Do host countries really benefit from F1 races?

Vietnam is going to hose our first ever F1 race in April 2020. It will be a historic moment for my home country since as far as I can remember, we never have an international sporting event. As an F1 fanatic, I am excited about my fellow Vietnamese getting to know the sport I love. However, do host countries usually benefit from hosting an F1 event? Let’s take a look at a few cases

The bull case

In 2017, Singapore Tourism Board announced its plan to retain the race through 2021. STB outlined its rational below:

The announcement comes against the background of a year-to-date 19% increase in ticket sales, with the weekend sales still to be included. In its first decade, the race has yielded significant economic benefits, attracting over 450,000 international visitors to Singapore and about S$1.4 billion in tourism receipts[1]. With more than 90% of the race organisation sub-contracted annually to Singapore-based companies, the race also contributes to the local economy, over and above the tourism outcomes. This event has also showcased Singapore as a beautiful, vibrant and attractive destination to over 780 million international broadcast viewers.

Source: Singapore Tourism Board

If you watch F1 often enough like I do, drivers love to come to Singapore and it’s one of the most anticipated races on the calendar. In 2018, the race attracted the second biggest crowd, only behind the inaugural race in 2008. Hence, it is safe to say that Singapore benefits from having an F1 race.

Bahrain became the first country in the Middle East to host an F1 race in 2004. Since then, it has become one of the favorite tracks of drivers and fans. According to an E&Y audit report in 2015, the race generated a net gain of $95 million for the country and added multiple jobs directly. It was also reported that the race ignited some aspects of the country’s economy. As a result, Bahrain is a beneficiary of F1’s draw.

I didn’t know much about Azerbaijan or its capital Baku until 2016 when it first joined the F1 calendar. Since then, Baku has been responsible for some of the most exciting races. In 2018, a PwC report claimed that “more than $270 million has been added to the local economy as a result of the race, $164 million of which is “direct spend” or money spent by visitors and participants”. the 2018 race attracted 94,000 attendees and was watched by millions of viewers around the world.

The bear case

  • Indian GP ran only for three years and was discontinued after 2013 due to the lack of attendance
  • Korean GP was cancelled after three years as well after failing to generate interest and money
  • Malaysian GP was stopped after almost 20 years of hosting a race since the “numbers don’t add up any more”

It is telling that two new Asian races were discontinued after 3 years due to financial infeasibility. Whether Vietnam will follow the footsteps of Singapore or become another example of the bear case category above remains to be seen. A lot will depend on the execution and whether the races will be good. For the sake of my country, I hope that we will strive to emulate the success that Singapore has had.

Deceiving pricing practice in hospitality in the US

I am not a fan of the tipping culture here in the US as I wrote about it before. I find the pricing practice in the hospitality in the US equally annoying.

I was trying to book a place in Chicago for an upcoming trip. Here is how a room’s price looks on AirBnb:

The initial listed price you see is just 66% of the final price you pay. All the fees make up 33% of the final bill. Wonder what it’s like on OTAs such as Booking.com?

After everything is added, the final price is 25% higher than the advertised price. Resort fees are basically what hotels charge you for the use of amenities and facilities on top of the base room. Think of it this way, instead of pricing everything (base room + facilities) together, hotels break them out in order to charge more. It’s worth noting that not every hotel charges resort fees.

I am not saying that the properties have to eat up the taxes themselves. Nonetheless, I would feel more comfortable if they could just advertise the final prices, including everything. The prices will be higher, but so will be the competitors. So relatively speaking, there won’t be any loss of pricing appeal, but the consumers such as myself won’t feel deceived.

How do chained hotel brands make money?

You must be familiar with famous chained hotel brands such as Marriott, Sheraton, Hyatt, Accor or IHG. They are affiliated with a huge number of hotels across the globe. But how do they actually make money? Below is a snapshot of how such brands generate revenue

The bulk of their revenue comes in the form of management and franchise fees. 77% of IHG revenue in 2018 came from management and franchise fees. The figures for Marriott and Accor are 82% and 93% respectively.

Source: IHG 2018 Annual Report

Additionally, these fees typically have very high margin as the expenses are low. The hotel chains receive compensation for their brand power and expertise, which can be easily leveraged. In 2018, the fee business margin for IHG after overheads is 52%, compared to the 7% of owned, leased and managed lease.

Source: IHG 2018 Annual Report

That is why, at the hotel chains, sales department has a target to hit in terms of how many hotels are to be signed in a period. The more hotels are signed, the more fees will flow into these chains.

How a private sale promotion by a hotel chain works

I received positive feedback from a friend who found my post on revenue management in hospitality helpful with what he does. That means a lot to me since he is one of my best friends and sharing is one of the biggest reasons why I spend time and money on this endeavor. So I decided to write a bit more about hospitality, from my own experience. This time is about private sale in hotel chains.

Every hotel chain wants to keep guests in its loyalty program. Membership makes guests drawn more towards the brand when booking decisions loom. If you are in Marriott’s loyalty program, you are more interested in staying at Marriott properties to accumulate points and enjoy perks, if possible. To keep guests exclusive on its program and out of its competitors’, a chain needs to offer exclusive benefits. Private sale is one way to do so.

Before we go into the details of a private sale, it’s important to be aware of different rates a hotel can offer for a room on a certain date. Below is what I learned from working for Accor Hotels. I suspect that it will be the same for other chains, at least in principles.

Different rates for a room on Accorhotels.com

Following the screenshot above, it’s normal to see a few rates on a website when you book a room. The lowest one in Accor Hotels system is called R03 (Stay Longer and Save in the screenshot) while the Flexible Rate is called R01 (Flexible Rate). R03 rates are about 15% cheaper than R01 rates, but come with more restrictions such as no cancellation or no refund. B&B rates such as the last one in the screenshot are usually R01 rates plus breakfast.

A sale promotion from Accor Hotels is usually 2 weeks and can go up to 50% discount on normal rates. On the first day of the promotion, information on the sale is sent out to strictly Accor Members only. In the following 7-8 days, information will be shared with both Accor Members and Subscribers. Bookings can only take place on Accorhotels.com. After that, information will become public on online travel agents such as Booking.com or Expedia. If you are an Accor member, discount can go up to 50%. An Accor subscriber or non-member and indirect channel guests such as those on OTAs can enjoy 40% discount. That way, guests are more motivated to become members or subscribers of Accor Hotels in order to receive exclusive benefits.

Discount is applied to R01 rates, the higher tier as mentioned above, with the restrictions of R03 rates. That way, participating hotels in the program don’t ruin their Average Daily Rates or RevPar too much. On that point, if your property is in a hotel chain, you can opt in or out of a sale, depending on the state of your property. For instance, it makes no sense to participate in a sale if your hotel has high occupancy already and is expected to pick up more. Otherwise, a sale can be a good tool to fill up the rooms.

A quick explanation on revenue management in hospitality industry

I was lucky enough to have a short amount of time working in the revenue management in the hospitality industry. Personally, I think it is the most exciting part of the industry. There are a lot of moving parts and many factors to be taken into account before a decision is made to maximize revenue. Below is a rough explanation on how it works

Properties have two types of end customers: individual guests who seek for short term stays and corporations which may combine meeting & convention needs with accommodation. Both are represented by the green color. Meanwhile, there are two main intermediaries between properties and customers: travel agents and online travel agents (OTA); both of which are represented by the blue color in the diagram. Properties can also communicate directly to customers.

There are multiple ways in which properties can communicate to individual guests. Guests can call, book via websites or just walk in to book rooms. However, there is only so much a property can do in terms of advertising and marketing. Relying solely on its self appeal, it’s unlikely an average property can fill up its rooms. Hence, it needs travel agents and OTAs such as Booking.com or Expedia. These agents combined can expand a hotel’s reach to a much bigger audience. In return for their services, properties need to compensate the agents.

With regard to OTAs, they will take commission that ranges from 13% to 25%, depending on negotiations between the two parties. They will take payments from guests, save their cut and pass along the rest to properties. Regarding travel agents, room rates are usually combined together with other items such as F&B, transportation and sightseeing, to name a few. Hence, it’s difficult to single out how much they charge for rooms, but it is sure that properties have to give travel agents a lower rate than what is publicly available, meaning that Rate 3 is usually lower than Rate 1 and 2. Otherwise, why would they be motivated to sell on behalf of properties and how would they cover operational expenses? Both travel agents and OTAs check public rates (Rate 2) on properties’ own websites very regularly to make sure that the rates they receive are beneficial. Sometimes, I received calls or emails from agents, asking why their rates were higher than the ones on our website.

As properties have to compensate agents, the question is why. The answer is volume. Travel agents and OTAs bring more bookings to the table and ensure that properties are filled up faster. Hence, a big part of revenue management is to balance out volume and margin. If occupancy is low, properties need to push on all cylinders with attractive rates to sell rooms. As occupancy inches upward, rates need to be raised to maximize the revenue. For instance, if a hotel has only 10 rooms available for a certain day in the next 7 days and is confident that it can sell those rooms directly based on historical data, it makes sense to not sell those rooms to travel agents.

Partnership with agents is more important when it comes to foreign markets. A property in Vietnam welcomes guests from many countries in different continents. Without local partner agents in foreign countries, how could the property reach out to international guests?

The same dynamic between individual guests, agents and individual guests is similar to that between corporate customers, agents and properties.

A property’s room inventory on a given day is limited and perishable, meaning that if a room is not sold, the room night is gone forever. Hence, it’s imperative that a hotel try to sell as many as possible. On top of that, the job of a revenue management person is to maximize the revenue. Below is the list of factors that can influence revenue, including but not limited to:

  • Rates
  • Occupancy
  • Seasonality
  • Competitors’ rates
  • Holidays, local special events
  • Room types & their availability (A suite is sold at a higher rate than a standard room. Hence, if you can sell a suite, why shouldn’t you?)
  • Promotions
  • Historical pick-up rates
  • Historical cancellation rates

In a highly competitive industry such as hospitality, rates have a lot of sway over a booking decision. If you look for rooms in a certain city on Booking.com, a difference of $2 or $5 between comparable properties is pretty significant. It’s easy to sell rooms by lowering rates, but what is the point if no profit is materialized? The hard part is to be able to fill up the rooms and make profit, but it’s also the exciting piece of the puzzle. You have to process a lot of data on a daily basis to make informed decisions, but working in the revenue department allows you to have a pretty good understanding of a hotel’s business. And that’s also what excited me.