Skibo Castle Case Study
Financial Overview
Current operation. The current operation of the Skibo Castle displays many deficiencies according to the news articles and the income statement provided. First, the Skibo Castle earns very little compared to the potential it has. The property should be able to earn more in room, food, liquor, and other revenues. Moreover, it was clear that some of the expense percentages must be changed to be efficient. Most notably, marketing was at 2.7% of total revenue. For their operation, it is not a problem, but upon our teams suggestions on renovations and expansion, certain figures needs to be changed. Proposed renovation. The proposed renovation for the Skibo Castle was mentioned above. Most significantly, the castle will join the Luxury Collection by Sheraton and various renovations will impact the financial statements. First, the Skibo Castle property is very beautiful, but it lacks capacity to effectively produce revenue with the number of members. The estimated cost of this construction and renovation will be $20 million in total. This estimation was made after considering factors such as other hotel …show more content…
renovation costs and franchising power. Moreover the estimated financing that will cover the cost of the $20 million will come from part owners and part bank loans of $12 million. The loan would have 6% bank loan on the $12 million, which will be paid each year. Through the renovations, the property will show improvements in the revenues and more balanced cost percentage to effectively manage the Skibo Castle. Table 1 below shows the breakdown of the total investment for Skibo Castle property.
Table 1: Breakdown of total investments Cost Per Room
Price of purchas $37 Million $1,233,333.33
Investment $20 Million $666,666.67
Total $57 Million $1,900,000
With the proposed renovation, both the room charge and the membership charge will be raised. However, for the membership charge, it will stay the same for the existing members to show appreciation for their loyalty. The franchise fee for Starwood Luxury Collection will cost the initial of $100,000, 7% management fee and 0.8% reservation fee each year. The franchising fee is quite low for Starwood, but it is due to the Luxury Collection being a soft branding method.
Year one. The year one will be the rebirth of the Skibo Castle with the name under Starwood management. First, the construction of each renovation would be finished by this time and ready to open for their members. This means, the property has improved spa, added rooms, added casinos and etc. There will be same amount of members in the club, totaling 250 members. The revenue will significantly be improved, not only in rooms and food sales, but due to focus on different revenue sources. The room/food was calculated:
Room/food sales = 30*365*1700*.65
This figure is very realistic, since the hotel will be open every day with 30 rooms. The $1700 was the increased room charge and we estimated that with all the renovations, first year would have about 65% of occupancy. Now, the room and food sales figure is combined because the food is included in the room charges. The figure is then divided in to two different sources of revenue by setting room as 77% and food 23% of room/food sales figure. The spa and the casino will be able to generate reasonable amount of revenue as extra. The liquor sales and other will see increase in their revenue as well because of the property being open everyday and the renovations that were made to push these sales. The cost of food sales is estimated to be 35%.
It is bit higher because of the high-end restaurant in the Skibo Castle (). Moreover, successful liquor sales have the cost of 25-28% of the sale. The estimated percentage for the cost of liquor sales is also on the higher side of 27% (). In the undistributed expenses, the payroll continued to be the highest figure of 60% of the gross profit. The current payroll was 70.7% of the gross profit, but we estimated that with the management change and higher revenue, 60% of the gross profit would be an appropriate percentage. Except the administration and general expense, everything has increased. As mentioned above, the castle needs to invest more in marketing and gain 300 members by the 5th year. The other undistributed expenses and fixed expenses have increased due to the expansion and
renovations. After the gross operating profit, the bank loan interest and Starwood management fee is also deducted. The depreciation of the properties and equipment was estimated to be 19% of the GOP and deducted as well.
Year two - five. After the initial changes in the first year, there will be minimum changes each year. From year two, the new price for the rooms will be established of $1775. Moreover, because of the expected increase of the members and popularity, the occupancy percentage continued to increase. In the later years, the Skibo Castle will be able to see more revenue in the spa, casino and liquor sales as well. The Table 2 will show the increase in the number of members in each year and corresponding increase in other revenues.
Table 2: Other revenues in each year Year 1 (250) Year 2 (260) Year 3 (264) Year 4 (285) Year 5 (300)
Rental 250,000 250,000 250,000 255,000 255,000
Merchandise 100,000 100,000 100,00 120,000 130,000
Membership Fees 1,650,000 1,720,000 1,748,000 1,895,000 2,000,000
Total 2,000,000 2,070,000 2,098,000 2,270,000 2,385,000
The year two’s membership fees figure was calculated to give same prices for the existing members and increased membership fees to new members. The calculation:
Membership Fees for year two = (250*6600) + (10*7000)
=1,720,000
The cost of food and liquor sales will remain the same percentage. The payroll is projected to increase in the year three due to hiring more employees to accommodate to the busyness. Moreover, the sales and marketing expense will decrease in the year four and five because the membership goal is almost fulfilled and it would be intelligent to decrease the marketing percentage. After the fifth year, the Skibo Castle should an analysis to see if they would like to extend their membership cap even greater. The Starwood management fee would be same 7% and 0.8% without the initial amount.
http://www.restaurantreport.com/features/ft_bevcost.html http://www.nightclub.com/operations/managing-big-three http://lodgingmagazine.com/examining-hotel-labor-costs/
Current operation. The current operation of the Skibo Castle displays many deficiencies according to the news articles and the income statement provided. First, the Skibo Castle earns very little compared to the potential it has. The property should be able to earn more in room, food, liquor, and other revenues. Moreover, it was clear that some of the expense percentages must be changed to be efficient. Most notably, marketing was at 2.7% of total revenue. For their operation, it is not a problem, but upon our teams suggestions on renovations and expansion, certain figures needs to be changed. Proposed renovation. The proposed renovation for the Skibo Castle was mentioned above. Most significantly, the castle will join the Luxury Collection by Sheraton and various renovations will impact the financial statements. First, the Skibo Castle property is very beautiful, but it lacks capacity to effectively produce revenue with the number of members. The estimated cost of this construction and renovation will be $20 million in total. This estimation was made after considering factors such as other hotel …show more content…
renovation costs and franchising power. Moreover the estimated financing that will cover the cost of the $20 million will come from part owners and part bank loans of $12 million. The loan would have 6% bank loan on the $12 million, which will be paid each year. Through the renovations, the property will show improvements in the revenues and more balanced cost percentage to effectively manage the Skibo Castle. Table 1 below shows the breakdown of the total investment for Skibo Castle property.
Table 1: Breakdown of total investments Cost Per Room
Price of purchas $37 Million $1,233,333.33
Investment $20 Million $666,666.67
Total $57 Million $1,900,000
With the proposed renovation, both the room charge and the membership charge will be raised. However, for the membership charge, it will stay the same for the existing members to show appreciation for their loyalty. The franchise fee for Starwood Luxury Collection will cost the initial of $100,000, 7% management fee and 0.8% reservation fee each year. The franchising fee is quite low for Starwood, but it is due to the Luxury Collection being a soft branding method.
Year one. The year one will be the rebirth of the Skibo Castle with the name under Starwood management. First, the construction of each renovation would be finished by this time and ready to open for their members. This means, the property has improved spa, added rooms, added casinos and etc. There will be same amount of members in the club, totaling 250 members. The revenue will significantly be improved, not only in rooms and food sales, but due to focus on different revenue sources. The room/food was calculated:
Room/food sales = 30*365*1700*.65
This figure is very realistic, since the hotel will be open every day with 30 rooms. The $1700 was the increased room charge and we estimated that with all the renovations, first year would have about 65% of occupancy. Now, the room and food sales figure is combined because the food is included in the room charges. The figure is then divided in to two different sources of revenue by setting room as 77% and food 23% of room/food sales figure. The spa and the casino will be able to generate reasonable amount of revenue as extra. The liquor sales and other will see increase in their revenue as well because of the property being open everyday and the renovations that were made to push these sales. The cost of food sales is estimated to be 35%.
It is bit higher because of the high-end restaurant in the Skibo Castle (). Moreover, successful liquor sales have the cost of 25-28% of the sale. The estimated percentage for the cost of liquor sales is also on the higher side of 27% (). In the undistributed expenses, the payroll continued to be the highest figure of 60% of the gross profit. The current payroll was 70.7% of the gross profit, but we estimated that with the management change and higher revenue, 60% of the gross profit would be an appropriate percentage. Except the administration and general expense, everything has increased. As mentioned above, the castle needs to invest more in marketing and gain 300 members by the 5th year. The other undistributed expenses and fixed expenses have increased due to the expansion and
renovations. After the gross operating profit, the bank loan interest and Starwood management fee is also deducted. The depreciation of the properties and equipment was estimated to be 19% of the GOP and deducted as well.
Year two - five. After the initial changes in the first year, there will be minimum changes each year. From year two, the new price for the rooms will be established of $1775. Moreover, because of the expected increase of the members and popularity, the occupancy percentage continued to increase. In the later years, the Skibo Castle will be able to see more revenue in the spa, casino and liquor sales as well. The Table 2 will show the increase in the number of members in each year and corresponding increase in other revenues.
Table 2: Other revenues in each year Year 1 (250) Year 2 (260) Year 3 (264) Year 4 (285) Year 5 (300)
Rental 250,000 250,000 250,000 255,000 255,000
Merchandise 100,000 100,000 100,00 120,000 130,000
Membership Fees 1,650,000 1,720,000 1,748,000 1,895,000 2,000,000
Total 2,000,000 2,070,000 2,098,000 2,270,000 2,385,000
The year two’s membership fees figure was calculated to give same prices for the existing members and increased membership fees to new members. The calculation:
Membership Fees for year two = (250*6600) + (10*7000)
=1,720,000
The cost of food and liquor sales will remain the same percentage. The payroll is projected to increase in the year three due to hiring more employees to accommodate to the busyness. Moreover, the sales and marketing expense will decrease in the year four and five because the membership goal is almost fulfilled and it would be intelligent to decrease the marketing percentage. After the fifth year, the Skibo Castle should an analysis to see if they would like to extend their membership cap even greater. The Starwood management fee would be same 7% and 0.8% without the initial amount.
http://www.restaurantreport.com/features/ft_bevcost.html http://www.nightclub.com/operations/managing-big-three http://lodgingmagazine.com/examining-hotel-labor-costs/