Case1Sapphire Beach Group1 Section1

Case Study 1Sapphire Beach Hotel

Ltd.

Section 1 (Group 1)Khairiyah Dawi 1116586Adibah Mohd Radzi 1115916Nurul Syuhadah Saharudin 1117100Siti Nur Diyana Mohd Radzi 1112532Ira Fariza Fauzi 1116044

Decision FlowAnalyze

situation

Define the

problem

Formulate

alternativ

es

Analyze

alternativ

es Recommend

solution

1 2 3 4 5

Timeline Summary1980

Decision of 3 Kenyan Businessmen to built a new hotel

1981

New Year’s Eve Bombing

1982

Expected schedule of completion (January – June)

August 1982

Coup Attempt

October 1982Delayed 4 months behind schedule

STEP 1: ANALYZE SITUATION

PESTEL ANALYSIS• Coup attempt against His Excellency President Daniel Arop Moi

• Investors lack of confident to invest in tourism industry

Political

• Economic crisis that the Western economies had suffered in early 1980s

• Bank or financial institutions losing confident in giving out loan

Economic

• Major customers of beach hotel is tourists especially middle class tourist

• Wide target marketSocial

PESTEL ANALYSIS• Low accessibility to Malindi because it did not have an international airport to handle tourist

• And highly dependent on tour packagers

Technological

• There is general perception in the business community that Malindi was currently overbuilt with hotel capacity

Environmental

• The tourism industry was frustrated by government regulation

• For example: Currency controls, Import restrictions on vehicles, Numerous reporting documents to file, Restrictions on charter flights into Kenya

Legal

SWOT ANALYSIS~STRENGTH~

*Situated at strategic location

*Specific target market*The three owner is considered as good

paymaster*High percentage of

foreign tourist

~OPPORTUNITY~*Tourism are the second largest

source of foreign currency reserves.

~WEAKNESS~*Lack of experience in

hotel management*Depends heavily on

foreign tourist*Depends on tour packages

*Insuffiecient funds*Delay in completion of

the hotel~THREAT~

*Western economic crisis

*Existing competitors(overbuilt

hotel)*Political instability

(coup attempt)*Government regulation

*Unavailability of international airport

STEP 2:DEFINE THE PROBLEM

Problem:INSUFFICIENT FUND

Dilemma: How to get the sources of fund to finance the construction costs?

Should the three owners take up loans or other financing methods?

How can they achieve their targeted occupancy rates?

Decision Maker: The THREE OWNERS of Sapphire Beach

Hotel

STEP 3: FORMULATE ALTERNATIVES

1. Stay with West

German bank2. Change

bank to KFS

3. Raise fund from investors

4. Sell the project to 3rd party

STEP 4: ANALYZE ALTERNATIVES

1. STAY WITH WEST GERMAN BANK

- No need to request fund from other financier- Enter into negotiation with the bank- Request for changes in the term (postponed repayment date)

- Foreign bank- Highly unlikely to entertain such issue from outsiders- Unfavourable situation of Kenya (Politics, Economics and Social)

Year 1Kshs’000

Year 2Kshs’000

Year 3Kshs’00

0Occupancy RateRate/bed Kshs 150 Kshs 155 Kshs 165

SalesAccommodation

Restaurant

Bar

Other

1,826

2,017

1,370

913

6,126

2,032

2,245

1,524

1,016

6,817

2,317

2,651

1,738

1,159

7,775Less : Cost of SalesBeverages

Food

Linens & Housekeeping supplies

890

1,109

146

(2,145)

990

1,234

162

(2,386)

1,129

1,458

185

(2,772)

Year 1Kshs’00

0

Year 2Kshs’00

0

Year 3Kshs’00

0Gross Profit (cont.) 3,981 4,431 5,003Less : Operating Expenses (4,751) (4,754) (4,702)Net Loss/Profit

(770)

(323) 301

Ratio AnalysisYear 1 Year 2 Year 3

Gross Profit Margin () 0.65

COS = 0.35

0.65

COS = 0.35

0.65

COS = 0.35Net Profit Margin (0.13)

Total Cost = 1.13

Operating cost = 0.78

(0.05)

Total cost = 1.05

Operating cost = 0.70

0.04

Total cost = 0.96

Operating cost = 0.61

Sales Net ProfitCOSOperating Cost

*Sapphire’s is GOOD in controlling and managing their cost (COS & Operating cost)

Break Even Analysis• Breakeven Point =

• At BE point, the Net Profit = 0

Year 1 Year 2 Year 3BE Point/year

= 30,455 beds

= 29,527beds

= 27,822beds

Real Point/year

25,623 beds

27,594 beds

29,565 beds

Real Point (Net Profit < 0)

Real Point(Net Profit > 0)LOSS PROFI

T

2. CHANGE BANK TO KFS- Local bank and local entrepreneur relationship- Tourism is the 2nd largest source of foreign exchange revenue in Kenya- 3 owners = good paymaster- Creation of another

loan- Incur additional cost (Interest)

Financing Kshs ‘000

Owners’ Equity 2,500West German Bank 10,000

Initial cost 12,500

Owners’ Equity 1,500 Overrun costUp to date cost 14,000

KFS 500

Overrun cost

Owners’ Equity 500 Overrun costExpected total cost 15,000Kshs ‘000

Loan requested 12,000Less : Repayment to West German

(11,500)

Balance 500

How to make Sapphire look favourable in the eyes of KFS?

3. RAISING CAPITAL FROM INVESTORS (OTHER THAN BANK)

1. Merger (Conglomerate)Pros :- Business Expertise &Ownership in the

business.Cons :- Little ownership in the company.

2. Issue Bond (Public)Pros :- Easy Way to raise capitalCons :- Lengthy time to follow procedure

3. Raise money from Family and Friend (Business Networks)Pros :- Lower or no interest rate. Low cost of

raising capitalCons :- Lengthy time to list and evaluate

potential family member and friends that are willing to invest.

4. SELL THE PROJECT TO THE THIRD PARTY

PositiveFree from further obligation towards the businessThe gain on selling the project could be used for other investment

Negative Hard to value the project and we have to incur more cost for the valuer

Hard to find potential buyer Incur opportunity cost (High possibility to get higher return)

THE JOURNAL OF TOURISM STUDIES Vol. 5, No. 2, DEC.'94

YEAR 1(Kshs 000s)

YEAR 2(Kshs 000s)

YEAR 3(Kshs 000s)

SALES

Accomodation 1,826

2,032

2,317

Restaurant 2,017

2,245

2,651

Bar 1,370

1,524

1,738

Other miscellaneous

913

1,016

1,159

6,126

6,817

7,865

Operating Expenses

(6,896)

(7,140)

(7,474)

Net Loss/Profit

(770)

(323)

391

Forecasted Statement of Profit and Loss

STEP 5: RECOMMEND SOLUTION

• 2nd Alternative = Change bank to Kenya Financial Services

• Reasons :1. Construction need to be continue as

soon as possible. IMMEDIATE financing is required.

2. Mr. Kimani had already tour around the hotel site.

3. ‘Bazaar report’ produced shows favourable result.

4. Ability to surpass 75% of occupancy rate

• Recommendations :1. Revised business plan (ensure

able to surpass 75% of occupancy rate in 3rd year)

Revised on the rate of room offered. Should not be too low than published rate.

Varies promotional and marketing tools

2. Suggest that KFS also has portion of ownership in the hotel business.