The Hospitality Industry is booming at a rapid speed with each passing year. Though once highly fragmented and dispersed, the Hospitality industry is gradually getting integrated since the 1980s. The growing global economic slowdown and the uphill in the Banking sector have once again disrupted this progress. No aspect of the industry has been relieved from the folds of this. And the ongoing Covid-19 epidemic and the slowdown of the global tourism industry have added salt to the misery. Philip Anandraj discussed some of the major financial challenges faced by the hospitality sector. They are:
Credit Crunch: Credit Crunch is acting as a massive hindrance to the progress of this sector. In countries like India, because of Regulatory norms, Hotels come under “Real estate” rather than infrastructure projects. Hospitality Industry is highly capital intensive it requires huge capital for the projects. And for this capital, the industry is dependent on the Banking sector. Due to the tough lending norms, the bracket risk is also very high. Philip Anandaraj opines that the Hotel businesses are always been considered as High Risk’ by the lenders. Besides, borrowings from the market are also low due to tough borrowing norms in different countries. And short term loans also reduce the repayment capacity of the borrowers. In many countries, there is no apex regulatory body that can bring investment in this sector. All these factors resulted in a “Credit Crunch” in the industry.
Taxation and Legal problems: In many countries, huge taxes are charged from the hotel businesses further slowing down the progress of this sector. Luxury taxes are collected and still, the hotel businesses are been regulated by age-old obsolete laws. Higher energy tax, Co-operative Tax, and low tax deductions are major causes of concern. As higher energy tax leads to lowering of auto travel trips, high rate of Corporate tax leads to lower funds for further improvement of the hotel business and low tax deductions result in fewer hotel businesses and Business trips.
Red Tapism Is also a major concern for this industry. An arsenal of licenses and permits is required from different agencies for permission. This whole process can take up to 6-12 months. Besides, there is a lack of investment opportunities and incentives for the lenders who are interested to invest in this capital incentive industry.
Small Working Capital: There is a working capital shortage in the sector for day-to-day operations. The short-term loans lead to negative working capital and this puts pressure on the payment of interests. Negative working capital is an additional burden as this industry is a highly capital industry and this requires high liquidity for daily operations.
Limitations in Valuation Techniques: Another issue acting as a major challenge for the Hospital Industry is Limitations in Valuation techniques. Hotel value is associated with net return to the property, sales comparison and, cost (Ciraldo, 1990). The value of the Hotel Businesses fluctuates over time; Variability in Demand and Supply balance, supply of capital, quality of the property, and others. International Hotel Businesses have more concerning factors such as Home and Host country’s economic conditions, political situations culminating into abnormal fluctuations in the Hotel values, etc. Another major concern is that the whole valuation process is not universal as such as the valuation techniques used in the Developing countries cannot be used for the Developed countries. The limitation in the whole valuation process is a hindrance to the capital in-flow in the industry.
Other Miscellaneous Factors: With the rapid increase in competition, it is becoming increasingly difficult for Hotel businesses to maintain higher margins. Philip Anandaraj hotelier stated some of the other significant concerning factors. They are mentioned below:
- Increasing competition from the Corporate clients focusing on lower rates and better services.
- Decrease in Average Room Revenue (ARR) because of increasing competition.
- Terrorism in any form acts as a major hindrance for the Hospitality industry in many developing countries.
- Growing Political and economic distress, natural disasters are also major threats for the industry.
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