SECTION ONE

ACTIVITY ONE
The Pest Analysis is as follows:

POLITICAL:

 The expansion strategy beyond South African borders could be affected by various political and
regulatory uncertainties, transparency in land ownership, corruption and timeframe in obtaining
licenses in various companies.
 With utilities being state-owned monopolies, there are operational challenges with the
continuing disruption in supply.
 Government continues to actively promote the tourism sector resulting in a positive impact on
occupancy levels.

ECONOMIC:

 Current global economic uncertainties continue to affect access to, cost and terms of funding for
expansion both inside and outside South Africa.
 The onset of the global financial crisis and slow GDP growth has limited people’s ability and
willingness to travel, both domestically and internationally.
 The effect of increases in municipal rates and energy costs, coupled with food inflation have
impacted the group’s cost base

SOCIAL:

 High crime levels continue to impact on the decisions of foreign travellers to choose South Africa
as a safe and secured travel destination.
 New capacity has resulted in consumers being spoilt for choice and possibly viewing the brand
unfavourably given its relative age
 Increased demand for skilled hotel staff potentially can erode the group’s skills base

TECHNOLOGY:

 Excellent technology infrastructure in South Africa continues to give the country the edge as the
preferred destination especially amongst multinationals
 Advances in telecommunications such as videoconferencing create a credible substitute for
business travel in challenging economic period
 The increased use of social media and the internet continue to shape how the group engages
with its stakeholders.
ACTIVITY TWO
Porter’s Five Model application is as follows:

THREAT OF ENTRY OF NEW COMPETITORS:

Being one of the biggest hotel chains in the country, City Lodge is able to offer a variety of locations,
features and budget choices with major international hotel players also well established in the country.
The group’s size enables it to carry large economies of scale within its business activities, thereby
minimizing cost. Current funding limitation also means that new hotel developments lack significant
capital required to compete with well established brands like City Lodge Hotel Group. With high entry
barriers, the threat is therefore LOW.

BARGAINING POWER OF CUSTOMERS:

Even though customers are many and diverse with no single large buyer, the power of the customer
remains HIGH. New capacity and oversupply of rooms, increased access to information via the internet
and rise in social media sites such as TripAdvisor means that customers are spoilt for choice. Other
factors include low shopping costs, non-existing costs of switching to a competitor and price sensitivity.

BARGAINING POWER OF SUPPLIERS:

Large hotel chains like City Lodge have a lot of power over the suppliers since there are many companies
providing the same services or products in the country, with intense competition to win contracts with
the group. Even with legislation providing for preferential procurement contracts for previously
disadvantaged groups, the bargaining power of City Lodge Hotel suppliers is LOW.

COMPETITIVE RIVALRY WITHIN THE INDUSTRY:

South Africa’s re-engagement and integration into the international and business economy post 1994
and the successful hosting of the 2012 FIFA World Cup have led to unprecedented growth in tourism.
Growth of new hotels across the country has been phenomenal making competition stiff with factors
such as price, service quality and location critical in gaining market share. Competitive rivalry is
therefore HIGH.

THREAT OF SUBSTITUTES:

Generally, business and international travellers especially will consider the stay at a lodging facility a
necessity once decision is made to travel. Therefore, this threat for City Lodge is LOW.
ACTIVITY THREE:
Having expanded from a 182 room hotel to its current 6440 rooms across 52 locations and expansion
outside South Africa, the company can be categorized as a CASH COW in South Africa and a QUESTION
MARK outside the country.

At the cash cow stage, a company is expected to operate with a range of formalized procedures covering
all aspects of its business operations. There is a high level commitment to HR polices as it continues to
view its staff as an important asset to maintaining its market share. It is therefore likely to offer effective
compromises in labour related negotiations. The HR function is well established with specialist expertise
in many areas. However, this period of relative stability may be interrupted by unforeseen situations
such as global events. As the stage progresses, there is an increased focus on the control of labour costs
which becomes harder to achieve as employees have become accustomed to increased pay. Staff
replacements are no longer automatic and HR initiatives such as training and development programmes
become harder to justify.

The group‘s HR strategy appears to be in line with the BCG Matrix position discussed above. According
to Best Employers South Africa 2012 research, the company is highly rated on primary benefits provided
to employees and career development plans with an average rating in the secondary benefits and
working conditions. There are detailed HR policies in place. Comments by two members of staff
corroborate the company‘s well-developed and implemented HR policies and procedures. The company
is expected to exhibit these same characteristics in its locations outside of South Africa even though it is
still a question mark in these countries as it should be able to leverage on the experience of its South
African operations.

ACTIVITY FOUR:
The three identified employment trends are:

1. HIGH UNEMPLOYMENT AND INEQUALITY: In 2009-2010, South Africa lost about 750,000 jobs
as a result of the 2008 recession, increasing unemployment to 25%. The loss has been across the
board, both in formal and informal sectors, in spite of the government’s aggressive counter
cyclical fiscal policy which resulted in a substantial increase in public sector employment (IMF,
2012)
2. STRONG COLLECTIVE BARGAINING FRAMEWORK: The direct result of this has been a rapid
increase in real wages without the comparable growth in labour productivity.
3. RELATIONS BETWEEN TRADE UNION, BUSINESS AND GOVERNMENT: The Congress of South
African Trade Unions (COSATU) is the third leg of the Tripartite Alliance that governs the
country. Unlike in most countries, government is not neutral, often making business the weakest
link in labour negotiations. The recent tragedy at the Marikana Miners’ Strike aptly
demonstrates these relations.
ACTIVITY FIVE:
The enactment and implementation of legislation in post 1994 South Africa aims to foster good
industrial relations, overcome the legacy of discrimination with regards to race, gender and disabilities
and to ensure fairer practices in a democratic society.

 The Labour Relations Act (1995) covers all the formal economic sectors and lays down
procedures for dismissals, resolution of disputes through the Commission for Conciliation
Mediation and Arbitration.
 Employment Equity Act (1998) promotes equal opportunity and fair treatment by implementing
affirmative action measures aimed at redressing disadvantage among designated groups. It
applies to companies with more than 50 employees or with a turnover of over R2 million.
 Skills Development Act (1998) aims to improve the level of education of workers, and also
established the Sectorial Education and Training Associations, including THETA, responsible for
training and development in hospitality and tourism sector.
 Broad Based Black Economic Empowerment Act (2003) is designed to improve the participation
of black people in the economy by encouraging and fostering more black ownership and
management.
 The Sectorial Determination for the Hospitality Sector (2007) lays down the conditions of
employment for workers in the sector and prescribes a minimum wage large and small
employers should pay and prohibits forced and child labour. An update to the minimum wage
was made in June 2012.

ACTIVITY SIX:
The financial activities of the Group were analysed for the financial year ending 30 June 2011.

LIQUIDITTY:

Even though cash generated by operations is down on previous year and loan facility taken for new
developments become payable within the next 12 months leading to lower liquidity, the company
remains in overall good financial position and is able to meet forseeable cash requirements.

PROFITABILITY:

Revenue grew by 5.5%, resulting from softer demand and oversupply of rooms. Costs increased at a
higher rate due to factors such as additional property rental expenses, 50% increase in electricity
expense and a 54% increase in depreciation as a result of capitalising new hotels. Margins are therefore
down. It continues to able to generate returns from its capital base.

EFFICIENCY:
The company continues to be efficient at credit control, reducing its debt collection days. A significant
reduction from 2010 in creditor payment days indicates the company is comfortable meeting its cash
obligations. Even though there has been a slight decrease in its utilization of its assets to generate
revenue in the year, expectations are that increased occupancy levels for existing and expanded asset
base will increase revenue in the coming years.

RISK:

As a result of increased borrowings to finance the new hotel developments, the company continues to
be highly geared. Despite the downturn in business, the company continues to be able to service its
interest expense from annual revenue. The gearing ratio is expected to improve once long term
borrowing is paid. Its interest cover well above the generally accepted level of 2 gives further assurance
that the company continues to be able to meet its interest payments out of current earnings.

ACTIVITY SEVEN:
The performance of Gooderson Leisure Group, another publicly listed hotel chain was used for
comparison over the last five years.

Profitability Ratios Activity Ratios

80
100% 70
90% 60
80%
70% 50
60% 40
50%
40% 30
30% 20
20%
10% 10
0% 0

City Lodge Gooderson Leisure City Lodge Gooderson Leisure

 Return on Capital Employed Asset Turnover Ratio

35% 80%
30% 70%
25% 60%
50%
20%
40%
15%
30%
10% 20%
5% 10%
0% 0%

City Lodge Gooderson Leisure City Lodge Gooderson Leisure

Debt Ratios Liquidity Ratios
2.00
1.80
1.60
350.00 1.40
300.00 1.20
1.00
250.00 0.80
0.60
200.00 0.40
150.00 0.20
0.00
100.00
50.00
0.00

City Lodge Gooderson Leisure City Lodge Gooderson Leisure

 PE Ratio Comparison as October 2012
25

20

15

10

0
Industry City Lodge Hotel Gooderson Leisure

Oct-12

City Lodge outperformed Gooderson Leisure Group on profitability, efficiency and activity ratios,
generating better returns on its capital base. Even though City Lodge remains the riskier of the two, its
shares is significantly more attractive to investors with better performance than industry average.
SECTION TWO

INTRODUCTION

The opening of the first City Lodge Hotel in Jonannesburg in 1985 pioneered the limited or selected
services hotel concept in South Africa, marking the opening a new market segment which had not been
explored by the existing hotel groups at the time. The Swiss-born Founder, Hans Enderle had extensively
investigated the selected service concept while he was the Managing Director of Holiday Inn South
Africa and felt it was a model that could be adapted successfully in the country.

From its beginnings with 123 rooms, it currently offers 6,440 rooms at 52 locations throughout South
Africa. The group has four brands offering a variety of locations, features and budget choices to
travellers. It has grown to one of the leading South African hotel chains, listing on the JSE in 1992 and
expanding to other African countries.

CURRENT STRATEGIC DIRECTION

The City Lodge strategy since its inception has been to focus on achieving high margins by offering
travellers a selected services concept without the often under-utilised services and facilities and the high
staff-to-guest ratios of full service hotels. It has remained loyal to this strategy of selected services
model even though there have been minor adjustments to facilities provided such as boardroom, fitness
rooms and coffee shops in response to customers’ needs.

As a chain, the group has expanded mainly through internal growth. It has shunned the growth path of
franchising and use of management contracts common with other selected services hotels in the United
States. Rather, it has expanded through a strategy of brand diversification and further market
segmentation of its selected service model of hotel development (Rogerson, 2011). In 1990, it
established the first Town Lodge as a two star offering and further segmented in 1995, to both one and
four star markets with the Road Lodge and the Courtyard Hotels respectively. Asides from adopting the
external growth strategy with a joint venture arrangement for the Courtyard Hotels, it has used the
internal growth strategy for its other diversifications and expansion.

In recognition of its core customer base i.e. the domestic business traveller, City Lodge’s location
strategy has been to have a presence in all major South African urban locations. In establishing any of
their four brands in a new location, careful research is undertaken with consideration given to the cost
of proposed development, what the market can afford and the supply situation of other accommodation
providers. The close association of City Lodge operations with the business tourism economy is
reflected by the continued concentration in Johannesburg and Pretoria (25 hotels), as opposed with 6
hotels in Cape Town and Durban, the two leading leisure tourism destinations in South Africa.

With the current downturn in the hospitality sector, the group’s strategic direction is one of
consolidation with no more developments planned in South Africa. However, in anticipation of positive
future upturns, the company is banking suitable lands, aiming to be ready for future developments at
the appropriate times. While pursuing the consolidation in South Africa, the company has started an
expansion strategy to other African countries, taking advantage of the unprecedented growth being
experienced in these countries and the continued expansion of many South African companies to these
countries. It is using both internal growth strategy (Town Lodge in Gabarone, Botswana) and external
growth strategy with the acquisition of 50% stake in Fairview Hotels in Nairobi, Kenya. Other
opportunities in Ghana, Namibia, Zambia, Mozambique and Mauritius are also been considered.

Having embarked upon the consolidation strategy, the company is now turning its attention to being
more competitive and innovative with a strategy to increase its service levels. This according to Marcel
Koblinski, the Human Resources Director entails changing the way employees think in order to come up
with new and improved ways of doing things. It has developed the “I’m Kind” programme which aims to
drive service delivery and encourage creativity amongst its employees. The group, understanding that
the key element in service excellence is its people, has a strategic priority to develop and acknowledge
its people on a job well done, ensuring they are fairly rewarded in return.

RECOMMENDATIONS
The success of any company’s strategy, especially those in the services sector depends greatly on its
people. While City Lodge has made great strides to improve the skills shortage amongst its African
employees, there is still a lot of room for improvement. An examination of the Employee Profile 2012
reveals no African in top management. Of the 69 people in senior management, only 6 are Africans,
Indians or Coloured. The figure improves at the middle management although there has been no
improvement between 2011 and 2012. Specific programmes must be implemented to redress its
employment inequity.

As the group expands into other African countries, it needs to decide on the strategy for parent-
subsidiary relationship. It is critical for the group to understand the national cultures of its new
acquisitions and strive to get a balance between its organizational culture and that of its host country,
seeking to think globally but act locally.

Even though the pioneer and still remains a leader in the selected services concept, other hotel groups
have introduced their own brands in this market segment and therefore, competition. The need for
continuous improvement in service delivery levels has to be a core strategy. This must however, be
balanced with ensuring that any operating cost increases result in increased revenues.

Substantial effort has been made in the utilisation of information technology in the running of the
business. The company’s website is being extensively designed and in roads has been made in using the
social media. However, there is a need for investment in its IT infrastructure to meet both the
company’s growing needs (fast and efficient reservations, check-in/out experience and monitoring guest
feedback) as well its customer’s growing needs, especially the increased dependence by business
travellers on the internet. It can, for instance, increase the free internet access time of 15 minutes in its
three and four star offerings in the first instance.

SUMMARY

The City Lodge Hotel Group was founded on a market differentiation strategy – the selected services
hotel concept. In its 27 years, it has remained true to the concept even though adjustments have been
made to reflect customers’ needs. It has further diversified within this market segment and grown
substantially using both internal and external growth strategies.

The group, having identified its core customer base, has expanded in correlation to areas in South Africa
with high business tourism activities. In recognition of the current tough economic conditions, it has
adopted a consolidation strategy within the country whilst seeking new growth market by international
expansion to other African countries currently experiencing great economic growth. In the wake of
increased competition, it has initiated a number of programmes to improve its service delivery to build
on a strategy of innovation and creativity.

Finally, a number of recommendations are provided in the report specifically relating to City Lodge’s
human capital management, organisation culture, innovation and IT infrastructure provisions.
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