Economic-Based Analysis, Competitive Analysis & ROI for Retail Shop vs Hotel

Q.
Using the models of Economic-based Analysis and Competitive Analysis, evaluate and comment on the risk and returns of investments in Retail Shop (boutique) versus budget hotel.

A.
Earlier post on Past Year 2013 Q4 is referred here.

The economic-based analysis can be summarized in Table 1.3 of earlier post: Demand in Property Market here.

An approach would be necessary to evaluate the factors found to be common and different to each sub-sector of the property. This is in order to avoid confusion and overlapping arguments on the same interlocked elements. For example, factors like good flow of purchasing crowd would have positive influence on both the retail and hotel business. In fact, retail shops can be converted to budget hotels if it is approved by the local authority (local council). It all depends on the risk appetite of the investor when evaluating which is a better venture. A lot of the decisions are about the background of the investor, his risk appetite and his capital at hand.

Firstly, we look at Economic-based Analysis (extract from Hamid 2007).

Economic-based analysis for hotel:
The variables are -
Type of hotel and star rating (in this case budget hotel), visitors' arrival (domestic and international), hotel guest factors (average length of stay, number of persons sharing a room), annual average operating days, room rates, market share, consumer profiling, spatial characteristics of urban business, hotel's market share.

Economic-based analysis for Retail Shop:
The variables are -
Primary trade area, types of business, average floor size of business premise, state-wide per capita retail spending, population size, household size, per capita income, local and state per capita income differential, consumer consumption and spending characteristics, spatial characteristics of urban business, business' market share.

The similar variables are:

Type of hotel/retail business - where budget hotel is compared to say a retail boutique shop.

Type of segment of market - where budget hotel is for middle class business travelers (middle price range 3-4 days stay) compared to middle income working ladies buying shirts and skirts for office use.

Area size required - where budget hotel would need about 3-4 shoplot size compared to a boutique shop which may only take up a single shop area.

Basic fixed cost investment required - where budget hotel requires furnishing and equipment like air-condition, water-heater and television set, a boutique shop would not require much furniture and fittings apart from display closets and changing rooms.

Other variables are for example, ancillary activities up-stream or down-stream of the investment area. This includes availability of amenities and other source of business or employment activities to supply to the population staying at the area.

The table below summarizes the variables:

Variables specific to only retail shop and not hotel:

• Per-capita income of household surrounding the area,
• Population size
• Socio-economic status
• Consumer spending characteristics
• Spatial characteristics of urban business

Variables specific to only hotel and not retail shop:

• Star rating or grading of hotels
• Visitors' arrival (local, regional or international)
• Hotel guest factors (average length of stay, room sharing, etc.)
• Market share of various grades of hotels (how big is budget hotel business in the totality of hotels)

Hence, various considerations of the factors influencing the economic activities at the area would play the role in deciding which choice of investment is better of or worse of.

The specific variables of population and per-capita income of the population is key to evaluating the viability of retail shop investment but not hotel as local people would not be staying in the hotel. Therefore, a low socio-economic status of the population would not be encouraging for investment in retail business for Expensive Apparel sector. However, a cheaper labour cost may be good for running the hotel business.

Conversely, a tourist attraction would be able to cater for budget hotels, as backpackers are common nowadays. Not all tourists are going to stay in 5 star hotels anyway. On the other hand, if there is minimum tourism and more of office or business travelers, the surrounding industries would indicate such scenarios.

From the above analysis, hotel investment would demand a bigger initial investment outlay and may face uncertainty of business as it depends a lot on the business travelers who come to this place for ancillary activities - the multinational firms and manufacturing plant at the vicinity of the area. One other consideration is the accessibility of the area (transportation) as people who come in to the place are not resident of the area. Furthermore, the required space for budget hotel is much bigger than retail shop, which also takes up a huge investment outlay (acquisition or lease).

Therefore, as a whole, it is more risky to invest in budget hotel than a retail shop based on the analysis of factors above.

Secondly, utilizing the Competition Analysis

The similar variables are:

Types of existing competitors - where competitor of hotels (how many stars) and boutique (imported or local) are studied.

Segments of competitors - where premium market segment (5 stars hotel) and common segment of market for boutique is targeted.

Size of competitors - where big hotels or retail outlets are in the competition. Existing boutiques.

Price of competition - where hotel rates are high and merchandise are imported.

Market Share - how big a market share is targeted, is there still room for business?

Other factors are: Threat by New Entrants, Substitutes, Government Regulations and Price Strategy.

Based on the competitive analysis above, hotel investment seems to have higher burden of competition than retail shop investment.

The major reasons are existing competitors like 5 star hotels in the area which may already offer the same attractive packages for the business travelers. Next is the potential of substitutes like home-stay and better transportation which would cut down needs of overnight stay. Thirdly, the government regulations which may need further application and approval would post major risk in delaying the project. All these would render the investment risky. However, if the question above has assumed the budget hotel is already in place, this factor is not in consideration unless there is renewal of approval as required continuously.

Thirdly, the Return of Investment (ROI) Analysis
Higher risk may thus attracts bigger returns. However, is this the case valid as an argument for hotel versus retail shop investment?

Hotel Investment - risk and returns

Price pressure
Higher possibility for profit margin as 5 star hotel is already in business. Hence, the budget hotel would have a good start as it offers more affordable range of substitute. This is especially so when rooms are limited in the 5 star hotels. This requires further study on the room rates in the hotels surrounding the area, as well as locality of the budget hotel from the 5 star hotel.

Locality
If the budget hotel has good locality next to the 5 star hotel, there may be overflow of traffic from the 5 star hotel during peak seasons. On the contrary, if the 5 star hotel is a resort, and far away from town, the possibility to enjoy the overflow would be minimal, if not impossible.

Time to break even
As hotel investment is of higher quantum and thus borrowings are inevitable for the capital outlay, the consideration of time to repayment of loan is important. If the price pressure is stiff, and margins gets eroded due to entry of new players (as shop houses are abundance in the vicinity), the investment return is curtailed. Hence, the higher risk of investment.

Retail Shop - boutique risk and returns

Price pressure
As boutique is very much a smaller investment, hence the margin for profit is also smaller. However, due to the merchandise being fashion (personal taste) and brand related, high margins are certainly possible in some franchises. The returns on such merchandise can be very attractive. It is a very lucrative business for lady attire and dinner wears.

Locality
Good locality like being near to business centers/offices would attract big office crowd and hence branded outlets can have high margin and high retail turnover.

Time to break even
Boutique selling clothing would break even very fast as the capital outlay is small and the merchandise are sold usually with high margin especially for the branded goods. Another advantage is that it is usually unpublished pricing (as no two dresses are the same), hence flexibility of pricing is certainly added profit margin.

Thus, for return of investment, boutique investment looks more attractive than hotel investment.

Ref:
Mar Iman, Abdul Hamid. 2007. Property supply and demand. Penerbit UTM. Chapter 3 & 4. Pg 55-101.
Own accounts.