My Trip to Grand Lagoi by Nirwana Gardens

I went to Grand Lagoi Hotel for a short break. They were running a 1-for-1 night stay promotion. My objective was to read my book titled “Exponential Organisation” and think about how I can grow the GIM community properly.

(source: https://www.grandlagoihotel.com/offers.html) 

Upon arrival, I realised something. The occupancy for the hotel was very low… there were hardly any guests.

During my first night, I dined at their rooftop restaurant. There were barely 6 diners during peak hour, In fact, there were more staff than diners.

I was not complaining at all because they were very attentive to me!

As an investor, my mind started to form a thesis about the unit economics of their business model.

You see, hotels have high operating leverage. They can increase their revenue without increasing their expenses proportionately. On the negative side, they have high fixed costs, which eat into their profits.

To operate a restaurant, you have need minimum 1 chef and 2 helpers. In the same manner, for hotels to operate, you will need a certain number of staff headcount as minimum. This is considered the fixed cost.

For hotels, the main revenue-generating asset (the hotel rooms) are there already. If they are vacant, the hotel is not making any money. If the rooms are occupied, the hotel makes ~$100 or more per room.

What about the cost to service the room? The rooms need to be cleaned and someone has to change the bed sheets, restock the pantry, and replace the soap. These costs are already sunk in because the cleaner is still being paid regardless whether he/she cleans 10 or 15 rooms per day. The remaining variable cost would be the price of stocking bottles of water, teabags and cleaning the linen.

Knowing this, doe it make sense for the management of a hotel to lower their rate for an overnight stay from $200 to $180 to bring in more customers?

Absolutely YES!

That’s why you see substantial off-peak discounts.

During off-peak seasons, hotels tend to do a few things to further reduce costs.

In the case of Grand Lagoi, I extended my stay to Monday, even more off-peak compared to the weekend.

I noticed a few things. Grand Lagoi shifted the breakfast place to a smaller location. There were less food variety to choose from. The management also shut down one lift to save on electricity costs.

I really have nothing to complain because I was already getting the night stay at a substantial discount.

What are the lessons?

Three points to highlight:

1. I am unlikely to invest in the hotel industry because their performance could be adversely affected during a downturn.
2. A hotel is not scalable. It takes time to a hotel asset to mature and gain normalised occupancy rates. Both Marriott and Hilton managed to gain scalability by adopting the franchise system. They license their brand names for existing hotel owners.
3. You want a business model that is able to scale yet it is able to cut back on fixed costs when times are bad. Just like a sponge!
   I’ll do another post to share some of my investment learnings!