Starting a Hospitality Business - Discussion with Justin Watzka, Founder @The Coachman Hotel
Image Courtesy: California Weekend Magazine
Justin Watzka, Founder of The Coachman Hotel in South Lake Tahoe, California, shares his experience of starting a hospitality business. Coachman Hotel was featured among the "Most Instagrammable New Hotels" in Vogue in Sept 2016.
Prior to starting his own hotel, Justin was with Marriott for about 7 years (Marriott Vacation Club and Ritz-Carlton). He did his undergrad from Cornell University and has an MBA from The Wharton School.
Check out the podcast below to listen to the complete discussion!
Some of the areas we touch upon in this episode include:
1. How Justin decided to start something to create his own mark and be in charge
2. How he attracted his first guests in the beginning
3. How he traveled extensively to gather good ideas to include in his hotel - eg: Learning from the emphasis on customer service in Asia
4. How it can be hard to raise money from banks for first timers in this space, since they tend to look for people with operational experience.
5. Rule of thumb - you can spend 1000 times the rate you can expect for a room
6. How hiring a great team is absolutely key - to handle operations, to handle real estate, etc.
7. It's important to decide how involved do you want to be - do you want to do the day to day checking-in etc? Or do you want to focus on more strategic long term initiatives?
8. Ways to scale: Eg: How you can scale by opening more properties or offering your management services
10. Resources to help you along
Detailed transcript of the discussion:
Tell us a little bit about what you're building. And what is your vision for the Coachman Hotel?
Well, like a lot of people who probably worked for larger companies, I worked for Marriott for about seven years. And with those big companies, it's harder to have your own kind of imprint on the experience at the end of the day, the product. And I always really wanted to be the person in charge of making all the decisions, being able to change from one day to the next. And I left Marriott back in 2010. And I've been on this journey to start my own hotel. And the goal really is to put people on vacation and have a good time doing it. It sounds kind of easy at a high level to say we want people to have a good time and enjoy their trip on vacation. But there really are 1000s of decision points that go into that from the coffee you serve to the toiletries and bath amenities you have, to what bedding you use, what the room looks like, the lighting, there's just so many things that go into that. And it's a lot of fun to be the person making those decisions.
Tell us a little bit more about how the Coachman hotel is different from any of the other hotels?
That's one of the things about the hotel industry, it's hard to do anything that's completely new or that nobody's ever seen, really, you're just borrowing as many good ideas as you've seen out there and trying to bring them into your hotel. And it's really a people business. You have to have great people and you have to have people that believe in your vision and can execute for guest satisfaction. I would never say, we're one of a kind. But I would say what we strive to do we do really well. And that's kind of what we want to be known for. Because you want guests to come back, you want them to tell their friends. And, you know, I think at the end of the day, we're just focused on just that. We want people to come back.
Who is your target demographic? And what kind of traffic are you seeing right now?
Our target market is kind of the young professional from the Bay Area, Sacramento, Reno, but the reality is you aim for a certain group, but you're going to attract a lot of people that are into, what that target market might be into as well.
We're actually seeing quite a few international guests. We're booking really well on booking.com, which is a heavy international site, I believe the stats are, we have about a four times higher conversion rate than other hotels, meaning when prospective guests click on our hotel, they're four times more likely to actually make a booking than when they click on another hotel. And I think a lot of that goes to what we convey and pictures are huge. Nowadays, the website is critical to the impression that you set for guests from the get go, they can tell a lot by just the quality of your photos. And that sets the expectations for the whole trip.
You were rated as the most Instagrammable hotel in Vogue relic. How did that happen?
I have an amazing PR person, her name is Alison. But one thing about content like that is it really does snowball. There are a lot of people out there that are blogs or websites or publications. And there's more more of them than there is good content. So if you can get placed in a few spots, if you can get the word out in the right publications, other people are going to see it and pick up on it and want to do another story on a wrinkle of that. I would say, that was kind of just the result of some really good targeted early PR, and then that just snowballed.
How did you attract your first few guests? How have you managed to build this brand?
One of the things for better or worse in the industry now is the online travel agencies or OTAs or Expedia and Hotel Tonight, they allow you to open up your hotel and basically start filling it right away. Because they're spending a tremendous amount of money to reach customers. And so your hotel can come up and they can see it right away. Whereas, you know, maybe 15 or 20 years ago, it might take you years to really begin ramping up your business because it wasn't easy to reach people.
So we don't have to spend any money to reach people off the bat. We just pay a commission for bookings. So that's been really helpful. The guests that have stayed have been our best lead gen. They're the ones who are coming back. They're the ones telling their friends. So just getting people in the door right away is a great strategy even though they may be costly. If you're delivering a great product at a good price and a good experience, they're going to come back. So I think that's really the formula we've stuck with from the get go.
And do you have to pay an initial amount just to get listed with Expedia?
No. In the cloud, really, most properties have property management systems that can sync up and link with all of these online travel agencies. So the inventory can be managed dynamically, in real time. And they don't charge you to get set up. But they do have a lot of wrinkles to try to get more money from you, you can pay more to be featured in a more prominent position, you can run promotions with them, you can allow them to collect the money, so that there's a lot of different angles that they use to get a higher commission.
What do you think was was great about your initial listing, that you think attracted guests to your hotel?
I think it's the high quality of design and the products that we're offering, I think in the market we're in, there was really a lack of hotels, doing specialty coffee, hotels really focusing on the beers and wines that they offered. And we designed the hotel to operate very efficiently. You know, this is a seasonal market. And a lot of the hotels up here struggle when they're fully staffed for the summer and winters. But then they go into the shoulder periods. And they have trouble either lowering their costs, or really staffing correctly and keeping the experience up to par for the guests that are visiting in the shoulder period.
So one of the things we did is we designed our lobby as one huge desk bar that is the core where you can get coffee, where you can get beer and wine as a bar, and where you check in at the reception. So the same person is able to do all of those functions. So whether we have 30 rooms sold, or we have five rooms sold, we're still offering the same level of experience at our hotel, to everybody. And I think that's something that's really resonated with people that they enjoy coming here any time of year, we're still seeing strong business in the shoulder periods. And it's kind of an operational tactic that we wanted to test out here. And it's been successful so far.
Take us back to the beginning of this journey. You were working in Marriott for seven years before you decided to start your own thing. How did you get this idea?
I moved over to Singapore in 2006. And I was over in Asia, between Singapore and Hong Kong for about four years, and just traveled quite a bit, and had a number of friends that traveled with me. And we just kind of said, if we could open a hotel, this is what we would do. These are the things that we really like about XYZ hotel, this is what we like in this other hotel. And one day we want to open a hotel, and we want to, pick the things we've seen, from all the places we've been. Throughout Asia, the customer service level is high I would say definitely higher than you see in the US. And so there was a lot of things we learned from a customer service perspective that we thought we could weave into a hotel here in the states that made more efficient use of labor, because I would say in Asia, Labor's significantly cheaper, so you can throw a lot more people at things in a hotel to deliver a high level of service. But you can't really do that here, especially in California. So you've just got to be really smart about how you use your people. And hire the right people and train them well. And I would say that kind of drove some of the philosophy and the operating style that we've tried to put in here.
Can you share an example of something that you saw about customer service in Asia, which really stood out for you?
That's a good question. I think it's hard to pinpoint anything in particular, more of it was just, they always solved every problem, there was always enough people there, it was a higher attitude towards customer service. And they really did a good job of making sure that we would go to countries that we didn't speak the language, we didn't know what to do or where to go. And they were always very good at making recommendations, some places were very good at making recommendations on what to do. And other places, if they were, large chain hotels, they tended to have pretty scripted responses to where you should go to eat, in China, or something they would recommend, what most foreign tourists would want to go to instead of, the real local experiences. So, you know, it was a combination, and it comes down to training. You ultimately have to train people for the experience you want guests to have. And we could see that, we could clearly see from hotel to hotel, which properties put an emphasis on guest experience and which put an emphasis on just kind of executing a playbook from the corporate office.
Did you see anything else that you have tried to incorporate in your hotel?
I'd say there's a lot of clean and efficient design, particularly what you'd see in Japan, living in Hong Kong, there is much better use of small space than you see in a lot of places here. So, that was definitely a tactic, some of the rooms, if you look at an average hotel room, in the US, that's maybe not in a super dense city, those hotel rooms can be 400 square feet, on average. And that's just a massive hotel room. And as soon as you can begin stripping some of that stuff out from the size of it, and going a lot more efficient, you can reduce the cost of building the hotel, and you can pass those savings on to your guests, we definitely stayed in a lot of places that were like that very limited service, focusing on the budget traveler, and delivering a very low price, because there's a huge market there for people that need to travel at a lower price point.
So we tried to borrow some ideas from those hotels, but try to improve upon them a little. There's a chain of hotels that make you pay an extra $5 to turn the air conditioner on. And, we didn't want to get to that point where we're nickel and diming people, we want to make sure it's still a great experience. But where can we find those efficiencies in the design and service to pass that savings on to the guest?
So then what was your next step? Once you decided you wanted to do this - what did you do next?
I really tried to begin educating myself on the process of buying and developing a piece of real estate, my background was more in customer service sales marketing on the hotel side. And so the real estate side, which is a whole another business in itself was pretty new to me. And I think I knew I didn't know everything, and probably was a little naive thinking I could figure some things out as I moved along. I figured, okay, well, when a decision presents itself, I've got a network of people I can tap into and ask for help, and kind of just jumped into it that way. Looking back on it, I still think that's a fair strategy, I think it's almost impossible for anybody to really know everything about the business that they're getting into. Particularly if it's something like this that has aspects like real estate, and operations, and construction all in one. I really just tried to ask for help when needed and educate myself on what the process was going to be. So I could be informed and not be taken advantage of.
It's a massive undertaking. Do you have a co-founder?
Well, I worked with my father quite a bit on this. He's spent his entire career in the hospitality industry. He's semi retired in about 2011. And I would say at this point, my general manager here in Tahoe, Kathleen, is also kind of my partner in the project now, and but up until we opened the doors it was really just me.
Do you think that you would have still gone ahead with this project, let's say you didn't have access to a network?
it would have been very hard, it would have been much harder to raise the money. Capital is a huge, huge barrier to getting into this business. If you're new, if you want to start your own hotel, and you go to a bank, it's very likely, well, I did it, I tried to go to, you know, one of the larger national banks, and they said, We don't loan to anybody who doesn't have two years of operating history. So that disqualifies pretty much all the banks for a first timer.
Eventually, you go to smaller community banks. They wanted to see experience or what I was doing, they didn't want to just lend money to somebody who had a dream to start this business without a significant background. And so there are some barriers to entry that are definitely networking capital based.
So right now, is it funded by people you know, or is it more institutional funding?
It's all friends, family, ex colleagues, combined with a bank loan. Again, institutional capital is going to look at your track record. And, you know, I didn't have institutional investing experience. So they typically want to invest in stuff that's going to have an operator, or has significant scale.
Did you try VC firms?
It's not the return profile. They're looking for that exponential growth. You might find maybe they personally are interested in this from a lifestyle play, but unless you have some sort of proprietary software or something that could be spun out and grown really, really rapidly, it just doesn't fit for them.
How big is your hotel? You have 42 rooms - is that considered a small hotel?
I would definitely consider it small. If you think about, the average of, you know, the average Courtyard or Marriott that you see, those are all definitely over 100 rooms. So I would say anything under 100 rooms is a different size. And if they're operated by the bigger companies, they tend to be much more high end, very Luxe, boutique hotels. That's how they can kind of pencil their overhead, is being able to get 3-4-$500 a night.
So for something like a 40 to like, under 100 room property - how much funding do you need?
The rule of thumb in development is your cost per room should be 1000 times your average daily rate. So if you're thinking that you can get a $200 average daily rate, you can spend up to $200,000 per room, in your building, and all in acquiring it, building it, you know, or what have you. Yeah, that's kind of a crude measurement. If you're in a seasonal market like this, you're not going to get as high occupancy. So you can't, you probably can't spend as much money and should kind of dial that back maybe to the, you know, 125 to 175 range. And depending on that your operating expenses, or what occupancy, you're going to run, right, and you'll see stuff out there for sale.
So far, what do you think have been some of the biggest challenges that you faced?
The renovation process - going through city and local processes for permitting, is time consuming and always takes longer than you think. I would say that was probably the biggest challenge, navigating all those different processes. Here in Tahoe, we have an overarching group called the TRPA. that's responsible for kind of management of the entire Lake Tahoe Basin. But then I also have to go through permitting processes with the City of South Lake Tahoe. And each group has different fees, each group has different processes, then, you know, you've got a host of ATA, American with Disabilities Act to get up to speed on and figure out so that was really challenging was just understanding how all these pieces fit together. And they don't do it in a really seamless way. Yeah, you find yourself running around quite a bit. I mean, so I'd say that was one of the biggest challenges. And, you know, for me, personally, I didn't have much of a background in construction. So it was hard for me to understand on a day to day basis, what was going on from a construction standpoint, and maybe look at ways that I could save money by doing some alterations to how it was constructed. And that's something I'm definitely a little bit more up to speed on now. And I think in the next project, I'll be able to control a bit more.
Clearly there are so many different things to decide. Finding a location, where to construct, the permitting process, the actual construction, the design, even the small decisions, like what sheets to have on the beds, etc. So, did you end up hiring a whole bunch of people who were key hires that you think you made, or someone in your position needs to make to really have a successful start?
Yes, it's all about the team. It's all about the people. So I was fortunate to be introduced to some very talented designers. Another person, their group's name is Studio Talk, they're based out of Brooklyn, I met them through some friends in San Francisco. And they were responsible for the design, and then the furnishing, and kind of sourcing all that as well as helping with the branding. So, you know, I know what I know, which was I had a vision for what the guest experience should be like, and how we should operate the property. And I know what I don't know, I'm not that great at design. I'm not that great at branding. So I was able to find people who I really got along well with, worked well with, they understood what I was trying to do. And they were able to, you know, take all that on. So I could kind of learn alongside them as we went through the process. And then when we got closer to what I could take over, which was the operations, that's when, you know, things really started kicking into gear, and I started hiring staff,
What do you think are some of the most important decisions you've taken, which you think have led to the success that you're seeing now.
We had a space that was above our lobby that was kind of earmarked to be a lounge area. And kind of halfway through, we decided, you know, what, this should be a meeting space, this is going to make us the most money, if we turn it into a meeting space. And we kind of figured we had a really good opportunity to attract small bay area companies, startups up here for offsites, retreats, meetings, they're really, as we looked around the market, there really wasn't any other hotels here, other than the big 500, room casinos that had suitable meeting space. And we didn't think any of those properties were really on brand or an enjoyable experience. So we kind of scrapped the lounge plan, and we turned it into a meeting space. And we've been extremely successful so far, with getting companies we've got, I think, maybe seven or eight meeting groups on the books for this coming June. And June is historically a really slow period for Lake Tahoe. So that's been something that's been really helpful in improving the profitability of the property is how we've got a space that can drive business when everybody else is really, really slow.
What are some of the problems or issues that keep you occupied on a day to day basis?
Well, fortunately, I have extremely talented team, my general manager, Kathleen, our Assistant General Manager, Jake, you know, they're focused on the day to day, getting people checked in getting them checked out, having the rooms clean, keeping the property up to snuff, that that lets me focus on Okay, well, what are the tweaks we can make to this business so that we're continuing to improve each year so that our guests that come back, there's something new here? So next week, we'll be launching a small plate food program in our lobby. That's something people have been asking about a while they're at the bars, do we have any food? And so we've taken our time to understand exactly what they want, how we'll fold that in operationally. And we'll be launching that next week. Another thing I'm looking at is how do we kind of improve our outdoor area, we've just submitted plans to the city to rip up some of our parking spaces, put more grass in and build an outdoor kind of woodfire grill. So I try to stay focused on improving the property from an experience standpoint, and making sure that the team has all the resources they need to keep showing people a good time.
I wanted to ask you some questions from the point of view of someone who, let's say, is going through a similar thought process - maybe they have prior hospitality experience, maybe they don't, but they want to start something. What would you recommend they should think about, and what's a good place to start?
Shoot me an email or give me a call, I have quite a few of those conversations every month or so. And I love having them because I was in that position too. So that's one of the best places to start is to just start asking around. But then think about what you want to do from what you're capable of doing. I mean, it really depends on your access to capital, and how much involvement you want to have. If you want to be the owner operator, be there working every day checking people in or out, there's a lot of people who love that and they run the property and they love interacting with guests. But then they may not be able to take themselves out of the business if they ever want to open another hotel, or something like that. So you have to decide how involved do you want to be in the operations? Or do you simply want to be kind of a developer and then hire an outside management company to completely run the property? That definitely changes things, you could open a hotel in a lot of different markets, you don't have to live there or live nearby. So yeah, I mean, I think you have to start asking yourself some of those basic questions. What do you want to do from a lifestyle standpoint? And what's your access to capital which will kind of inform a lot of this.
What’s your day to day like from a lifestyle standpoint?
It's a great lifestyle, I get to spend quite a bit of time with my daughter, which is kind of one of the reasons that I pursued this, I'm at the point now where I can start thinking of other projects and other hospitality businesses too because to really make this a career, you know, I'm going to have to do more than more than one of these. But the lifestyle is a lot of fun. I mean, your days are around getting people on vacation, I spend a lot of time trying to stay up on the trends in coffee, or beer or wine, I get to meet a lot of interesting people in the hospitality business, which is a fun business to be in.
What are some reasons why you should get into the hospitality business?
I think it's a bit of what I just said in terms of really enjoying the outcome of your work, which is getting people on vacation, showing them a good time. I had a boss a long time ago, he worked for a casino company in Las Vegas. And he was responsible for kind of attracting gamblers. And he said, after a few years, he just got kind of burned out because he didn't really like at the end of the day, always trying to get people to come in to lose money. But when he moved over to Marriott, and he was working more on, you know, getting people straight onto vacation. He said, he really enjoyed that. And I kind of remember that for a long time and find a lot of value in what I do.
What do you think are certain misconceptions that outsiders typically tend to have about running a hospitality business?
I read a weird article just the other day that said, Oh, hotels must be extremely profitable, because it only costs, you know, at minimum wage, you know to clean a room or turn a room. And when they're selling that room for hundreds of dollars, they must be making a lot of money. It's not a fair way to look at the industry. I mean, there are a lot of fixed costs, especially on the real estate side. So I think when people look at just the business as a hotel, hotels are hard to be profitable from an operating business.
I also think people don't know that the ownership and the operator are typically not the same. Most hotels you stay in, somebody else owns it, somebody else operates it. So the owner is often real. In that case, the owner is really driven by profit. And the operator is often paid simply a percentage of revenue, there's usually an incentive fee built into their management contract. But they have different goals. And the management company might want to pay to upgrade the lobby, because you know, the furniture is really old, but if the owner doesn't want to, because he doesn't want to spend the money, then they can't. And the guest’s experience is impacted and the guests that's coming in and getting angry at the General Manager - his hands are tied, because his owner doesn't want to spend the money. So I think people don't realize that this structure can impact them.
Let's say someone is starting out, is it a good strategy to first start one property and make sure that you're doing a good job, understand what's your formula and then replicate across multiple locations?
It kind of depends on what the product is meant to be. If you're trying to be in urban markets, or leisure markets, it's tough to really have much of a first mover advantage in the hospitality business. So, you know, there isn't usually too much incentive to doing anything really fast. But I would say, Yeah, you know, you want to do one, to figure out what you know, and what you don't know, and improve upon it.
And the second one, kind of the easiest way to scale is through additional management contracts. So here in Tahoe, we, you know, our group owns and operates the hotel. Now, maybe the hotel down the street isn't running very well, and they want to have a new operator, well, we could come in and start running it for them. And that really doesn't cost us any capital to do that, because somebody else already owns it. Somebody else would pay for renovations, all that stuff. We just come in with the people and we start staffing it and running it and taking the fee. You can grow your business a lot quicker that way through simply managing the listing, because you don't have to go through the intensive process of due diligence and buying properties.
That's a really interesting idea. I'm guessing that's an easier way to scale?
Yeah, it sounds great in theory, but you also have to convince a hotel asset owner to let you run his property. And he's going to want to see success quickly. You may have to have a very aggressive management fee to beat out other operators. So it's quicker to scale, but it's certainly not easy to get. And you also have to then take into account, you know, that owner has a lot of control over the guests experience based on how much funding they're going to give you, you know, what they're willing to invest in their product, and what they want to see from a return standpoint.
What is the IP, for lack of a better word, in a business like this?
It's a lot of processes. I mean, everything is process driven from how we assign housekeeping, how we order our food. It's process driven with people and we're going to bring our processes, we're going to bring a commitment to quality, we're going to bring in expertise and marketing and reaching people in how we drive direct bookings. You're going to pitch all of those things in the way you manage, you are going to be able to have some synergies with, say, a sister property and share some resources they're both buying. So there's a lot of things that can go into that pitch.
And yes, you're right there, there isn't any IP in the conventional sense. Marriot has these proprietary legacy systems that cost them 10s of millions of dollars and now when they want to integrate online, you know, say mobile check in, that costs them a lot of money. Whereas if you're me, and you're buying this new cloud software that's constantly updating, you're getting better functionality all the time. So it really does come down to how you manage people and what your processes are.
Are there any aspects of being a hospitality business owner that you do not like?
Not really. There are challenges of course. I do wish that, it's fun to see all these, you know, companies that are offering these amazing perks and benefits to their employees. And the reality is, you just can't price those into service businesses very well, where you have minimum wage employees, you know, I'd love to be an employer that provides a significant amount, more of compensation. But market forces just don't kind of allow for that, since customers aren't willing to pay more for that, you know, the studies have shown, hotel customers are not willing to pay a premium for green features. You know, it might sound nice in the marketing, and might attract you a little bit. But the data has shown that there's no, there's no revenue bump, for those things. And I don't believe that there would be a revenue bump for, you know, saying that our employees receive these things, most people are looking online for the cheapest price, or pictures of a hotel they like, and that's what they're going to book. And I would love to see a bit more regulation, I guess, or help in businesses like ours, being able to offer more to people. So, that’s something I don't love, I wish we could be at par with some of those other industries.