From his days collecting rent in gritty inner-city backpacker hostels to becoming a major hotel management force in Australia, CEO of 8 Hotels Group Paul Fischmann talks about scaling back to basics and doing what he does best – redefining and refining – the boutique hotel experience.
There’s a curious thing going on in the Australian tourism sector at the moment. According to Deloitte’s Tourism and Hotel Market Outlook Report (August 2016), while global economic growth is slowing, and long term trends indicate travel growing a little faster than growth in GDP per capita, 2016 has seen a boom in travel growth at multiple times of income growth in both developed and developing economies.
International visitors to Australia, including Asia, UK and USA has grown by ten percent over 12 months to June 2016 – the fastest growth since mid-1990s. On the domestic front, local travel is humming too. Corporate travel is growing around 11 per cent and domestic tourism is growing around nine percent – making it the fastest growth on record to-date. Australia has suddenly become a hot destination of choice, particularly with locals hitting regional hotspots in northern NSW and northern Qld to southwest WA and southern Victoria which has seen double digit growth….and the big end of town is taking notice.
According to the Financial Review’s prediction of booming foreign hotel investment in Australia in January last year due to a weaker AUD combined with growth in tourism has made Australian hotels very appealing to offshore investors in Asia and the US.
Eight years earlier, AHA – the peak body for the Hotel industry, commissioned Price Water House Coopers to provide an overview of the Australian hotel industry, which confidently asserted that ‘there is little consolidation’ in the hotel sector. Within nearly a decade, off-shore investors combined with favorable recent gains (i.e. fall in the AUD and crude oil prices) has seen a major shift resulting in hotel consolidation, rendering PWCs assertion now defunct.
With Starwood Hotels accepting a AUD13.6B merger with Marriott International in the second quarter of 2016, the sale of Westin Sydney and Sydney Hilton to Asian investors and Solotel purchasing the Australian Hotel and adjacent Abercrombie Heritage Terraces in Sydney in the third quarter, commercial agents are rubbing their hands with the expectation that big players will continue to consolidate and/or consume smaller operators in our capital cities for next few years at least.
Someone who understands this trend all too well, and predicted the shift early, is founder and CEO of 8 Hotels Group, Paul Fischmann.
“The market for hotel development in Australia is very hot… in my view, it may be too strong and could hurt some markets in Australia in a few years’ time. Getting into the hotel market is difficult, they’re big real estate, availability is limited and cost to build and maintain is huge so making it work is tricky. It’s a highly competitive space, and with the amalgamation of tier one players going on…going up against guys with big capital has never really been feasible for me,” says Fischmann.
Fischmann, 41, started his hotel career over twenty years ago, as a half-owner / manager of a boarding house in inner-city Sydney. In Fischmann’s words, it was a dodgy riot of fun.
“I went into the boutique hotel space because I started with a 14-room hotel. It wasn’t like I was going to be able to buy a 500-room hotel…no one was going to give me money to do so without a track record. I definitely had to sell myself to landlords in the early days because they needed to feel comfortable enough that I was going to pay the lease. It was a shady place – I was a bit shady too! It was scary, trashy. Frightening. Tenants would draw pictures and write obscenities about me on the walls because I was the guy collecting rent. I was young but I had a lot of fun too. I was very fortunate to have some very grown up friends around me, who were professional, and I realised I had a lot to learn,” says Fischmann.
Within a short time experiencing exponential growth with the addition of three boutique hotels to his portfolio, Fischmann says he had the Midas touch, and then suddenly, it all went pear-shaped in his late twenties.
“I ended up going broke. It wasn’t a big deal as I had no family at the time and the dollars weren’t serious. But, the experience taught me a few valuable lessons – how to focus and the importance of doing things the right way so when I was ready to build a new business, I was very motivated,” says Fischmann.
Success came fast. With the establishment of his new company, 8 Hotels Group, Fischmann grew his portfolio to 21 hotels nationwide, and a holding in Paris within a decade. The maturation of the company, and Fischmann himself, quickly brought him to a new cross-road – either bring in a big capital partner to compete aggressively against tier one players or find a niche differentiation strategy to survive. After weighing his options, from floating the business, bringing in investors or selling the business outright, Fischmann decided that none of these options were viable. Fischmann did what most business owners find terrifying – a complete shift in strategic direction – which meant everything had to change.
“I didn’t want to aim to be a 100-strong hotels management company anymore. I just wanted to create really special boutique hotels. It’s natural for large companies to experience a drop in quality of work and I didn’t like that. As a group we were becoming far less entrepreneurial and our mind-set had become risk-adverse. Thirdly, commercially the hotel management space was becoming very competitive. The larger hotel management groups are public companies that create value through long-term management contracts. My view was that some of these were bad deals or deals that I didn’t want to compete with because they either offer too low management fees to make it work or offer high guarantees or key money contributions in order to obtain a long-term contract.”
According to Fischmann, key money is very attractive to developers as they are often short of cash flow and most developers, particularly the ones that are not hotel savvy, assume that engaging a large management company is the right play i.e. take a few bucks with a low management fee for a lock-in long-term contract. The appeal for tier one management companies is that they’ve signed the hotelier on for contracted revenue over x amount of years and may be trading at 15 times the earning – so instead they make money at the value end rather than cash flow end – which they can afford by virtue of having a larger infrastructure to support a higher volume of hoteliers. For Fischmann, without substantial investment from a capital partner, he knew he was not going to be able to compete against that model – and win.
“I didn’t want to take on another partner! I had real estate deals, landlords, banks, owners I was dealing with, staff, I thought do I really want to take on another large voice in my business? The answer was no. So that’s why I decided to change the strategic direction of the business,” says Fischmann.”
Now, 8 Hotels Group focusses on owning, developing and operating boutique hotels – with the focus on exceptional quality in product, and customer experience. Fischmann has also diversified his company’s product portfolio with a white label hotel management services product, and a hospitality web-based training platform – Typsy.com. By offering a white label product, 8 Hotels Group can cater for developers who are non-traditional hotel owners that have secured land on commercial sites – particularly for those who don’t want to be long-term holders of the asset – they may just want to build and sell.
“The biggest value our white label product offers developers is management contracts that allow for vacant possession of the hotel. This is the opposite of what the tier one players do. The ability for the developer to be able to sell the asset without being locked into an iron clad long-term contract with the operator offers more value for the developer and I’m happy to do that as we consider ourselves a developer as much as an owner, so we understand what our clients most value. This means we are essentially setting up really interesting hotels that gives developers the option to terminate the contract at any time,” says Fischmann.
What this means to the developer is that if it’s incumbent to an operator for 25 years then the market for potential buyers is smaller. If there’s no incumbent on the asset, then this opens the market to all buyers – as some buyers may want to be hotel owner/operators themselves. Alternatively, they may have an existing relationship with another operator, or they may want one of the big boys to throw key money at the project. All these reasons are very attractive for hotel developers to sign up to a white label product. The major advantage for developers is that 8 Hotels’ white label product also means that they offer services across the entire value chain – from conceptual design, positioning, fit-out and operations for the lifecycle of the owner’s asset.
Not one to stay still, Fischmann’s latest venture Typsy.com sees his first foray as an angel investor. After being approached by a Melbourne start-up as a potential user of their on-line hospitality training platform, Fischmann immediately recognised the benefits, and implications of the product – and opted instead to become a major investment partner.
“We just launched Typsy.com and I think it’s going to revolutionise the way that training and development is delivered for hospitality companies to their employees and as a complementary vocational platform for hospitality management schools. It’s five minutes or less video tutorials, delivered through a monthly subscription, licensed user-base, web-native platform. Tutorials may be how do I hold a wine glass or how do I clean a coffee machine? It’ll feature thousands of videos covering all aspects of hospitality from front of house to operations. I’m incredibly excited about it,” says Fischmann.
Closer to his core business, 8 Hotels is currently restoring a 35-room luxury guest house in Surry Hills, Sydney. And while it’s had a fair set of challenges in terms of neighbourly engagement, Fischmann is pretty pumped about the project – which is on schedule to open mid-2017.
“I love heritage buildings, they’re beautiful. Our latest guesthouse, ‘Little Albion’ is very different. It’s feels very homely but luxurious. It’s a stunning heritage building with connecting courtyards, in one of the hottest spots in inner city living. It’s perfect,” says Fischmann.
For any budding hotel developer, Fischmann says that understanding location, area and what he calls, demand drivers, are key when investing in a hotel purchase. “Location and position are two different things. The location is an area, but a position is the spot within that area. The position is just as important as location. You may have a great position in an undesirable area and vice versa…The important consideration is understanding the demand drivers – what’s around the hotel that will create demand for occupancy – or are you going to create that demand yourself? For example, we did a hotel in Pyrmont, which was near the Convention Centre, it had parking next door, fish markets, Darling Harbour, so it has great demand drivers,” says Fischmann. As for competition, Fischmann asserts that he doesn’t care about what the guy next door is doing – as ultimately, he argues that a hotelier is really competing against themselves in a way.
“We are all limited by physical stock. I can only ever sell 100 rooms if I only have 100 rooms… this is a supply demand driven business – you can have the world’s greatest hotel, but if no one’s travelling you won’t fill it. Every hotel is very different from each other. We can have mid-market, upper-market boutique hotels, so we compete within a lot of different spaces. Price point was very relevant to us a few years ago, but now I’m driven to building a product where I can push the rate as far as possible. Like anything, you have to find the price point where the customer feels like they are getting value for spend. Ultimately, I want to build hotels that excites and exceeds expectation,” says Fischmann.
As for the day-to-day operations of 8 Hotels’ enterprises, Fischmann credits a large part of his success to the people he’s surrounded himself with. During the tumultuous period of scaling back the business to where they are today, Fischmann says it was an emotional time for everyone.
“Changing direction took two years to complete. We let a lot of people go and I sold a lot of hotels. It had a huge impact as the business was based on growth and suddenly I turned around one day and said I no longer wanted the growth story anymore. So to convince others to buy into the new story and accept the lay-offs was tough. There were people that helped me to build the business from the beginning, who knew that they would not have a position with the new business, yet they helped me to facilitate that change,” says Fischmann.
Being a private company, Fischmann says he never identifies as a professional CEO, but concedes that he shares a common trait that all good CEOs must possess – persistence.
“Success means persistence. Keep on going until you get a yes. I’ve never had an I give up moment. I also employ people who share that trait. I’m not interested in bullshit. It’s the one that looks you in the eye, that commits and says yes, I’ll be here at 7am and shows talent – that’s the one I want,” says Fischmann.
Being a hotelier means it’s a 24/7 business, and Fischmann’s energy lends itself to his livelihood. It’s little wonder then, when asked whether he takes advantage of staying in his own hotels gives him pleasure and respite, his response was immediate – “I never stay in my own hotel. I can’t relax!”