Risk

RISK

The Entrepreneurs has researched the rate of business failures in this industry. As a real estate based service industry the failure rate of this business is much less compared to other industry. A project may become financially insolvent due to:

  • Over building of a facility
  • Disproportionate level of Amenities
  • Wrong target customer base
  • Wrong pricing

A project totally failed and abandoned within 5 to 10 years after commissioning is very uncommon in this industry. However, aging of the facility and lack of good maintenance and upgrade may lead to closure of specific projects. It is not uncommon to see lodging facilities in operation for more than 40 to 60 years in a single location. The Entrepreneurs have taken into consideration the above points in selecting site, designing and developing facility and amenities, defining value and price, and targeting customer base.

There are a number of issues which is beyond the control of the Entrepreneurs may lead to a short term insolvency due to downturn in revenue expectation.

  • Economic Condition: A country has its cyclical economic change. All industry including lodging facility also suffers during an economic downturn. However, it is very rare that a lodging facility has completely gone out of business during an economic downturn. On the other hand, over 20% of the business report that they went bankrupt due to economic downturn.
  • Behavior of competitors: There is very insignificant barrier or regulatory restrictions to enter in this business. In some cases, an existing business or a new entrant may destabilize a balanced market by offering un-proportional rate or an innovative product and service. Considering all industry, approximately 16% of business claim to become insolvent due to arrival of a competition in the market. However, this number is significantly low in lodging and hospitality industry.
  • Insufficient demand: There can be unexpected unexplained sudden drop in market demand in a specific location. This may cause short-term financial hardship. However, it is very rare that such issue cased a business failure in lodging industry.


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