Hotel & Restaurant News Kenya: Why Do Hotels & Restaurants Fail?

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As Hotel Consultants in Kenya, we are passionate about meaningful, successful and sustainable hospitality, through our daily life, we come across hotels, restaurants and other such hospitality establishments, that close prematurely, on the fast lane to failure, or simply open but not just making it, and it certainly pains us to see the potential available and opportunity lost. Which leads us to why do hotels fail?

Some Hotels & Restaurant establishment still open for business have actually retired, and some of these are known to you, think about it! when the hotel /restaurant doors opened, everyone seemed to notice it, and most likely you visited and experienced some services, or products and or you heard about it, but what happened, it no longer has the enticing feel in fact, now that you think of some of these former seemingly well to do establishments, it surprises you that you don’t even remember the last time someone mentioned to meet up there or spend the night. Your kids used to nag you to take them to that popular hotel or restaurant, today you all forgot about it, you can’t even go back there to refresh old sweet memories, This reminds you of some of those that opened and shut down, bought out or leased out, only memories remain.  But why?   Is it because the founding owner is absent? or operates behind the scene and unaware of the real issues? Did the competition swallow it? Did they stop marketing? Or did their standards just drop or did they have any standards to operate by? Was it because of a fire? Maybe it’s the economy? Or they couldn’t keep up with changing times? Someone said the staff drained it to the ground? The questions and theories are just many, the facts are real and surprisingly most of these hotels and restaurant failures were avoidable.

The Hotel Industry in Kenya and as well in East Africa has been said to be highly profitable, to some however, it has been short lived or a dream waiting to come true, yet some under the same economic conditions have thrived through the years and still common household names.

It’s astounding that a hotel is not making profits? The average cost to turn over a room, to keep it operational per day, is between 400/- and 2,000 Kes depending on Category and size. Let’s talk of the budget hotel scenario, If you’re paying 3,000 Kes a night, the approximate cost to turnover that room runs close to 400 Kes. That 400 Kes turnover cost includes cleaning supplies, electricity, and hourly wages for housekeepers, minibar attendants, front desk agents, and all other employees needed to operate a room as well as the cost of laundering the sheets.. Now compare that with an average room rate, and you can see why it’s a profitable business.  The same applies to restaurants if you take the allowed % cost standards to revenue not making profits is unreal, so why do many fail anyway.

 To understand how to open a hotel or restaurant in Kenya / East Africa and keep it vibrant, with sustainable growth, it’s good research why many fail unreasonably.

We have done this research for you taking one of the highest Hotel & Restaurant Population and leading in the highest tourism % in the world for this purpose ;-

 According to a post reference:  Statistics  by Wikipedia as quoted below

“90% of new restaurants fail in their first year,”,[1] was an interesting statement made by Chef Rocco of a reality show called ‘The Restaurant.’ The number is very intimidating, yes, but hardly factual. “After the first year 27% of restaurant startups failed; after three years, 50% of those restaurants were no longer in business; and after five years 60% had gone south. It was reported by Dr. H.G. Parsa, Ohio State University. His research is titled “Why Restaurants Fail?” was published in the Cornell Quarterly (2005). At the end of 10 years, 70% of the restaurants that had opened for business a decade before had failed,”.[2] Although these numbers are still alarming, they are not as appalling as those stated by Rocco. The top six reasons why restaurants fail include no unique selling point, too large of a menu, all talent but no brains, poor pricing strategy, no marketing skill, and bad negotiation skills,.[3] This is where a Hospitality Consultant comes in to play.

Another extract reads ; –

American Express has estimated that 90% of restaurants fail in the first year. A study by Parsa, Self, King and Njite (2005) showed that the restaurant failures are in fact under 30% during the first year of operation, and although individual failure rates may rise by the third year of operation, they do not achieve the levels 3 reported by American Express. Other studies by Self (2004) using data from California have shown that restaurant failures are also less than 30%. The National Restaurant Association of US recognizes a 30% failure rate as the norm in the restaurant industry. Even the well established and commonly accepted 30% failure rate during the first year of operations is still unacceptable as it has significant economic impact. Restaurants are a significant part of American life. According to the National Restaurant Association (2009), total revenues for the restaurant industry exceed $580 billion with nearly 1,000,000 operating restaurants in the US; providing jobs for over 13 million people. The sizeable economic impact of the restaurant industry can be measured by the 4% contribution it makes to the Gross Domestic Product in the United States. In addition, the restaurant industry has been expanding at a steady rate of 2 to 4 % over the past three decade.

In Kenya

According to WTTC report  on tourism in Kenya, The direct contribution of Travel & Tourism to GDP was KES183.4bn (4.8% of total GDP) in 2013, and is forecast to rise by 2.9% in 2014, and to rise by 5.2% pa, from 2014-2024, to KES314.1bn (4.7% of total GDP) in 2024. The total contribution of Travel & Tourism to GDP was KES462.8bn (12.1% of GDP) in 2013, and is forecast to rise by 3.1% in 2014, and to rise by 5.2% pa to KES791.4bn (11.8% of GDP) in 2024.

Domestic travel spending generated 49.2% of direct Travel & Tourism GDP in 2013 compared with 50.8% for visitor exports (ie foreign visitor spending or international tourism receipts). Domestic travel spending is expected to grow by 4.6% in 2014 to KES163.5bn, and rise by 5.3% pa to KES274.1bn in 2024

Clearly there is great potential in Kenya and a Market, So why do many fail anyway?

  1. The Operating Reality of Hotels Make Them Particularly Vulnerable to General Economic Cycles– Hotels are among the most economically fragile A downturn to the Economy will reducing the available spending, and this adversely affects hotels and restaurants from reduced traffic.
  1. Location: this has significant impact on the success or failure of a hotel or restaurant.  A market study is needful to reveal current and projected economic data, expected growth in the supply of and demand for hotel accommodation, proposed construction of facilities, which could be deemed to be, competitive, and the status of the competitive market, with projection estimates.  Without this correct analysis the hotel or restaurant should look forward to failure.
  1. Start Up Capital and future allocation: The Hotel and restaurant business is very capital intensive and because they require keeping up with standards, they have to keep recycling the capital. Many poorly budget or under-estimate pre-opening projections and operate on serious negative cash flows, as well without future allocations to keep up with standards. This therefore begins to strain the business owner and staff and under such conditions, the business cannot operate in a stable manner, hence they lose their market over time. This is a major concern in Kenya hotels and restaurant Startups. Very few replace or have capital to keep up the standards. You can think of several that are in need of a serious facelift, including keeping up with guest amenities or facilities, they look ‘retired’.
  1. Hotel and Restaurant Name: In Kenya and East Africa, we find all sorts of names, it surprising and one wonders what business some are into. It’s a real fact that the name of a hotel or restaurant makes a difference in the success or failure of the business. The name ought to stand out, one that we can remember, attractive and descriptive -{especially for restaurants}. Some can perceive a name to only relate to a certain social status, or particular group and they may see themselves as not fit to visit, which we see in our towns and cities, some are known as belonging to a particular community, which is disastrous.
  1. Operating with a Higher Ratio of Fixed Costs to Revenues: The need for revenue, cost and risk management cannot be over emphasized unfortunately many Hotels or Restaurants are run without regard to industry knowledge and or higher unqualified managers who may not know where to start and apply common business accounting, resulting to drains and lack of control.
  2. Design and Layout: In Kenya many Hotel entrepreneurs completely ignore involving qualified Architects, Interior constructors, with experience in Hotels & Restaurants and more so ignore the input of Hotel Consultants at the pre-opening stages before building or renovating a hotel or restaurant business premises. In fact, most entrepreneurs involve a hotel consultant in Kenya after they have constructed, and have only relied on friends who may have a similar business prior, yet also not competent in the field and usually the Hotel consultant is at this point involved, to hire and help with purchases, yet the design and layout mistakes are obvious, sadly this is why many fail. Success or failure of a Hotel or Restaurant depends partly on the physical layout and architectural design. Failure in this areas leads to inefficiency in so many aspects,{ and are causes of staff accidents, fires, poor storage space, or guest area spaces e.t.c the list and consequences is not short, you’d be surprised} and some have to give their business over to those built for the market. Try correcting the mistakes and you will know the phrase, “it cost me an arm and a leg” and most corrections cannot fully achieve the intended goal.  When opening a hotel or restaurant in Kenya.
  1. Service Standards & Training – The success of your hotel or restaurant will highly depend on well trained staff and the existent of clear service standards, which are easy to use and are followed. In Hotels and restaurants in Kenya today, Lack of staff training and absence of user friendly,  service standards is on the rise, resulting to poor service, cases of food poisoning, wastage, or running out of common needful items, is also too common, makes you wonder if at all its a business. The recovery where such mechanisms are absent lead to varied numerous complaint and travel review website with such bad press keep such establishments empty. Online Management in hotels and restaurants in Kenya is really wanting. Many hotels have failed because of this key element.
  2. Cultural and demographic changes; This can bring a hotel or restaurant to its knees; it can make the location once popular, deserted and business now diverted to newer and emerging areas, this can also happen if there are changes in the way of life in the society, where the establishment exists. A market study can help reveal future developments, to ascertain the establishment longevity. Some have shut down, over time new roads came up and other developments sandwiched the establishment, and the once good viable hotel is now hidden and surrounded by an unfamiliar market.  A Hotel Owner  Roberts Rives owner of the Millennium Hotels and Resorts, 780 Rm Hotel in St Louis USA  said when announcing the hotel closure in 2013 “However, we have concluded that the hotel, in its current state, does not meet our standards and has not kept pace with guest demands.” The hotel among weighing its options was to consult with the city officials on what to do with the structure”.  This has happened to several hotels in Kenya, they couldn’t keep up and lost out to those that kept with the changing trends. Over reliance on one market group is also a big contributor to hotel and restaurant failures, once the source cuts off the hotel or restaurants closes. E.g. Kenya has over reliance on International Tourism, travel advisories have made it difficult for many hotels and restaurants to operate normally, yet its known that if domestic tourism was promoted as compared to the first and second world countries, this closures would not happen, but would at-least act as a cushion protecting the loss of jobs. Some also rely on adjacent institutions and then trouble knocks when those institutions close or become seasonal.
  3. Insecurity: “ Kenyan occupancies were lower than in the previous year as a result of the perceived Ebola threat and numerous foreign travel advisories in relation to the terror threat in the region, compared to 2014 hotel performance” the Pan Afric hotel owner was quoted recently.
    In Kenya areas that have been reported with several instances of insecurity, despite them being popular destinations, will  experience lower revenues and may even lead to closure. Tourism in Kenya has had its share of downs in the past 5 years, some of the most affected areas are now hanging signs for closure. Engaging the local authorities and participating in security meetings with authorities can be very helpful.
  4. Fraud: Why would you invest in millions or hundreds of thousands and have a guard at the door, cctv surveillance and fail to invest in hotel management system/point of sale system, and or also fail to have clear control policies? This is a recipe for closure. – It is well known that fraud occurs at all levels, from junior staff as well as Senior Management, including procurement and travel agent deals that will drain the revenues that cannot easily be detected until its too late, proper risk control measures must be implemented the consequence of lack thereof  wears out many owners to closure.
  5. Entrepreneurial Incompetence: Most Hotel & Restaurant owners and others similar establishments enter the hospitality business with the passion to own a business, but without the proficiency. They have the expertise for a business, however the Hotel and Restaurant business require one to have good understanding in various complexities of room revenue, food & beverage concepts & management, marketing, Hospitality accounting-finance, legal matters, e.t.c. You require the knowledge and necessary background to successfully run the business, it’s advisable to hire the experts and enjoy profits or otherwise, only have a tiresome wish to succeed.

There other reasons not discussed e.g poor marketing strategy or its absence, poor start up and planning.  Wrong business concepts simply “Enjoy success from the start, begin with the Experts”

As Seasoned Hotel Consultants Kenya, we urge that you research carefully and seek professional assistance before starting, see tips to opening a hotel or restaurant establishment in Kenya. YES it is enjoyable and profitable if done right.

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SEE: Tips on Opening a HOTEL or RESTAURANT

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