Q & A: Reviewing your Options in the Guesthouse Market

Q: I am thinking of opening up a guesthouse what elements should I be considering?
P de Souza, Polokwane
A: People of South Africa have a well developed appetite for the tourism industry and have responded to the call by Government to become entrepreneurs and to build businesses which can assist in job creation and poverty alleviation. We commend such entrepreneurs and encourage them to continue their good work. We do however, wish to share some of the knowledge which we have gained over the past 29 years in the tourism sector and hopefully we can assist those who are choosing to invest in the tourism sector to make good decisions.

Here are some of the questions which have come up when deciding to invest in the accommodation segment in the tourism industry. This segment at first glance looks very lucrative and easy to do, however a number of considerations should be taken into account before venturing off into this market.

  • What should the entrepreneur be considering if they are new to the industry and want to invest some of their money in this segment?
    One should bear in mind that this industry generally has to be based on long term investments of over four years and often the first 2 years the business will be running at a loss before it becomes known in the industry. It is more a lifestyle business that only people who enjoy the work can go into as the returns are generally not large. You must recognize that this type of business takes up a substantial portion of your life. Questions you should ask yourself include: will you be able to fund the shortfalls in the initial stages and over the low season especially if your clientele base is seasonal. What is your competitive advantage going to be, compared to the existing players? Do you have a ready client base or existing networks that could give you an advantage?

  • Is this market saturated at all? Or would that depend on geographic location?
    Saturation is a function of common product offering to the same market. Whilst there has been a proliferation of Bed and Breakfasts in the last couple of years due to the property boom and the hype around 2010, there have also been a number that have failed. A key to the success of Bed and Breakfasts has been the ability to identify a niche. This can be based on location e.g. being next to a large hospital that has patients and relatives of patients that travel from afar to the hospital. Or it can be based on the type of facilities offered to niche markets e.g. Friendly premises that can cater for the blind or disabled tourists. It is advisable that the entrepreneurs "segment" the market and focus on a specific target market. You can't be everything to everyone.

  • Is location important?
    Being visible and accessible to travelers on the road helps, but it is also important to market the premises. The establishment also needs to be accessible to and from main road arterials, attractions and amenities relevant to the target market. A lot of bookings for B+Bs are now done over the internet, and if you don't have a well connected web site it also affects how many people will know about you.

  • Does your star grading affect your occupancy rate?
    It can affect it positively and sometimes negatively. People would like to know what standards to expect at a B+B and having a star grading gives reassurance on the level of facilities and service that can be expected. However, a higher grading does not necessarily lead to more business as some people would search for only three star grading because they expect a four star facility to be too costly, and yet your facility may be affordable but graded higher than people would expect for the facilities offered. This can lead people not to even enquire on your rates, whilst you may have specials during the slow months.

    On the other hand those establishments that do provide service and value that exceed the grading, are more than likely to also record superior occupancy rates and over time build a up a reputation of superior service. The converse also applies.

  • What type of person do you need to be, to be successful in this segment?
    You need to have a very friendly and hospitable personality that loves dealing with people. You also need to be patient and persevere as results often take longer to materialize in terms of profitability, pay attention to detail as small inconveniences to the client may lead to no repeat business.

    You need to ask yourself if you can relate to all people from all cultures and be interested in them. Are you innovative? You need to able to review your offering, constantly search for differentiation, decor, service, food selection, choice of bath towels, bath salts, rates, specials, there are so many ways a person can innovate their offering beyond the norm.

  • Should entrepreneurs link up with other activity based tourist attractions?
    In some respects yes. This lends to innovation in that the person's stay can become "experiential", relating to activity to the accommodation. Through linkages you also offer holistic packages which give tourist the opportunity to explore with some peace of mind.

  • Are B & B's a good investment or is the small hotel more sought after these days?
    Both have pro's and cons but B & B's are becoming more popular with the corporate market as it is perceived to be better value for money. I would suggest that if a person is starting out for the first time, then a B & B is a safer "entry" strategy.

  • What are the key indicators financiers, like Business Partners, look for when deciding whether a B & B is viable or not?
    If the guesthouse is still to be purchased, the price being paid is crucial, especially if the funding for the purchase has to be financed from a financial institution. Likewise if it is being built from scratch, the cost of putting up the structure must be considered. In both cases the amount of the entrepreneurs own contribution as a percentage of the total cash outlay required, plays a significant role in assessing the viability of the business.

    Does the entrepreneur have the required skills and some experience, as well as the disposition to be in a service oriented industry?

    Sustainable and achievable occupancy figures, as well as achievable rates are key.

    Many new entrepreneurs do not really spend enough time researching and understanding what (1) occupancies (2) commensurate rates they will need to achieve in order to breakeven and make profits.

Another key area that is often overlooked is that the area may not lend itself to the "intended" target market; again, a consequence of insufficient planning. Entrepreneurs need to ask themselves whether the location and offering of the guesthouse, will meet the expectations of their specific target market. Why will that specific B 'n B or guesthouse be preferred destination for the target market?