ACCT 2011 Sheraton Hotel Case Study

This case study presents a scenario where Jean Lafleur, the managing director of the Sheraton Hotel in Montreal, must decide whether to accept a contract from Alitalia for 40 rooms at a discounted rate, along with a daily crew allowance. The case provides detailed background information about the hotel, its services, and its competition. It also includes sales and cost data, such as room statistics, food and beverage revenue, and operating costs. The case requires an analysis of both quantitative and qualitative factors to determine whether accepting the Alitalia proposal is financially beneficial and strategically sound for the hotel. The final decision must consider the hotel's financial goals, cash flow issues, and the potential impact on other guests.

ACCT 2011 – WINTER 2017
Group Case # 1 –Sheraton Hotel
“I will give you my decision in about a week,” said Jean Lafleur, managing
director of the Sheraton Hotel in Montreal, as he put down the phone and looked
pensively at the letter before him. The letter was from the airline Alitalia requesting a
one-year contract for 40 rooms at $42 per night. In addition, the hotel would have to
provide a crew allowance of $25,000 per day. Bills are to be paid within seven days
of receipt of statement on a weekly basis. The problem facing Lafleur was a simple
one: does he take Alitalia and fill the 40 rooms at $42 or does he refuse the business
and hope that he can sell the rooms at the full rate of $105 per night. Last year he
had 115 rooms sold out.
Background
The Sheraton Hotel was located in the downtown area of Montreal. It was
viewed as a corporate/convention hotel. In 1987 the hotel was named winner of the
Canadian Automobile Association “Four Diamond Award” and the “Four Star Award”
from the Mobil Travel Guide. The hotel had 824 rooms including the Sheraton
Towers – a prestigious hotel within a hotel. The Towers had its own check-in
facilities, lounge, and special amenities. It contained 131 rooms, including 16 suites.
The balance of the hotel offered a choice of king, queen, and double beds with an
additional 24 suites and six rooms specially equipped for people with disabilities. All
rooms were equipped with a pay-TV system.
The Hotel opened three restaurants. Le Point de Vue on the 37th floor offered
Gourmet French cuisine and an exceptional wine list. It had a seating capacity of 84.
Le Boulevard on the third floor was open for breakfast, lunch, and dinner and had a
seating capacity of 259. La Musette was a European-style “express” restaurant on
the promenade level for people in a hurry. It had a seating capacity of 60. In
addition to the restaurants, the hotel had five lounges and 14 function rooms,
including a ballroom that would accommodate 1,100 people for banquets and 2,600
people for receptions. Other features of the hotel included a five-story glass-in-
atrium, a glass-enclosed year-round pool and a health club with gymnasium, sauna,
whirlpool, and masseuse. There was indoor parking for 500 cars and boutiques and
specialty shops on the promenade level. Other services included multilingual staff
and audio-visual services. All meeting rooms had cable-TV, audio-visual facilities,
and telephone jacks.
1

Competition
For airline crews, all hotels in the Montreal area were Sheraton’s competitors
because airlines choose hotels based on price. Nevertheless, for Alitalia, the criteria
for selecting a hotel were slightly different. They preferred four-star hotels located
near shopping and entertainment facilities. Hence, the competition was limited to
about 10 hotels in the downtown area. Since all hotels met the Alitalia criteria, the
decision would be made on price and service. Jean was well aware that a number of
his competitors had expressed interest in the Alitalia business. He was also aware
that if he took the contract and satisfied the Alitalia crew, then he would have more
negotiating power when the contract came up for renewal next year (i.e., the room
rate would be increased). In the hotel business it was always easier to renew
existing room contracts than to solicit new ones.
The Proposal
Sheraton’s target market included all forms of corporate groups, professional
associations, and conventions. The Alitalia proposal appeared to be a good
opportunity for Sheraton because it guaranteed 40 rooms per night for the entire year
plus potential clients from their flights. The contract, if accepted, would require the
hotel to:
 have clean rooms immediately upon check-in
 to have on hand $25,000 every day as an allowance for crews
 to distribute the allowance as instructed
 to control the crew’s wake-up calls
These services were standard tasks for the Sheraton Centre; however,
because of the late departures of aircraft in Europe, check-out time for Alitalia would
be between 4:00 pm and 10:00 pm the same night. This meant that the hotel had to
keep extra maids on duty to have these rooms ready within two to four hours. In
addition, when flight schedules were changed, there would be changes in wake-up
calls and in the distribution of the allowances. This extra service to the crews would
be at the expense of the other guests who were paying the full room rate.
Experience with other airlines had shown that airline crews spend less during
their stay at a hotel than a regular guest. This was because their usual stay was only
one night. If they were grounded for several days, they preferred to explore the city
of Montreal; hence food and beverage purchases were often made outside the hotel.
Sales and Cost Data
Jean knew that he would have to work fast on the proposal so he called in his
assistant, Marie and asked her to collect all the data required to estimate additional
revenue and costs that would be involved if the hotel decided to accept the Alitalia
offer.
2

She began with an analysis of room statistics for the previous year, which
showed that if the proposal had been in place, then the number of nights of regular
guest rooms lost was equivalent to 115 sold-out nights. An analysis of the food and
beverage statistics for the previous year showed average food revenue (not including
banquets) of $17 per occupied room and average beverage revenue (not including
banquets) of $13 per occupied room. The hotel’s standard cost percentage was
36percent for food and 32 percent for beverage.
In analyzing the probable effect on operating costs, Marie found that during
the period when the hotel was not full they would require the equivalent of one
additional front-desk clerk to handle the Alitalia crew. The average hourly wage for
this job was $9.20 per hour. Employee benefits were calculated at 35 percent of
wage cost. In addition to this cost, Marie estimated the following variable costs per
occupied room:
 Housekeeping – one half hour per room. Housekeepers were paid $8.60 per
hour.
 Laundry and linen - $0.75 per occupied room
 Utilities - $1.00 per occupied room
 Amenities - $2.25 per occupied room.
With this information in hand, she turned to Jean for final analysis and decision.
As he sat in his office with the new information supplied by Marie, he
remembered a discussion at the recent meeting of general managers of all
Sheraton hotels where they were told that one of the Company’s objectives for
the coming fiscal year was a 12 percent return on investment. He was also very
aware of the serious cash-flow problem facing the hotel at that time. Cash flow
for the last fiscal year was negative by over $2 million and with a $50 million
long-term mortgage at a floating interest rate and $4.2 million in municipal taxes
to pay, the Alitalia business promised a steady and certain cash flow every
week.
Required
You have been hired as an outside consultant to write a report to Jean Lafleur
recommending acceptance or rejection of the Alitalia proposal. Your report
should analyze the relevant quantitative and qualitative aspects of your
recommendation and any other issues that may impact the accept/reject
decision.
3