Alpaca Hotel Group

Alpaca Hotel Group

1. SWOT

   • Strengths
     • Quoted company - easier to raise finance
     • 10% of luxury market in Maylandia
     • Hotels retain own character
     • Centralised IT & Procurement (except food/drink)
   • Weaknesses
     • Luxury only - at risk of economic downturn
     • Budgets prepared by regional directors - motivation/performance issues
     • 2019 Profit decline - decreased sales/increased costs
   • Opportunites
     • Celebrity sign ups/professional chef?
     • Year of Culture 2021 - corporate events/sponsorship
     • All-inclusive option
   • Threats
     • Damage of offering All-inclusive - Joe's Pie's out of business
     • Average 3.8* Low quality of service/cleaniness

2. PESTLE

   • Political
     • Report in Accordance with IFRS
     • Maylandia Tourist Board - responsible for marketing Maylandia
     • MHSA - Health and Safety, certified annually, unannounced inspections
   • Economic
     • Thriving Economy
     • Maylandia residents disposable income
   • Social
     • High standard of living
     • Stays vary from few days - 2 weeks
     • Expectations vary of price paid. Consistent levels of service expected
   • Technological
     • Price comparison sites, online travel agents, hotel website
     • Algorithms to generate competitive prices
     • Visitadvisor - reviews from previous guests and used by potential guests
   • Legal
     • MHSA - Health and Safety
     • HR monitor compliance of Maylandia's employment legislation
   • Environmental
     • Climate change/carbon footprint
     • Corporate Social Responsibility and Sustainability - i.e vegan suites

3. Core Activity A

   • Capital Appraisal Decisions
     • NPV
       • Discounted to present value to take into account time value of money and required rate of return. Accept if positive, impact on shareholders wealth.
     • IRR
       • Internal rate of return - higher than required rate of return - accept
     • Time value of money - money is worth more now than in future, loss of purchasing power, uncertainty and risk of cashflows
     • Sensitivity analysis /scenario planning, simulation = 2 variables change at same time
     • Real options
       • Abandon
       • Wait
       • Expand
   • Pricing Strategies
     • Current business model - price differentiation demand/availability/competitors
     • Price skimming - maximise revenue short term, useful for new/different (rooms)
     • Ideal - profit maximisation model, relationship between price & demand. Market research to predict levels.
     • Penetration pricing - low price initially, use with cost-plus pricing to maximise occupancy with a profit
   • Digital data sources
     • Big data
       • Vast volumes of uncorrelated data to extract meaningful information. Time consuming, overwhelmed with data. Characteristics - velocity (speed), volume, variety and veracity (truthfulness)
     • Other digital sources
       • Social Media
       • Review sites
       • Search engine
       • Third party data set
     • Business intelligence systems
       • Improve decision making, management tool, new business opportunities
   • Alpaca Business Model
     • Define Value
       • Identify - Who for & why? Shareholders/ Employees/Local community/Maylandia Government/Customers. Use Mendelow Model to analysis stakeholders needs
       • Prioritise - Rank by power/Legitimacy/Urgency. Customers are ranked highest
       • Establish and identify needs - high paying leisure customers require high level of service or corporate clients needing suitable space to work
       • Formulate value propositions - high paying guests, memberships/complimentary gifts/priority service
     • Deliver value
       • Create value
         • Partners
           • Employees/Suppliers/Partners - build relationships and trust
         • Resources
           • Source right products/services - food/drink, furniture, decor
         • Processes
           • Design and develop processes which create calming environment - convert inputs to outputs
         • Activities
           • Activities which use processes to convert sources to goods/services
         • Outputs
           • Aim to meet customer value proposition - calming/attractive environment
       • Customer segments - leisure/business. More in depth geographic/demographic/behaviours.
         • Must be meaningful, measurable, stable, substantial, easy to understand and mutually exclusive
       • Channels - Alpaca Website, Travel agents, online comparison site
         • Helps to collect data
         • Customer experience starts before they have even booked. Whole process must be seamless
       • Capturing Value
         • Major employer for unskilled staff
         • Cost model - efficiency of process, levels of activity, resources consumed, price paid for resources
         • Revenue model - speed converted to cash. Pricing / collection policy
         • Sharing residual value
           • Quoted - shareholders/dividends.
           • Government - taxes
           • Retained income - investments
   • Disruptive Business Models
     • Changes and disrupts existing business models within industry. Examples - AirBnb
       • Effects - loss of revenue, more competition. Consider level of service offered.
         • May be able to meet business objective of acquiring a new hotel every 3 years as current owners in the industry may wish to sell and we could buy at bargain price
       • Adapting - we must use this opportunity to adapt our current business model into a more disruptive business model. Power of digital ecosystems. Four strategies: Build, Buy, Partner or Invest
   • WACC
     • Weighted Average cost of capital - debt and equity. Debt required return of lenders. Equity required return of equity investors. Using the WACC as discount rate to establish a positive/negative NPV
       • Appropriate to use when required return is not expected to change.
       • Not appropriate to use if required return is expected to change. For instance if the risk will increase for investors (moving in restaurant sector/business risk) the investors will require a higher rate of return. Risk financial risk - % debt/equity finance. Size of investment/investment risk
   • Evaluate opportunities to add value
   • Mutuality / Orchestration
     • Mutuality
       • Closer coordination to achieve common goal
       • Alpaca's objective - 'Honesty and respect to our guests/employees/owners and wider environment'
       • Branded uniforms/Local suppliers for perishable goods
       • Payable days @ 133 is concerning
     • Orchestration
       • Coordination, arrangement and management of complex environments
       • Alpaca as orchestrator
         • Online comparison sites
         • Travel agents
         • Local perishable goods suppliers
         • Other suppliers - towels/cleaning products

4. Core Activity B

   • Project life cycle
     • Gido and Clements
       • Need
         • Solution
           • Implementation
             • Completion
     • Project Management Institute
       • Project tools
         • Performance measures - all project tools can be used to measure performance. But must have a clear change management process in place
           • Targets - must be achieveable, challenging and measurable to avoid demotivating the team. Project manager is to manage the project constraints - time, quality & cost. They may add float into the timescale.
       • Initiating
         • Planning
           • Executing
             • Controlling
               • Closing
           • Activities & Costs - Work Breakdown Structure, Work Packages, Product Breakdown Structure, Cost breakdown structure
           • Quality - Project Quality Plan
           • Time - Network analysis/Gantt charts, PERT, scenario planning, buffering, milestones/gates
           • Resources - Resource Histograms
         • Project Initiation Document - scope of project
   • Project Key Personnel
     • Project sponsor - provides resources (i.e FD Zoe Diaz)
       • Project owner - interested in end result (i.e hotel manager)
         • Project customer - end user
           • Project manager - responsible overall project output
             • Project team - achieving project tasks
   • Risk and Uncertainity
     • Identification
       • Risk Analysis
         • Risk Planning
           • Risk Monitoring
         • Use TARA - Analysis relation of likelihood and impact. Transfer, Accept, Reject, Avoid
     • Downside Risk
     • Upside risk
     • Risk
       • Quantifiable
       • List of outcomes and probabilities known
       • Use Expected Values - not to shown return but averaged outcome. Use to replace cashflows in NPV
     • Uncertainity
       • Unquantifible
       • Number of outcomes, probabilities not known
       • Use adjusted discount rate or complete sensitivity analysis
   • Sources of finance
     • Cash balance
       • Strong cash balance M$188. But low current ratio of 1.1 need to analysis cash required for project
     • Group lending
       • The consolidated group cash position may be strong but will need to review the cash position of division. Could provide group lending and group charge interest to division but would have no effect on group consolidated statements.
     • Equity finance
       • Full market value - expensive and may upset current shareholders by diluting their share.
       • Rights issue - combat concern over dilution. Cheapest way to raise equity finance. May raise concerns that company is in distress
     • Debt finance
       • Bank loan - Good gearing of 20.6% could lend at reasonable interest rate, may wish to secure loan from lender on land/buildings to reach a better rate of interest. Cheaper than raising equity finance
   • Project Leadership
     • Project Manager skills - motivation, negotiation, leadership, delegation, planning and control.
       • Lifecycle of project teams
         • Forming
           • Storming
             • Norming
               • Performing
                 • Adjourning
             • Conflict stage
   • Implement senior management decisions
   • High performing teams
     • Achieve shared goal
     • Voluntary participation
     • Unstructured/informal communication
     • Team building
     • Rewards

5. Core Activity C

   • Balanced scorecard
     • Performance measurement based on financial and non financial perspectives
       • Financial, Internal process, learning & growth, customer perspective
     • Long term - reduce emphasis on short term decision making
   • Employee engagement, empowerment & alignment
     • Empower to make decisions quickly
     • Employee 'buy-in'
     • Set clear company objectives
       • Communicate corporate objectives
         • Cascade objectives
           • Review structures & processes
             • Budget setting process - engage managers
             • Introduce regular appraisals
               • Ongoing performance ma
     • Discipline
       • Regular Appraisals to discuss any concerns/issues before needing to be escalated
       • Informal talk
         • Oral warning
           • Written warning 1st & 2nd
             • Suspension
               • Demotion
                 • Dismissal
       • Means learning. Should encourage improvement, act promptly and gather the facts.
   • Leadership styles
     • Historic theorists thought money was only motivator
     • Maslow Hierarchy of needs
     • Democratic / Participative -'Lets work together to solve this' encourages innovation and creativity
     • Alpaca's leadership style - transactional
       • Bureaucratic
       • Relationship seen as trade off - rewards for service/loyalty
     • Transformational - inspiring/motivating
   • ABC/ABM
     • Cost drivers - causes change in cost of activity
       • Cost transformation - control costs to increase value
     • Different channels
       • Website - cost of online payment transactions?
       • Comparison sites - commission costs
     • Different segments
       • Leisure - cost of leisure facilities - pool/gym
       • Business - corporate meeting rooms
   • Value Chain
   • Risk to Stakeholders
     • Consider risk appetite of stakeholder, risk seeker (maximax)/risk adverse (minimax)/risk neutral (highest EV)
   • Manage performance and costs to aid value creation
   • TQM
     • Get it right first time & continuous improvement
       • Conformance costs
         • Prevention - defects don't occur in first place, repairs/maintenance, quality training, building quality into design
         • Appraisal costs - measuring conformity, incoming inspections, operating process control
       • Non-conformance costs
         • Internal failure - before reaches customer, scrap costs
         • External failure - effect to customer, compensation, liability costs
   • Life cycle costing
     • Development & design
       • 80-90% costs appear at design stage. Land acquisition/design of construction
     • Total costs and revenues for full lifespan of product/service
     • Introduction
       • High marketing costs
     • Growth
       • Revenues increase, high marketing
     • Maturity
       • Most popular/high occupancy. Review feedback, maintain high level of service
     • Decline
       • After Year of culture, review costs, if loss making, disposal costs/resale income
   • Responsibility centre
     • Cost centre - responsible for costs only
     • Profit centre - revenues & costs - hotels ran as profit centres
     • Investment centre - costs & revenues & investments - reasonable NCA additions required (acquire Joe's Pie's)

6. Core Activity D

   • Analyse ratios
     • Still recovering from credit crunch
       • Down to revenue drop - couldnt have been avoided as APAS checks competitors price
         • Revenue drop & increased operating expenses (loss on disposal PPE)
           • Still strong - due to operating profit drop
             • Concerning - low and decreased - expected increase as per budget
               • Improved but still low - should be good at 1.5:1
                 • Improved - obtain reasonable rate of interest, need to compare against industry
                   • PPE replaced in 2019 - if at year end may not of recognised benefit yet
                     • Should be low - check usage of food as purchases remained constant
                       • Increased - longer terms to corporate customers?
                         • Increased but we have large cash balance, maintain good relationships, review cash of individual divisions
     • Recommendations
       • Review APAS pricing algorithm to increase revenue
       • COS - Reduce agency staff - three times higher
       • Operating profit - renegotiate commissions
         • Encourage direct bookings
       • Loss on disposal decreasing profit - review depreciation policy
   • Financial conclusions
     • Stable
     • Surge in cash - reason unknown
     • Gearing portraying positive message
     • Concerning liquidity, receivable days and payable days
     • Low ROCE - impact external view
     • Budget - operating profit to slightly increase but not huge growth, maybe concern for potential investors
   • Appropriate accounting treatments
     • Provisions, contingent assets & contingent liabilities
       • Provision - present obligation arising from part event, probable outflow of economic resources & can be reliably measured
         • Recognised - in P&L and Liability - once paid reverse liability
       • Contingent liability - only possible outflow - recognised as note with nature and detail
       • Contingent asset - probable inflow - recognised as note with nature and detail
     • Leases
     • Intangibles
       • Non monetary without physical substance
         • Can be sold separately from other assets and arrives from contractual/legal rights
       • Business combinations - Goodwill
         • Comparing consideration transferred , any NCI if only part purchase with fair value of net assets
         • Recognised under non current assets in group
         • Reviewed annually for impairment - written off to P&L
         • In Alpaca individual - shown as investment under non current assets
     • Financial instruments
     • Debt instruments
     • EPS/DEPS
       • Highly auditable as companies try to show their entity in best light possible
       • DEPS - Diluted earnings per share - often 'warning signal' to investors that their shareholding may become diluted
       • Arises when convertible loan stock or share options in issue
       • Presented so gives equal prominence as EPS calculation
       • Calculation - adjusted earnings for saved interest and additional tax on convertible loan , then divided by shares in issue and additional potential shares
     • Foreign purchase
       • Functional currency - primary currency of which entity operates, M$. To determine - currency which effects sales/purchase price, labour, regulators in industry.
       • Presentational - currency of which group present statements, currently all M$ as no foreign subsidaries, but if there was an foreign sub acquired the sub will need to present in presentational currency which may be different to their functional currency.
       • Recognition
         • Initial - rate for the day of transaction
         • Payment/sale - realised exc. diff at date of payment, gain/loss to P&L
         • Reporting date - Monetary items & goodwill - retranslated to closing rate (reporting date). Non monetary - item in consol financial statements i.e construction asset left at historic rate. Income/expenses/interest - retranslated to average rate
       • Gains/Losses on translating an acquisition to groups consolidated accounts goes to translation reserves
         • No impact of reported profit - taken straight to reserves
   • Measure performance
   • Stress testing
     • Form of sensitivity analysis to test robustness of business to extreme changes
     • Regularly stress test based on risk attitude of the board
     • Test each division - seek external stress testing experience to gain this skill set
   • Revenue recognition
     • Example - discount given for next stay
     • 1 - Identify contract with customer
       • 2 - Identify performance obligations with customer
         • 3 - Determine transaction price to each obligation
           • 4 - Allocate tranaction price to each performance obligation
             • 5 - Recognise revenue as performance obligation satisfied
   • Related party
     • Key personnel (directors) & close family members, other entities within group
     • Disclosure - nature and details and balance of transaction should be disclosed as note to financial statements. Materiality is not considered for related party transactions
   • Cash flow
     • Actual cash inflows/outflows - as other statements on accruals basis and non cash items (depreciation)
     • Operating cash flow - revenue generating activities - Alpaca strong position M$76
     • Investing activities - purchase/sale of PPE, could include dividend income
     • Financing activities - loans/other sources, dividends paid, no new loans/share issues in 2019
   • Relevant costs
     • Future, incremental, cashflows
     • Interest isn't relevant as built into cost of capital

7. Core Activity E

   • Additions to the group
     • Subsidiary
       • SOFP
         • Replace investment line of individual investor with goodwill in groups consolidated statements
           • Combine 100% of Asset and Liabilities line by line
             • Only report share capital and premium of parent company
               • Percentage spilt of post acquisition reserves
                 • NCI - shown in equity section of investees % spilt. Valued either fair value method of proportion of net assets
       • P&L
         • Combine revenues / expenses line by line
           • Check for part year acquisitions
         • Eliminate for intragroup sales
         • Adjust for unrealised profit from intragroup sales
         • Adjust for NCI's proportion of profit
     • Associate
       • 20-50% of shares is likely to show significant influence
         • But can also be determinded by number of seats on board
       • Power to influence decisions but not control
       • SOFP
         • Shown as investment in associate under non current assets
         • Using equity accounting
       • P&L
         • Post acquisition profits - one line in group consolidated P&L, after deducting goodwill impairment & unrealised profits
         • Double entry - increases/decreases Investment in Associate line in SOFP to show true value of investment
     • Control
       • Power over the investee's decisions
       • Rights to variable returns
       • Power to affect decisions and affect the amount of those returns
     • Joint venture
       • Two or more parties have joint control
         • Share decisions and returns
       • SOFP
         • Shown as investment under non current assets
       • P&L
         • Share of post acquisition profits
         • Double entry - increases/decreases Investment in SOFP to show true value of investment
   • Transfer pricing
     • Inter divisional transactions
     • Benefit division and wider group
       • Negotiated and agreed by individual divisions or FD of Alpaca group
     • Cost price
       • Market price
         • Negotiated price (between cost and market)
     • Goal congruence
       • Check cheaper than outsourcing staff
   • 6 Capitals of IR
     • Financial - pool of funds - cash generated through operations and finance raised loans/shares
     • Manufactured - physical objects - buildings, fixtures/fittings, branded towels/uniforms
     • Intellectual - Intellectual property - hotel-specific software, room pricing APAS,
     • Human - capabilities and experience employees/directors - motivations to innovate
     • Social and relationship - Relationships between stakeholders, employees/guests/suppliers/board
     • Natural - Use of water - rooms/kitchens/pools. Electricity. Consider whether their buildings/processes are energy efficient
   • Communication process
   • Negotiation process
     • Preparation - Establish what we are able to accept. Consider culture/language/location/currencies
       • Opening - influence and persuade. Both parties give their side. Could test/trial new system
         • Bargaining - Narrow the gap. Logical and sensible
           • Closing - Agreement is made. Should be Win-Win mutually beneficial and gain long term relationship
     • Negotiator - good communication skills, analysis info, attention to detail, consider financial and non financial impacts
     • Win-Lose - one party loses and other party has maximum gains
     • No agreement reached - worse position
   • Conflict management
   • Manage internal and external stakeholders
   • Integrated Reporting
     • Explains to our stakeholders how we plan to create value through our strategy
     • Financial statements are at a point of time, whereas IR gives users relevant non financial information to make economic decisions
     • International Integrated Reporting Council
       • Principle based - no set format but stipulates all components should be considered
       • Components for Alpaca
         • Governance structure
         • Risks and Opportunities
         • Strategy and resource allocation
         • Performance of business objectives
     • Issue - as not audited open to being bias, information may be omitted that doesnt show business in best light

8. Benchmarking

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