ROKO H OTEL

Profitability Low difficulty

Leisure & tourism Interviewer-led case

This case focuses on the profitability challenges of an established hotel in Paris.

The case has an extended but heavily interviewer-guided numeracy section.

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Problem definition

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Your client is a family-owned hotel in Paris called Roko Hotel. Until last year, they ran a very successful

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business with healthy profit margins. However, as of last year they are facing declining profitability and

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do not understand why.
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The hotel is located in the suburbs with the city center a 20-minute tram ride away. The hotel is still
independent and not owned by a chain.
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The owners have asked you to help them identify reasons for the decline in profitability and
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recommend how to turn the situation around.

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Additional information
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If asked about the hotel size, please share that the hotel has 30 rooms

Note that questions about room mix, customer types and pricing should be kept for the analysis phase.
 Question 1 (Structuring)

How would you structure your approach to the question?

Possible answer

1. What revenue factors are driving the profitability decline?

a. [Number of rooms] x [average utilization (%)] x [price / room] x [operating days]
b. Other revenues:
• Food & beverages
• Additional services

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2. What cost factors are driving the profitability decline?

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a. Fixed costs:

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• Building maintenance
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• Insurance
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• Taxes
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b. Variable costs:
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• Cleaning
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Food & beverages

• Booking fees
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 Question 2 (Creativity)

Besides rooms, food, and drinks, what revenue streams could a hotel like this have?

Possible answer

For hotel guests

• Airport pick-up
• Commission on entertainment sales, e.g. city tours, shows
• Dry cleaning
• Premium internet access

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• Spa treatments

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For non-guests
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• Meeting rooms
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• Events, e.g. weddings, conferences

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Restaurant
• Gym (payable for non-guests)
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• Business working space (payable per day/week)

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Question 3 (Numeracy)
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Based on this exhibit [share Exhibit 1], what’s the annual revenue for this hotel?
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Possible answer

Weekdays:
25 rooms x 60% x $100 x 5 nights = $7,500
5 rooms x 100% x $140 x 5 nights = $3,500

Weekend:
25 rooms x 60% x $100 x 2 nights = $3,000
5 rooms x 40% x $140 x 2 nights = $560

Total per week: $14,560

Total per year: $14,560 x 50 weeks = $728,000
Exhibit 1 – Prices and utilization from this year

Room data

# rooms Price

Standard 25 $100

Premium 5 $140

Average utilization rates of rooms

Weekdays Weekends

Standard 60% 60%

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Premium 100% 40%

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Question 4 (Numeracy)

Based on the additional data in Exhibit 2 on last year’s performance, what insights can you draw
about recent changes in annual revenue?

Additional information
If asked, please share that prices have not changed year to year

Possible answer

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Weekdays:

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25 rooms x 60% x $100 x 5 nights = $7,500

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5 rooms x 70% x $140 x 5 nights = $2,450
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Weekend:
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25 rooms x 100% x $100 x 2 nights = $5,000

5 rooms x 80% x $140 x 2 nights = $1,120
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Total per week: $16,070

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Total per year: $16,070 x 50 weeks = $803,500

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Roko Hotel is making roughly $75,500 less revenue this year compared to last year. Looking at the data it
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appears this is being driven by a decrease in utilization at the weekends by nearly half.
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Interestingly, utilization of premium rooms has increased during weekdays over the same time period.
Exhibit 2 – Utilization last year

Average utilization rates of rooms

Weekdays Weekends

Standard 60% 100%

Premium 70% 80%

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 Question 5 (Numeracy)

Now take a look at Exhibit 3. What does this tell you about the hotel’s current performance on
cost, and the hotel’s overall profitability?

Additional information
• Unlike revenue, the cost inputs have not changed over the time period
• The tackle this question, the candidate must calculate profit last year vs. today. Note that to calculate
the # rooms, a candidate must make use of the utilization rates covered earlier
• While quite precise calculations are followed in this example, the numbers may also be rounded for

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simplicity without affecting the outcome

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Variable Cost
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Current:
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Variable costs: (# Std rooms filled per week x Cost/std room + # Prem rooms filled per week x Cost/Prem
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room) x 50 weeks = $241,750

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Last year:
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Variable costs: (# Std rooms filled per week x Cost/std room + # Prem rooms filled per week x Cost/Prem
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room) x 50 weeks = $269,750

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Profit
Current:
Profit = revenues – fix. Costs – var. costs = $ -13,750

Last year:
Profit = revenues – fix. Costs – var. costs = $33,750

Variable cost has clearly decreased in line with changes in utilization. However, due to quite high fixed costs,
the drop in revenue has taken the client from a c.4% profit last year to a loss this year.
Exhibit 3 – Cost data

Standard Premium
room room
Variable $35 $40

Fixed costs $500,000

Variable costs reflect cost to serve one room for one night

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 Question 6 (Creativity)

Based on the data and your understanding of Roko Hotel’s situation, what do you think could
have caused the decrease in profitability?

Additional information
If not done proactively, steer the candidate towards identification of root causes of shifts in room
utilization.

Possible answer

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Identification of changes in utilization:

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1) Last year - Standard, weekend rooms fully booked

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2) Current - Premium, week rooms fully booked

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Potential reasons:
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1) Increased competition / supply

• New hotel openings nearby
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• Increase in alternatives such as Airbnb

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• Decrease in prices of other hotels drawing customers away from Roko

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2) Change in customer demand

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• Fewer weekend tourists visiting Paris, e.g. due to competing tourism destinations
• Fewer weekend holidays taken per year within France – extended long haul holidays favoured
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• Increase in weekday business travel due to upturn in local economy

• Increase in customer loyalty towards hotel chains among weekend tourists who are more price-
sensitive
Question 7 (Creativity)

Last year a famous concert venue a 5-minute walking distance from the hotel closed down, which
previously scheduled shows every weekend. Additionally, a huge conference center opened close to the
hotel, offering multi-day business events during workweeks.

How do you think these changes have impacted the hotel and what solutions do you therefore
propose to increase Roko Hotel’s revenue?

Possible answer

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Ultimately, leisure/music tourists (booking standard rooms) decreased and business travelers (requiring

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premium rooms) increased.

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Short-term solutions:
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• Additional business traveler revenue:

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- Offer business travel services e.g., premium taxi service to conference center, paid printing
services, high-end business lunches in own restaurant
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- Increase prices for premium rooms

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Leverage tourists: plan promotions, increase marketing, develop guided tours

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Long-term solutions:
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• Re-model hotel to increase number of premium rooms

• Build additional facilities for business guests, e.g. event space for drinks receptions
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• Reposition brand as high-end business hotel

Question 8 (Synthesis)

What recommendation would you put forward to Roko Hotel to increase profitability?

Possible answer

We were asked to diagnose the reasons behind Roko Hotel’s profit challenge, and suggest options to
turn the situation around.

The change in profitability has been caused by two factors:

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Decrease in leisure travellers due to closure of nearby concert hall
• Increase in business travelers due to opening of a conference center, for which the hotel set-up is

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not optimal

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To solve the profit issue, I propose both short-term and long-term actions:
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• Short-term: Maximize revenue from business travelers by increasing the premium room price and
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introducing tailored services, such as a premium taxi service to conference center

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• Long-term: Re-position the brand and remodel the hotel to better accommodate business travelers
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with additional premium rooms

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As next steps, I would suggest investigating strategic partnerships with the conference center to increase
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the visibility of the hotel to its event attendees.

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