Hosp Review the Market Dynamics Case Study (docx) Market Dynamics Case Study (docx) – Alternative Formats , and the accompanying Market Analysis Template

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Review the  Market Dynamics Case Study (docx) Market Dynamics Case Study (docx) – Alternative Formats , and the accompanying  Market Analysis Template (xlsx) which focuses on non-demand related market dynamics. Given the information about each market, you will select and defend your decision in which market you would propose a hotel development. 

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HOSP 4040 Market Dynamics

Case Study

Background:

We have already learned how the analysis of the current market demand and the pipeline of projects may influence a decision to enter a market. And these are exceptionally important considerations. But not the only consideration.

As important as the demand/supply dynamics are the other attributes of a market, and the trends of those attributes. Some examples follow.

Demographics

The Demographics of a market can greatly influence a location decision for most hospitality businesses. Generally, not as important for hotels because the local demographics are not representative of the guests who would be coming to that market. But for restaurants, etc. – these are crucial. For a hotel, you need to understand the dynamics of where your guests will be coming from. For the purposes of this paper, assume that the majority of your guests/groups will be coming from within the state.

As you consider these, you need to consider both the existing data, but also the trends over time. Building your business based on yesterday’s demographics without considering the trends is a recipe for disaster. Markets are always changing. Some growing, some not.

· Income. Clearly important because most franchise businesses are based on discretionary income. That amount of household income that is not consumed by non-discretionary expense such as rent/mortgage payment, utilities, food, transportation, clothing, taxes, etc. The local population can only spend what is left over after these needs are met, and so income can be a very important consideration.

· Age. The age of a market population is important. Older populations tend to have more discretionary income. Younger not so much. On the other hand, younger populations tend to have more entry level workers available.

· Housing. This is useful information for many businesses. Owned homes consume more products and services than rental units in general and represent an interesting data point with respect to future demand for many products. For example, you rarely see a Home Depot in the middle of a bunch of apartments…

· Race. Generally, irrelevant for business decisions, and can be quite catastrophic if demographic stereotypes are applied.

As a general statement, you want to try to determine, based on trends, whether the location is “improving” or “declining” with respect to business opportunities, and how likely it is that this will continue. It is also important for a location decision that the area in which you plan to locate is not degrading. You want to be in a growing, thriving area with income and growth.

Taxes and Fiscal Structures

Taxes are an exceptionally important consideration. Taxes remove income from discretionary spending of both businesses and individuals.

· State and Local Income Taxes. Whether paid by a business or an individual, income taxes are a significant drag on individual and corporate discretionary spending. The higher the tax rates, the less money earned by a business or individual may be retained by them and used as they see fit for growth and investment or for discretionary expenditure. The same is true of Federal Taxes, but those rates are identical across the country, so not a location consideration.

· Sales Taxes. Effectively raise the cost of everything, again lowering the amount of earnings available for investment or discretionary spending. It could be argued (and has been) that sales taxes are the “best” because they are the only consumption-based taxes and therefore more in the control of the individual. That said, they still increase cost and reduce discretionary spend capacity of potential guests.

· Occupancy taxes. These are the taxes paid by hotel guests in a market. Many locations advocate for high occupancy tax rates (some locations are as high as 23%) because those taxes are not paid by the citizens of those locations and guests don’t vote in that market. However, occupancy tax rates are a major consideration for meeting planners and corporate travel departments and can create a big competitive positioning challenge between markets.

· Property Taxes. Paid by both businesses and individuals, typically for the funding of city/town services and for local school districts. As property taxes increase, the value of residential and commercial businesses decreases. As with all other taxes, they remove discretionary spending capacity and increase your costs as a business. On the plus side, these taxes are retained and used locally.

As important as existing tax rates is the fiscal condition of the area you are considering locating in. Today’s deficits are tomorrows increased taxes to pay them.

· Market areas (state, city, etc.) with high deficits will ultimately need to raise taxes. There is no alternative. And the higher the tax rate are raised, the less income available in the market for discretionary spending by businesses and individuals. This creates a strong downward trajectory for growth and economic opportunity. Ultimately influencing the productive individuals to leave the area for those areas with greater fiscal responsibility, lowering the tax base even further.

· Government units with high levels of unfunded pension liabilities will ultimately need to raise taxes to pay for the promises made. There is no alternative.

Objectively, the best decision would be to locate in markets with the lowest current and future tax load. The citizens of those markets have the highest percentage of discretionary income, employees have greater take home pay and the businesses (yours included) are not burdened by high taxes, allowing profits to be reinvested for growth. This must be balanced against the income and other dynamics.

Infrastructure

The infrastructure of a location is important. In addition to the current state, what are the trends?

· Vehicular. What is the condition of roads? Well maintained or in disrepair? Today’s disrepair is tomorrows increase in taxes to fund repair. In addition, major highway projects can be hugely disruptive for years. It is exceptionally important that you clearly understand what projects are being considered and how they would impact your business.

· Air. What is the status of air transportation into a market? Is it growing or declining? Are their plans for expansion? Air transportation – both for people and for freight is a considerable economic engine for a market.

· Rail. Although rail service between markets is very limited in the United States, intercity rail is common. Interestingly these intercity rail projects almost always result in growth corridors near stations, and effectively increase the effective market radius for hotels. For example, a hotel located near an intercity rail station with convenient schedules to the downtown area would allow that hotel to be competitive with other hotels located in the city core. Rail projects are always both inefficient and enormously expensive, but over time can prove beneficial if well planned. An easily mobile population and workforce is positive.

· Water, sewer. What is the condition of this infrastructure? In many cities, there are major problems with both, and the replacement of this infrastructure is monstrously expensive and disruptive – but must be done. There are also areas of the county with growth is extremely limited because there are insufficient water supplies.

· Energy. Plentiful and reasonably priced energy is important. The cost per Kilowatt hour varies from $9.39 cents to $32.76 cents between the states. That is a massive difference. It is important to consider both the current cost and the investments being made in future generating capacity when looking at a market. Every dollar an individual spends on energy means less discretionary income which can be spent in your business. It also means greater cost for yours.

Demand Generators

Every market is different of course. The ideal market is one in which the demand generators are healthy, growing, and in diverse industries or segments. It would be unwise to enter a market which has a small number of demand drivers that are concentrated in one segment. No matter how fantastic today, things change….. Just ask Detroit how that worked out for them.

Corporations

· Corporations are large sources of potential business, whether hotel related or other. If a corporation has a main or regional headquarters in the market, often there can be significant inbound travel as remote management/employees visit for training, meetings, etc. In addition, vendors to the corporation can visit often to begin and maintain their relationships. The more diverse the corporate representation in a market, the better.

Education

· Notably higher education. Higher Ed demand is typically based on sporting events, the start of school/move it, homecomings, and graduation. So it can be quite concentrated in a few time frames.

Medical

· Medical centers can be large generators of business. Particularly large, specialized centers such as MD Anderson in Houston or the Cleveland Clinic in Ohio. Patients and families are often in the market for extended periods. In addition, many medical centers service as professional training centers and research centers – drawing even more demand.

Entertainment

· Amusement parks, concert venues, sporting events, regional events (State Fairs, for example) are all huge demand generators – if only seasonally.

Regulatory Environment

The state and local regulatory environment is exceptionally important. In order to open and to operate a business, you will need to climb through all of the hurdles, and it important that you understand what they are. How difficult and/or expensive is it to obtain the required licenses and permits – and to maintain them? In some markets it can take YEARS to obtain a license.

Some markets are exceptionally business friendly and encouraging for new businesses with a light regulatory environment. Others are decidedly not, and place huge hurdles in place to prohibit new businesses from entering a market. Still other markets are simply corrupt, at some levels or all.

Here is a
real example
of the differences between two states in the USA. If you as an individual want to prepare food for sale – say at a farmer’s market or for a church fundraiser:

· In State A, you must a) have a commercial grade kitchen, b) purchase a business health permit annually, c) complete state mandated training annually, d) be inspected periodically by the local health inspector, e) comply with all nutritional labeling requirements.

· In State B, you must simply include a label indicating that the product was “prepared in a home kitchen” and let the purchasers take individual responsibility.

If this is what State A requires for a homemade food product, imagine the requirements for a business….

Case Requirements:

Now that you have some background on the issues with respect to markets, you will be presented with several hypothetical market scenarios – each with pros and cons.

You will need to select ONE of these in which to invest and open your business. You will need to
defend your position
as to why you chose the market you did over the others.

Assume for the purposes of this analysis that the existing and probable supply/demand dynamics would all be equal. Therefore your decision would rest
solely
on the other dynamics of the markets.

Market

Demographics

Taxes

Fiscal

Infrastructure

Regulatory

Demand

A

Ageing population, decreasing income, low rate of home ownership, low percentage married.

High taxes across the board, the State has a massive deficit and massive unfunded pension liabilities

Poorly maintained infrastructure in transportation, water and sewer. Highest energy costs in the continental US with constrained supply.

Highly regulatory, intrusive and expensive requirements. Generally considered to be somewhat corrupt.

Highly concentrated in 3 major industries, each of which is growing. However, recently several corporate headquarters have made the decision to leave the state because of the business environment.

B

Average age of population steady trend, increasing income at the national average, national average rate of home ownership, national average percentage married

Moderate income tax rates, two brackets. Corporate tax rate is moderate.

Fiscal situation is not strong, however the state has funded all pension liabilities to date

Road infrastructure fair. Airport has a new terminal under construction.

Water and sewer replacement construction throughout the metro area have traffic in snarls, but this is not expected to last long. Energy prices slightly above the national average, but energy supplies are abundant.

Fairly diversified between corporate, medical and manufacturing. Several major sporting events annually, a handful of annual festival type events. Highly seasonal.

C

Population is of national average age. Average age is decreasing. Population is growing rapidly. Income is stable, home ownership above national average and growing. Rates of marriage stable.

No state income tax on individuals or corporations. Fiscal situation is strong. State has a law against public unions and public pensions.

Road infrastructure excellent – most new roads are toll roads. Water/sewer constantly being upgraded. Energy prices low and abundant thanks to huge wind installations and the building of 3 new nuclear power plants. Exceptionally business friendly regulatory environment.

The major airport near your market is scheduled reduce 50% of capacity due to an expansion project that will take 2 years.

Widely diversified across all segments. Companies are flooding into the state based on low taxes, light regulation, and low costs.

Strong sporting and entertainment/event demand.

D

Population is of national average age. Income is stable, home ownership above national average.

Low but increasing income tax rates. Fiscal situation is OK now, but trends show deterioration.

Infrastructure Ok for now but deteriorating due to deteriorating state fiscal situation. Energy supplies tightening, but OK for now. Regulatory environment is highly corrupt – you need to “know a guy” to get practically anything done.

Fairly diversified. Many industries have a strong presence in the state currently but are not expanding their operations due to the regulatory corruption and the fiscal trends.

Strong base of sporting and entertainment events drive demand into most markets.

Requirements of your paper:

3-5 Pages, double spaced.

At least 1 paragraph per section above describing how the environment is either beneficial or not for your business. Each section in your paper should have a bold header to aid in readability.

No spelling or grammar errors.

Professional language throughout.

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