“Top Management”
When the dream becomes a nightmare
This scene repeats itself with almost frightening regularity. A potential investor sits in front of me, looking for help with the development of his tourism project. They often refer to it in an emotional way – “I have this dream” -, and assume, from the outset, their own limitations of knowledge – “I know nothing about hotels. That’s why I came to you.”
So far so good. It looks like the beginning of a promising project, with a motivated and receptive client being supported by a consulting team with specific skills. That’s what I’m selling. But the illusion is short-lived. Suddenly, the architectural project – already licensed –, the application for the “Portugal 2020” European incentive program – already approved – and the project schedule with the plea of urgency – construction will start next week. That’s the moment I realize that the investor does not need me. Our conversation would have been important … a year earlier.
When I arrived in this industry eleven years ago, it was condescendingly described as “making beds and serving breakfast”. It is this wrong perception that still today grounds the illusion, of many small investors, that opening a hospitality business is like welcoming friends at home. It never was. While it is true that this was once a relatively simple business, it is also undeniable that complexity has increased exponentially in the last ten years. If it that weren’t the scenario, I would still be in banking.
The dynamics of evolving consumer needs, multiplication of segments with increasingly specific needs, growing complexity of distribution, greater technical and analytical demand for pricing and inventory decisions, the total transparency brought by social media ratings… are just a few examples of how the industry has become more sophisticated, requiring increasing professionalization and competences from management teams.
It is, therefore, worrying to see these investors – often families who are investing their life savings – make such important investment decisions based solely on sensitivities, intuitions and personal tastes. From there to the architectural project and application for PT2020 funds is just a small leap.
Without specific tourism and hotel operation skills, application projects end up being rich in keywords that the consultant knows will arouse the interest of evaluators. However, these lack the creation of a differentiating concept, a product and positioning strategy, a minimally substantiated idea about the market and its needs.
The resulting business plans end up highlighting, in the rawness of the numbers, the lack of knowledge of the reality of the sector. Even in the absence of a USALI format, which would allow us to glimpse the operational reality behind each department, the red flags are impossible to ignore: occupancy and average rates inappropriate to the destination (or lack thereof), utopian lean payroll structures, hotel managers earning little more than the minimum wage, absence of commercial or management commissions, completely unrealistic Operating Result or EBITDA margins: “Excel can handle it all”.
I usually tell my clients that we don’t do the work of incentive fund application consultants – we have a specialized partner for that -, but the least I would expect is that they wouldn’t try to do ours. These are complementary and sequential perspectives: first, the concept of the hotel is created and the return on investment is evaluated; Then, if the return is positive (and adequate), and you decide to move forward, it makes sense to think about applying for funds. Trying to reverse or combine the two stages is a guaranteed recipe for disaster.
I measure my words carefully when I say “disaster”. Once the financing grace period ends, the operation must generate cash flow to pay it off. And that non-refundable component that they promised you… depends on meeting the agreed targets.
This is normally the second time we are contacted. And then, I no longer come across dreamers, but disillusioned business people, often families with their savings destroyed, clinging to bad projects for life. Projects that, with adequate studies and advice, would never have gotten off the ground.
And then, the dream became a nightmare.
A CONTRIBUTION FROM…
José Manuel Esteves | General Director of AHRESP
From your experience, do investors undervalue the complexity of the hotel business?
For five decades, we have witnessed various cycles of undervaluation, I would even say irresponsibility, in hotel investment in Portugal. Except for honorable exceptions, we have seen it all, from the “tourist real estate” in the Algarve, which more than 40 years ago gave precedence to the real estate developer to occupy the coastline with hotels and tourist villages, initiating the poorly executed Time Sharing System. Moving on to the initial financing from the Portuguese Tourism Board and European Union funds, where everyone rushed to invest, back in their hometowns, at the request, and even under pressure, from the Mayor. A reality up to the present day, just because “Tourism is what’s happening.”
What are the main gaps and difficulties for investors?
As Filipe rightly says, they cannot invest without first assuming what they are. Are they investors, or entrepreneurs, or business people? Are they knowledgeable about the activity, or are they “touristologists”, because they have traveled a lot, and slept in many hotels and dined in many restaurants? And besides, the daughter is an architect, and the son is a lawyer? It is obvious that the temptation of “friends” who facilitate the approval of projects and financing will lead them to the path of perdition and force them to hand themselves over to the banks and recovery funds, when it is already too late.
How can those gaps be mitigated, and the risk reduced?
As Filipe once again says, investors must respect themselves and do not invest 1 euro without first listening to experts. Especially nowadays, when the complexity of the tourism market requires very competitive, well-segmented and clearly differentiating hospitality offers. As a final positive note, we must always bear in mind that, even when a travel destination is in decline, if not due to a natural calamity or security risk, a well-structured tourist product can be in fashion.
Written by Filipe Santiago
September, 2018
This article was published in Publituris Hotelaria as part of the “Top Management” series. You can access the printed version here.

