a means to be successful in the industry. However, location is merely part of the success parcel because there is a need to adapt in ever-changing customer demand, industry standards and other environmental factors. In the past, there are hardly “modern facilities”. But today, such features of a hotel are treated as an acclaim and marketing plot.
PEST Analysis
Political/ Legal Factors
According to (2003), the non-intervention policy of the Mainland regarding the economic activities is an indication of political indifference of HK people that ultimately give the region political stability (p. 473+). In addition, political apathy gives HK the acknowledgement as one of the less restricted business area in the world (2003). In the contrary, Lam concluded that the definition of political indifference in HK requires further investigation to include the implicit factors like publicities generated by the media. However, digging deeper to the issue through media reliance would not be available in the short-run because the 1999 challenges faced by HK media (e.g. Chan incident, false SARS news and photos of famous naked actress) are still lingering (2006). Not until these challenges are addressed, the extent of adverse impacts to credibility of the government-controlled media in Mainland and private-ownership media in HK may as well be comparable leading to further political indifference and stability.
Although HK already has political, cultural and economic independence from the Mainland and British authority, it remained under the direction of the Mainland in the aspect of military and foreign relations. Due to this, it is quite rational to believe that HK is at the risk of military invasion but this is not discernable this early or until at least after forty years when the assured full autonomy given by the Mainland will lapse (2006). Being the second largest foreign direct investments (FDI) destination in Asia after China, the legal framework for contractual enforcement in HK is lucrative because there is a free flow of capital, clean government and adherence to international standards (2005). Further, the dependence of the region in China’s trade relation contracts to other developed countries (e.g. USA) is not eminent when it comes to FDI because such Mainland’s attachment occurs largely on exportation and importation operation or the tradable goods sector ( 2006).
HK also became an FDI destination because of its low corporate income taxes which is comparatively lower in global standards ( 2004 ). However, as the region demands higher revenue performance from its taxation (2006), corporate income tax can escalate in which the region can confidently apply without being anxious to the already established foreign businesses. In the positive side, the region mitigates double taxation as the presence profit tax provokes the absence of capital gains tax ( 2005). As a result, foreign investors especially the shareholders can maximize their investments in both long- and short-term perspective. Every hotel is required to expose their blueprints to local authorities (e.g. Department of Architecture) for inspection regarding safety standards ( 1995) which implicitly demands a global hotel company.
Economic Factors
The economy of HK is currently under a strong GDP trend for more than two years wherein the foreign sector highly contributed especially due to high exports and imports (2006). Inflation is rising since 2005 that indicates that the purchasing power of HK consumers is increasing. This is supported by the falling unemployment rate from 9% in 2003 to 4.7% in 2006. Further, the economic autonomy of the Mainland for the region implies minimal intervention of government in the free market. In addition, this advantage is intensified by the strengthening trade relations of HK and Mainland in which more companies of the former will be allowed to do business in the latter. In effect, HK will be able to exploit the large market possibility from the Mainland that can result to continued increase in macroeconomic indicators (e.g. GDP, purchasing power and employment rate).
When it comes to stability of currency, HK dollar is pegged to US dollar (Rajan & Siregar 2003 pp. 1325-1356) which makes the former sensitive to the national development and issues of the latter. In the contrary, since 1983, the currency of HK is semi-fixed with the US dollar at HK.80 for every US dollar. This makes HK currency less susceptible to US-based economic problems (e.g. terrorism effects, recession). Aside from this, the strength of the currency is guaranteed by monetary authorities as only banks with equivalent US dollar reserves will be able to issue the counterpart HK dollars (2006). HK is a financial center and has expertise in financial, securities and related services that are world-class (2006). In addition, the potency of its financing capability is supported by gradual liberalization of financial markets in the Mainland that results in a closer relationship between them. Additional source of expanding its finance sector is on gradual process.
Further, the labor force of the region has an empirical evidence of having high earnings mobility (2001). This means that employees have a habit of working hard to be able to rise in the higher level of earnings distribution. Mainland immigrants especially the males are not discriminated in HK due to their lack of skill or educational qualification rather on the fact that they are from the Mainland (2006). As a result, businesses can exploit the contagious discrimination to motivate the large pool of Mainland immigrants to apply and work hand in their relatively warm working environments. In terms of foreign visitors, 2005 figures showed 23.4 million visitor arrivals or 3.4 times the size of the population (2006). This indicates a 7.1% increase year-on-year and continued increase in tourist arrival. Also, it is a popular venue for hosting regional headquarters making the supply of executive visitors abundant.
Social Factors
Hong Kong is bounded with two distinct cultures; namely, Chinese and Western (2006). Due to this, although at least 90% of the population has Chinese descents, HK people are developing individualistic attitudes which are shift from the former collectivist culture ( 2004). The region has also one of the liniest open-economy where foreign traders can easily penetrate the local market (2003). According to (1997), each dominating political ideology, economic principle, legal system, or perhaps the delicate religious order descends from an existing and dominant culture. The former are merely spots within a bigger latter. To rebuild a new culture entails exhaustion and elimination of a minority culture by a more dominant one (1996). In the contrary, the region overtakes these theories and makes an identity framework of its own. For example, HK customers are far more sophisticated and demanding than ever when it comes in selecting products/ services (2006). On the other hand, only the minority of HK populace uses online shopping and prefers of mall-like appeal. Hotel occupancy rate is at 86% for 2005 and industry players are adding more rooms in their infrastructure to attract customers specifically the local ones.
Most of the HK visitors are in the region to deal with business, as a tourist or shore excursionist (2003). All three of which requires a place to stay and since the number of tourist basically exceeds the local population there is a strong demand for hotels. For a high-end market oriented industry to utilize this opportunity, industry players are required to address active complainers with regards to hotel service which are commonly characterized as young, better-educated and belonging to the high-income bracket (2003 ). There is definitely demand for hotels but coherent and dynamic strategy should be employed to be successful.
The demand for hotels is explainable by some theoretical frameworks and since there is a large share of foreign visitors in HK (Partner Net 2006) there is not one single culture that can be analyzed. Tourists requires tourism attractiveness as well as the quality of linkages that connects them (e.g. transportation, information/ marketing, pricing) (1998 ). As demand accelerates, supply will also evolve accordingly due to their positive relationship. In a more specific model, travel flows are the result of political and economic prosperity/ affluence of the travelers (p. 80). In this view, their demand is compatible with the nature of hotel industry in HK (e.g. five star hotels).
Technological Factors
In terms of infrastructure, the region has several development plans on its harbor-fronts, new town and renewal of the urban areas including Kai Tak (2006). Tourist-oriented infrastructures will be enhanced such as kaleidoscope, constructing new tourist attractions, development of west Kowloon cultural district and other historical buildings. Transportation is being expanded wherein the endeavor of linking Mainland with rest of the world is slowly taking phase. Over 100 kilometers of new roads are expected to be completed on 2008 which started ten years ago. The hugeness of transportation industry which signifies the mature transportation development in the region is proved from the forecast that 80% of the employment pool will serve the industry. Improvement in logistics will also improve the attractiveness of the region for businesses particularly those who are exporting/ importing. Amid these developments, the region prioritizes environmental protection which serves as another incentive for the potential tourist. HK is not only an industrialized region but more importantly a sustainable-oriented economy. Despite possible fleet and traffic congestion, it aspires for cleaner harbor and air ( 2006).
Porters Five Forces Model
The Nature of Five Star Hotel Industry
Five star hotels enjoy the cost advantage against small hotels or even motels. As they tend to be large and well-known, they can obtain economies of scale from their purchases of high-end items to maintain or repair their establishments. In effect, customer predation from small players is unlikely due to size, financial and marketing differences. The products and services of the industry are highly differentiated from the competition. This is because affluent owners of these businesses cannot afford to be driven away by new product developments. Their future profitability relies on this strategic move. However, dedicating a specific capital to go on with the expensive competitive reactions requires also committed investments in the form of real assets. As they are illiquid, decision of financing is very important because there is seemingly no backing down once investment is employed.
Switching costs in the industry is relatively low because HK have a number of luxurious hotels or at least fifteen around the region. This is obvious especially that the customers are relatively meticulous and wanted convenience/ flexibility. As long as the hotel is a five-star, switching costs (e.g. physic costs) tends to be insignificant especially when customers have corporate purpose. Distribution channels are important to such hotels especially on its backward and forward channels. The former helps it maintain the level of quality of the service through modern facilities and appropriate foods while the latter (e.g. airports) supports its marketing schemes and attract customers. Desirable location like the scenery of Kowloon Harbor may not be available to prospective investors because it is already occupied by two five star hotels being Peninsula and Intercontinental. In effect, there are cost disadvantages independent of scale. Government policy regarding hotel establishment is rigid primarily due to the SARS outbreak that necessitates sanitary standards to be complied by hotels. Expected retaliation is undeterminable because each five star hotel has its own distinction and culture passed to its customers. Pricing strategies are less significant to receive retaliation from facility upgrade, improvement or increase in branches and direct intention to rip off the already served market.
The bargaining power of suppliers tends to be less powerful in the industry because thee are few large companies that can afford to buy their offerings. Five star hotels can simply choice to export needed materials if current suppliers apply very restrictive customer contracts. Since the number of hotel customers is far smaller than the suppliers of hotel equipments, accessories and other materials, suppliers are not in the position to get too much from them. Further, the bargaining power of customers tends to be stronger because they are very scarce in supply and vying for value. As such, traditional approach to business (e.g. price-based marketing) is less useful. This mere admonition gives the idea that five star hotels are vulnerable to customer perception about their service and will do their best to keep customer loyalty and trust. Threat of substitute products like small hotels and motels has minimal effects to the industry. It is shielded from the business model of mass production rather on value-creation. It has also a more determinable and highly-classified customers (e.g. known, wealthy and business titans) whom the former types of hospitality establishment are not able to satisfy even in partial terms.
As there are quite numerous five star hotels in HK and they are also equally balanced, a competitive action from one player will cause vigorous response from the other especially when the latter target market is at stake. The industry is characterized as slow growth as “poor becomes poorer and rich becomes richer” principle. Wealthy people or 20% of the global population have control to the 80% of global resources that makes the customer base static stiffening the available market in which industry players would be competing. There are also high fixed costs when these firms are investing in both star-up and operational. This is the situation in relation to having a very conservative and stiff market base which imposts aggressive marketing campaigns to recoup the investment. The industry has also high differentiation exemplified by its players as they want to sustain and attract customers and prove that their service is valuable. Companies also have high strategic stakes especially when investments are located in metropolitan centers such as HK. Lastly, there is the presence of high exit barriers arising also from high strategic stakes in five star hotels and substantial investments required.
Table 1
General Forces
Specific Forces
Rating
Threat of new entrants
Barriers to entry
· Economies of scale
High
· Product differentiation
High
· Capital requirements
High
· Switching costs
Low
· Access to distribution channels
Medium
· Cost of disadvantages independent of scale
High
Governing policy
Medium
Expected Retaliation
High
Bargaining power of suppliers
Low
Bargaining power of buyers
High
Threat of substitute products
Low
Intensity of rivalry among competitors
· Numerous or equally balanced competitors
High
· Slow industry growth
High
· High fixed costs or high storage costs
High
· Level of differentiation or switching costs
High
· High strategic stakes
High
· High exit barriers
High
An attractive industry is one that can provide the platform for a firm to earn above average returns from its invested capital ( 2001 ). An attractive industry has high entry barriers, low bargaining power of suppliers and buyers, low threats of substitute products, and not-so-fierce rivalry among competitors. In relation to five star hotel to be established in HK industry, prospective investors are confronted by high barriers to entry, low bargaining power of suppliers, high bargaining power of customers, low threat from substitute products and high intensity of rivalry among competitors. Overall, HK five star hotel industry is attractive but it should be noted that the “customer is the king” is largely important to be successful.
SWOT Analysis
Strengths
- Long-term relationships with suppliers
- Ability to implore economies of scale
- Highly differentiated products
- Presence of industry standards and government policies
- High rise buildings is an automatic advertisement
- Tends to induce customer loyalty
Weaknesses
- Depletion of strategic location and sites
- Large investment needs and hard-to-mitigate investment loss
- Small customer base
- Value-oriented marketing scheme results to limited strategic choice
- Sensitive to terrorism and epidemic disease outbreak
Opportunities
- Free market with minimal political intervention
- Destination of global FDI
- Low corporate income taxes
- Mitigated problem on double taxation
- Prosperous economy
- More active trading and financial relations with the Mainland
- Stable currency back-up with US dollar reserves
- Quality banks
- High earnings mobility of the labor force
- Having large labor supply from the Mainland
- Continued increasing tourist arrivals
- Support of theoretical frameworks in tourism analysis with regards to HK
- Modern infrastructure, sufficient transportation, environment-friendly and culturally-dedicated
Threats
- Tarnished media reputation
- Absence of military and self-defense as a region
- Pressing need to raise taxes as a source of government revenues
- Rigid authority inspection in hotel infrastructures
- Quite unpredictable HK people culture and preference
- Over-complaining from high-end market customers
- Difficulty in analyzing different cultural preferences
Recommendation and Conclusion
The business plan proved to be an effective measure to appraise the idea of investing in HK luxurious hotel industry. PEST analysis enables to identify opportunities and threats in HK business environment while Porter’s five forces model identifies five star companies nature of operations. SWOT analysis shows that the strength such as highly differentiated products between industry players can mitigate the weakness of having limited strategic locations left in the option of prospective investors. Further, the opportunity such as free market with minimal political intervention can mitigate terrorist acts within its borders. This technique is recommended to rationalize decision-making. Overall, it is advisable to build a five star hotel business in HK.
Credit:ivythesis.typepad.com
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