Tainan Market Analysis

This post is an exercise on the analysis of market share, occupancy, and average daily rate as a supplement to the previous post (Stabilization in Hotel)

Market Snapshot & Competitive Market Defined

In this exercise we choose lodging industry in Tainan City, Taiwan as our target market. Tainan City is located in southern Taiwan and famous for being the oldest city in Taiwan with rich history and traditional street food.

To analyze market share, we need to first define what the market is by figuring out competitive position of each relevant facilities of interest and deciding which hotel to be included in the competitive market (understand the reason as well).

Taiwan Tourism Bureau has hotel categorization for administrative purpose in addition to 5-star rating. The categorization is shown below:

  • International Tourist Hotel (國際觀光旅館)
  • Standard Tourist Hotel (一般觀光旅館)
  • Hotel (旅館業)
  • B&B (民宿)

As of June 2018, there are six international tourist hotels (1,429 rooms), one standard tourist hotels (40 rooms), 265 hotels including 21 properties without permits (10,194 rooms),  and 217 B&Bs including 3 properties without permits (776 rooms). In total, there 12,439 rooms supplied per day by regulated lodging facilities in Tainan.

Taiwan Tourism Bureau collects and discloses individual high-level operation statistics from five international tourist hotels in Taiwan.

  • Tayih Landis Tainan (Tayih Landis)
  • Evergreen Plaza Hotel Tainan (Evergreen Plaza)
  • Shangri-La’s Far Eastern Plaza Hotel, Tainan (Shangri-La Far Eastern Plaza)
  • Crowne Plaza Tainan (Crowne Plaza)
  • Hotel Tainan

Due to the limitation on data access, we only focus on the international tourist hotels in Tainan. Hotel Tainan is excluded from competitive market participant universe because its different market positioning reflected in lower ADR compared to other hotels.圖片14

In addition, Crowne Plaza Tainan is not included in the competitive market because the latest annual data is 2017 and it just opened in September 2017. In fact, the Crowne Plaza Tainan will be the subject hotel for stabilization and other analysis later on. The owner of Crowne Plaza Tainan secured loan syndication from banks to acquire land, construct and decorate the hotel in 2013 so later we will do an exercise on feasibility study by using data before 2013 and see what might make our analysis go wrong with the benefit of hindsight.

When determining competitive market, the analyst should identify all relevant lodging facilities. Due to information availability, some competitive hotels might be neglected in this study because they are technically not categorized as a tourist hotel so their detailed operation data will not be disclosed. Some hotels might be primary or secondary competitors of any hotels in the our defined competitive market universe. Below is the list of potential competitors:

  • Silks Place Tainan (a brand of Silks Hotel Group)
  • The Place Tainan (a brand of Royal Hotels & Resorts)

The map below illustrate where three hotels in the competitive market are located.

圖片1  [Map of Tainan City]

Historical Occupancy & Market Share in Competitive Market

Shangri-La’s Far Far Eastern Plaza started with a trial run on November 22, 2008 and opened on Mar 23, 2009. The hotel added around 330 rooms to the market. The increase in room supply and global financial crisis had less impact on Evergreen Plaza while Tayih Landis’s occupancy decreased by 17 percentage points in 2009.圖片4

The chart below shows that Shangri-La Far Eastern Plaza gained market share from other two competitors and that it roughly took five years for the demand (estimated by number of rooms occupied) to absorb the room supply with market occupancy stabilized at around 73%.

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Competitive Position

While the market share can be easily calculated by number of rooms occupied, it is not very intuitive to determine the competitive position only with market share information. This is because the number of rooms to be occupied in each hotel is constraint by the number of rooms supplied by that hotel . A hotel with 100 rooms running at full capacity has less market share than a a hotel with 200 rooms running at 60% occupancy. Thus, to determine the competitive position, we need to take room supply into consideration.

[Market Penetration Method]

The market penetration is calculated by dividing the actual market share by fair market share. The rationale behind fair market share calculation is that under competition process, market share captured by each hotel should be the same as the proportion of room supplied by each hotel to overall market supply.

圖片5

The relative competitiveness between Evergreen Plaza and Tayih Landis can be calculated by dividing market penetration of Evergreen Plaza (1.06) by that of Tayih Landis (0.97).

[Competitive Index Method]

The competitive index simply shows the number of days per day a room is occupied in the hotel. The relative competitiveness between Evergreen Plaza and Tayih Landis can be calculated by dividing competitive index of Evergreen Plaza (282.1) by that of Tayih Landis (256.9).

圖片6

[Relative Competitiveness]

Both competitive index method and relative competitive method will yield the same relative competitiveness.

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Applying Competitive Index Method to Evaluate Relative Competitiveness of Entrant Facility to Market and Forecast Resulting Occupancy

[Evaluate Relative Competitiveness of Entrant Facility]

Due to the limitation of data access, market segmentation like leisure, commercial, and group & meeting is not available. Taiwan Tourism Bureau collects data of number of guests categorized as free individual travels (FIT) and group so we use this categorization as market segment.

With the market segment information, the competitive index can be further broke down into FIT and Group. For example, a guest room in Shangri-La’s Far Eastern Plaza is occupied by FIT guests for 207.9 days and by guests traveling in group for 57.3 days annually.

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Next step, we gauge relative competitiveness of Crowne Plaza (Subject Hotel) by comparing with existing hotels (benchmarking). Shangri-La’s Far Eastern Plaza is more comparable to Subject Hotel because both of them are international brands (Crowne Plaza is a brand under IHG) and might have similar pricing strategy. For instance, Crowne Plaza might trace Shangri-La pricing pattern. We estimate that the Crowne Plaza’s FIT  and Group competitive index are roughly 90% of Shangri-La’s due to the location difference. Crowne Plaza is located in the outskirt of Tainan while Shangri-La is located in the center of Tainan. Adding up two market segment competitive indexes, the Crowne Plaza’s estimated competitive index is 245.

圖片9

[Forecast of Resulting Occupancy ]

A reminder: conceptually, the resulting occupancy estimated here is different from stabilized occupancy in the competitive market.  It’s a occupancy rate for each hotel in the competitive market after the inclusion of the subject hotel which capture a share of existing demand and latent demand. The market will start a dynamic adjusting process toward the stabilization.

Table 5 below shows the room-night demand before the inclusion of Crowne Plaza in 2017. It’s based on the split between number of FIT guests and Group guests. Latent room-night demand for FIT and Group segments are estimated as 10% and 5% of total accommodated in each segment respectively. The total demand from FIT segment and Group segment in the competitive market are room-night of 178,910 and 65,360 respectively.

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Table 6 shows the calculation of market share in FIT segment after the inclusion of Subject Hotel.

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Table 7 shows the calculation of market share in Group segment after the inclusion of Subject Hotel.

圖片12

Below shows the projected occupancy for each hotel in the competitive market after the inclusion of Crowne Plaza in 2017.

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Note that the projected occupancy is different from stabilized occupancy. The competitive dynamics in the market and demand reaction to the dynamics will adjust occupancy to the long-term stabilized level. While the stabilized level might change after the inclusion of new property, the best estimate on the occupancy level might be the one before inclusion the new property.

As shown in the previous chart, Number of Rooms Occupied & Market Share, the average occupancy rate between 2013 and 2017 was around 73%. The market occupancy during this period of time (5 years) was stable enough for a stabilized occupancy estimate.

The following chart is a occupancy comparison between actual and what we forecast for first half of 2018 (after the inclusion of Crowne Plaza).

圖片15

As Crowne Plaza is still in the build-up stage, the actual occupancy rates for incumbents are higher than what we forecast and the one for Crowne Plaza is lower than the prediction for the first half of 2018. That said, the overall occupancy is in-line with the forecast. It might be that dynamics in the market takes more time to adjust so that the actual occupancy for each hotel would be closer to the forecast. We will revisit this after annual data is released.


[Preview of Next Post]

*A Case Study*

As we have done the exercise on the market analysis, we are ready to do a case study on market forecasting for a hotel development as part of the feasibility study. The subject hotel is Crowne Plaza Tainan and the timing of forecasting is set in 2013 when the hotel development company secured a syndication loan of NT$ 1.9B with the maturity of ten years.

Stabilization in Hotel

After the hotel opening, the next milestone for financial stakeholders is stabilization. The interval between opening and stabilization is called build-up period or ramp-up period.

The shorter the build-up/ramp-up period is, the higher return equity capital providers get and the lower risk to which debt capital providers are exposed.  This is because the hotel property is generally valued based on it’s stabilized performance. As the newly-built hotel does not have operation history, potential investors are less likely to buy in rosy pro forma provided by the seller. Once the hotel has enough traction, it’s easier for parties to communicate the valuation metric on forward-looking basis. The reason why the we derive the hotel valuation from a forward metric, for example net operating income (NOI) or net cash flow (NCF), is that it’s how the finance math works.

Recall a simple dividend discount model (DDM). The present value of a stock (PV) is dividend to be distributed next year (D) divided by cost of equity (r) minus terminal growth rate of that dividend (g).

PV = D / (r-g)

The DDM implies that the business has ready reached the steady state (or at least stabilizes next year from the point of time the business being valued)  so the performance of underlying operation should grow in tandem with industry and broad economy. From a value investing perspective, investor figures out the normalized earnings power for a company in steady state. The dividend just is a function of that earnings power (free cash flow is a reasonable estimate).

Due to aforementioned mathematical relationship, when considering investment timeline, investors tend to set the exit year 1 year before the estimated stabilization year. For example, if the construction and hotel pre-opening take 2 years and it takes another 3 years for the hotel to stabilize, the exit will be set at the end of Year 4.


If someone has hands-on experience in hotel operation, she/he might understand that it’s much more complicated to get hotel operation on track than just punching numbers in spreadsheet. That said, the stabilization for particular proposed hotel project is examined in the feasibility study well before the opening of hotel.

Few questions to answer when considering hotel stabilization:

  • What is the key metric for stabilization?
  • At what operational level, the hotel is considered stabilized?
  • How long does it take for a hotel to reach stabilization?

Occupancy as the key metric to determine stabilization

There are two key metrics for hotel room department, Average Daily Rate (ADR) and Occupancy. Occupancy is a better metric to determine stabilization because the ADR has no upper bound and that new hotel generally can charge higher on guests compared to its competitive incumbents.

Methods to estimate stabilized occupancy level and time to reach stabilization

1. Widely-adopted 3-Year Build-up Assumption

  • The assumption is supported in the empirical study, Hotel Occupancy: Is the Tree-Year Stabilization Assumption Justified?.  I think this is a standalone approach as it defines a hotel reaches stabilization when the occupancy level did not increase by 1 percentage point from previous year. While the hotels tested in the study are located in United State, I think it generally holds.
  • Other notes:
    • Luxury, upper upscale, and independent hotel stabilize more slowly than upscale hotels
    • Hotel size and service level is less correlated to the length of build-up period
    • Location and market matter
    • Brand matters. Another study, How Fast Do New Hotels Ramp Up Performance, finds that branded hotels (no matter it’s brand-managed or franchisee-managed) were able to stabilize the occupancy level faster than independent hotels which supports the convention thoughts that hotel brands add value to the property by bringing in brand recognition / global reservation system / hotel loyalty program.
    • [A case study of build-up pattern of two Taiwan hotels is shown below]

2. Penetration analysis

3. Pro-forma provided by hotel operator 


[A Case Study on Build-up Pattern]

*Taipei Marriott Hotel vs Grand Mayfull Hotel Taipei*

I choose Taipei Marriott Hotel vs Grand Mayfull Taipei as my case study for the following reasons:

  • Both are 5-star hotels (probably upper-upscale)
  • Close to each other (roughly 500m) and close to my place (shown on bottom left)
  • Interval between two hotel opening is roughly 6 months
    • Taipei Marriott Hotel opened on September 28, 2015
    • Grand Mayfull Hotel Taipei opened on April 2, 2016

美福萬豪地圖

Grand Mayfull Hotel Taipei | Taipei Marriott Hotel

IMG_6020[1]IMG_6017[1]

 

 

 

 

 

 

 

Grand Mayfull Hotel Taipei

The hotel did a 3-months trial run (charging guests with invoice issued) before the hotel grand opening on April 2, 2016. The operation during the trial run was recorded. The occupancy during trial was between 0.29% to 4.18% while occupancy in grand opening month (almost a full month) was 1.78%. The occupancy climbed to 39.5% in November 2016 and appeared to gradually stabilize onwards. The latest data available as of writing is post shows the trialing twelve month occupancy in June 2018 was 47.4% and it has been 27 months (2 years and a quarter) since the grand opening. For comparison, the average occupancy for international hotel in Taipei area was 72.8% in 2017. Observing from the pattern, if there’s no initiatives on sales and marketing or other activities, it seems the hotel is reaching stabilization with an unfavorable occupancy level.

Grand Mayfull Hotel Taipei Occupancy

Taipei Marriott Hotel

The hotel did a 2 months trial run (August and September 2015) before grand opening on September 28, 2015. The occupancy in trial run were 3.8% in August and 21.0% in September. The chart shows that the occupancy has been increasing since trial run with higher average level and fluctuation compared to that of Grand Mayfuull Hotel Tapei. From the pattern and time elapsed, the property might be about to stabilize with market comparable occupancy level.

圖片6Comparison

To mitigate the age influence from opening timing, the grand opening month is defined as Month 1 (M-1). In the mean time,  trailing twelve months is selected the metric in the comparison to smooth fluctuation resulting from seasonality. 圖片8

The chart above supports the idea that international brand can add value to the hotel by bringing in brand recognition / global reservation system / hotel loyalty program. Value-add reflects in time to reach stabilization and the stabilized operating level.

Since the opening month,  gap in occupancy between two hotels has been more 10 percentage points. It seems that Taipei Marriott Hotel follows a 3-Year stabilization pattern. On the other hand, it seems Grand Mayfull Hotel Taipei stabilizes slower or reaches at a lower stabilized occupancy.

In addition to aforementioned factors, other reasons why Grand Mayfull Hotel Taipei underperformed include:

  • Experience level: Taipei Marriott Hotel is franchisee-managed and the franchisee has experience in hospitality business while the owner/operator is a new entrant to this trade.
  • Different focus on market segment: MICE (Meeting, Incentive, Convention and Exhibition / Event) is one of focused market segments for Taipei Marriott Hotel. MICE might can bring in large amount guests with longer length of stay.

 

Data from Taiwan Tourism Bureau