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CASE: M-314

DATE: 02/07/08 (REV’D 10/25/16)

AVARI LAHORE RAMADA RENAISSANCE HOTEL
In January 2016, Mr. Tahir Raza Mian, Assistant Sales and Marketing Manager at the Avari
Hotel Lahore (until 1994 known and operated as the Avari Lahore Ramada Renaissance Hotel),
was concerned about the average room rate at the hotel. For the first time since operations began
in Lahore, Avari’s average room rate has fallen below that of its main competitors, Pearl
Continental Hotel, The Nishat Hotel, or Heritage Luxury Suites. Tahir felt that he needed to re-
evaluate Avari’s current pricing policy in order to develop a plan to remedy the situation before
the beginning of the new year.

LAHORE

Lahore is the second-largest metropolitan area in Pakistan with a population over 10 million
people. It is the capital of the Punjab province and has been a center of culture and learning since
the Mughal rule in the Indian sub-continent. It has a rich architectural heritage, with a number of
old monuments and tombs. The Wazir Khan Mosque, the Badshashi Mosque, the Lahore Fort,
Shalimar Gardens, Emperor Jahangir’s Mausoleum, and the walled city are some of the city’s
primary tourist attractions.

Shahrah-e-Quaid-i-Azam (also known as the Mall) is the primary and most famous road in the
city of Lahore. Branches of all the major banks, commercial centers, and government offices are
located on this road. The Pearl Continental Hotel (Pearl) and the Avari Hotel are the only five-
star hotels situated on this street, whereas the Heritage Luxury Suites and The Nishat Hotel are
more south near the Sultan Park.

Wasim Azhar, Lecturer in Marketing at UC Berkeley and Marc Fetscherin, Associate Professor at Rollins College
prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of
an administrative situation.

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Avari Lahore Ramada Renaissance Hotel M-314 p. 2

The formation of a tax free industrial zone in Chunnian, 30 miles from Lahore, has given a
marked impetus to the industrialization of the area resulting in increased business travel to the
city. It is generally believed that the industrial sector in Lahore expected an even larger growth
in the future. Lahore’s nominal GDP was around $58 billion in 2015 and projected an average
growth rate of 5.6 percent1.

Lahore also has an international airport, but there are no incoming flights from Americas or
Europe (except one from London). Foreign flights arriving at the Allama Iqbal International
Airport were mainly from Asia (e.g., Thailand, Malaysia, and India) or the Persian Gulf region
(e.g., Qatar, Saudi Arabia, and the United Arab Emirates). Direct flights from Europe and United
States are expected to start soon.

AVARI LAHORE HOTEL

Mr. Byram Avari, the owner of the Avari Lahore Hotel, has been in the hotel business for a
significant number of years. His first hotel, built in 1944, was a beach front hotel in Karachi. In
1978, he constructed a hotel in Lahore, and gave its on-premises contract to the Hilton chain for
a period of twenty years. In 1984, Avari opened another hotel in Karachi called Avari Towers,
which was run under the franchise of Hotel Ramada Renaissance. Soon after the opening of the
Karachi Avari Towers, Mr. Avari decided to regain control over the hotel in Lahore and take
over its management from Hilton. After a lengthy law suit, he managed to win the court battle
enabling him to terminate his contract with Hilton. On October 1, 1987 Mr. Avari took over the
management of the hotel and entered a franchise agreement with Ramada Renaissance Hotels.
Until the end of this agreement in 1994, the hotel was named and operated under Avari Lahore
Ramada Renaissance Hotel. After 1994, it has been operated under its’ current name of Avari
Lahore Hotel2.

The Avari is one of four five-star hotels in Lahore. It is situated on the Mall, facing the
Zoological Gardens, between the Alhamra Arts Council and WAPDA House. This location is in
the heart of the city within walking distance of the Provincial Assembly, Pakistan Arts Council,
and commercial and shopping zones.

It has 190 rooms, including 15 suites12 junior suites, as well as the executive, Bridal and
Presidential suites. The other rooms available are the studio and twin rooms which can also be
converted into single bedrooms whenever the need arose. Except for the suites, there are no
gradations or categories within the rooms. All bedrooms have attached bathrooms and are
equipped with modern appliances such as AC, movie channels, coffee & tea maker, electronic
safe deposit box, minibar or Wi-Fi.

The hotel has six restaurants featuring different cuisines such as the ‘Fujiyama’ restaurant
(presumably the best Japanese restaurant in the city); the ‘Dynasty’, a Chinese restaurant;
‘The Lakhnavi’ restaurant serving ancient Mughal and Persian culinary traditions; ‘The
Tollington’ which is an open air BBQ restaurant serving international and local BBQ dishes.
There is also an all-day (24 hours open) buffet restaurant called ‘Kim’s’ (after the historical

1
Source: http://www.lloyds.com/cityriskindex/locations/fact_sheet/lahore
2
Source: http://www.avari.com/property/avari-lahore/our-history
Avari Lahore Ramada Renaissance Hotel M-314 p. 3

Kim’s Gun in Lahore made famous by Rudyard Kipling). Finally, there is also ‘La Patisserie’
which is a pastry shop offering snacks, pastries and cakes. Next to those, there is also the
‘Cinnamon Coffee Lounge’ as well as the hotel provides 24-hours in-room dining3.

The hotel also offers a number of choices of functional and conference rooms and a lawn. The
function rooms are used for business conventions, large dinners, or for social occasions such as
weddings. Other recreational facilities available include a mini spa (with Jacuzzi, steam bath,
massages), gymnasium, jogging track and an outdoor pool.

As an additional service, the hotel has an executive business center which offers a complete
range of services for the traveling business executive.

CLIENTELE

Avari management segments its clientele into four broad categories: business, walk-in, tour
groups, and others.

Business clients constitute 61 percent of the hotel’s business (see Exhibit 1). This particular
segment has been growing over the past few years, and growth is anticipated. These clients
usually held company accounts with the hotel which makes them eligible for quantity discounts
on the rates of available rooms.

Other major clients are the individual walk-in guests, known as the frequent individual travelers
(FITs). Unlike the business client segment, the inflow of FITs is seasonal, decreasing
significantly in the summer. Visits from tour groups also tend to be seasonal. Due to Lahore’s
extreme temperatures (110-120 degree Fahrenheit) in the summer, tour groups usually arrive in
the city in winter and spring. Other clients of the hotel are non-seasonal guests, including airline
crews, government officials, and journalists. Generally, 10 percent of all guests arriving at the
hotel register for a double room. This is also true for the competitors.

ROOM RATES AND PRICING POLICIES

Avari prices its rooms on the basis of demand and competition. Over the years the room rates
have remained only marginally higher than those of its main competitor Pearl. The rates are
revised and adjusted twice a year according to the inflation rate. Avari has numerous types of
rates in keeping with its policy of not turning away any guest that come to the hotel. Hence, the
following rates prevailed:

Individual Rate

There are three categories within this rate class. However, the ordinary traveler or guest is not
normally aware of this hierarchy, and the lower categories of rates are offered only to those who
cannot afford the prices quoted at the reservation desk, or to those who have some knowledge
about the existence of these special discounts. The sales department assesses and decides the
eligibility of clients for the lower rates. The categories are as follows:

3
Source: http://www.avari.com/property/avari-lahore/dining
Avari Lahore Ramada Renaissance Hotel M-314 p. 4

1. Rack Rate: This rate is the highest rate which is officially offered to all FITs. At this
rate, a single room is priced at Rupees (Rs) 1806 and a double room at Rs 1986.
Management always tries to rent the rooms at this rate because it automatically raised
revenues, profits, and the average room rate.

2. Commercial Rate: This is the second highest rate meant for those business clients who
do not have an account with the hotel but are considered to be of good repute. It is given
to those FITs who know about this rate and whom the management considers worthy of a
lower rate. At this rate, a single room is priced at Rs 1641 and a double at Rs 1821.

3. Preferential Rate: This rate, the lowest individual rate, is Rs 1478 for a single room and
Rs 1658 for a double room.

Contract Rate

An enterprise or firm can enter into a contract with the hotel, and thereby negotiate room prices
according to the number of room nights that it is willing to provide the hotel within a given year.
The interested firm register for either an EBS (executive business service) or a VEBS (volume
executive business service) rate. The criteria for qualification for either one of these rates are
developed by the hotel according to the reputation of the client company, its size, and its past
record with the hotel.

Usually, only the multinational and foreign companies enter this category. After assessment, a
contract is signed by the hotel and the firm. This contract is renewable at the beginning of each
year. Additionally, the hotel makes an evaluation of the client company every three to six
months. New client companies which have no previous records with the hotel are evaluated
more frequently than long-standing clients. The purpose of this evaluation is to see whether or
not the client has supplied the hotel with the promised number of room nights. The rates are then
be re-evaluated and adjusted accordingly. The following contract rates are common at Avari:

1. EBS and Group Rate: This rate is meant for those companies that agree to provide
the hotel with 75 to 100 room-nights per year, and also for some large convention
groups. Generally, the EBS and group rate are 30 percent below the rack rate. In
2015, a single room under such a contract is Rs 1165 and a double room Rs 1345.
However, these rates are subject to change after the periodic evaluations conducted
by the hotel. Avari has nearly 250 to 300 such accounts.

2. VEBS Rate: Only those companies that can ensure at least 200 room-nights per year
to the hotel qualified for this rate. They are charged Rs 1020 for a single room and
Rs 1200 for a double room.

3. Special Rate: Sometimes large companies and organizations, such as the United
States Agency for International Development (USAID), negotiate special rates with
the hotel. These rates vary, usually ranging between 45-60 percent off the rack rate,
according to the agreement signed by both parties. As a matter of policy, few rooms
are given at these rates as it has an adverse effect on the average room rate and the
Avari Lahore Ramada Renaissance Hotel M-314 p. 5

hotel’s contribution margins. Hence, the hotel only has 10 to 20 special rate and
VEBS accounts.

Garbage Rates

The term garbage rate refers to a category of miscellaneous rates that forms a low percentage of
the hotel’s total revenue accruing from room rentals. This category includes the following types
of rates:

1. Government Officials and Diplomats Rate: Pakistani government officials,
when on tour, are usually given a nominal per diem making it difficult for them to
afford the listed prices of the hotel. The same is true for some foreign diplomats,
especially those from Eastern Europe. For these officials, a discount of 50
percent is given off the rack rates of single and double bedrooms. Since these
rates also adversely affect the average room rate, the hotel does not encourage
such clients.

2. Net Wholesale Rate: This rate is offered to tour organizers and agents who
arrange packages for tours groups. In this category, there are no fixed rates and a
percentage of the rate charged is given as commission to the tour organizers by
the hotel. The room rates in this category are lower than the EBS and group rates,
but higher then the VEBS rates. Avari tries to limit the number of group tours by
not giving the organizers more than a total of 1500 room nights in a year.

3. Journalists Rate: A 20 percent discount off the rack rate is given to foreign and
local journalists coming to the city to cover major events.

4. Airline Rate: This rate is meant for the crews of international airlines that fly-in
from Middle Eastern countries. These airlines have contracts with the hotel to
provide them with 10 rooms per day throughout the year. The discount given to
them is 55 percent off the rack rate. In 2015, only Saudi Arabian Airlines has
such an account with Avari.

5. IATA Rate: Avari also puts up transit passengers of any airline at a 50 percent
discount according to an agreement with the International Air Travel Association
(IATA).

Suites

Avari’s four types of suites all have different rates: Rs 3300 for the junior suite, Rs 5500 for the
executive suite, and Rs 7150 for the Presidential suite. The Bridal Suite is complementary if the
wedding or reception is held at the hotel, otherwise it is charged at its normal price of a double
room at the rack rate. Floral decorations can also be provided with an additional payment of Rs
500. For an extra person in any suite, the charge is Rs 180.
All room rates of the hotel are subject to 7.5 percent government excise duty and a Rs 20 tax per
person, per night.
Avari Lahore Ramada Renaissance Hotel M-314 p. 6

PROMOTION AND ADVERTISING

Discount pricing is the primary promotional tool used by Avari to increase the hotel’s occupancy
rate, and the summer package is one of its major promotions.

Summer Package

This is a special discount program offered every year by the hotel during its period of lean
occupancy. From May to September, the hotel’s occupancy level could drop as low as 45 to 50
percent (see Exhibit 2).

As part of the summer package of 2015, a single room is offered at Rs 930 and a double room at
Rs 1050. Also for every nine guests in a group, two rooms would be given free. Breakfasts are
complimentary, and there is a 10 percent discount on all meals consumed at the hotel by the
guests.

One of the objectives of this package is to raise occupancy levels at the hotel during the lean
months, as the performance of the management is evaluated not only on the basis of revenues
collected from rooms, but also upon meeting the targeted average room rate and occupancy
levels for each month. However, the management at Avari is confident that even without the aid
of the summer package, the hotel can attain an average occupancy level of 80 percent for the
year. Yet, no harm is seen in continuing the summer package program in the future, as any
increase in occupancy is welcome.

Other Promotional Activities

Other forms of promotion used at by Avari include serving free bed tea to the EBS and VEBS
guests, and inviting the EBS and VEBS account holders to the hotel for free meals. Such
activities, designed to enhance customer goodwill, compromise only a small portion of the total
promotional budget.

Avari’s sales executives are expected to develop new company accounts, as well as nurture
relationships with and meet the individual needs of the existing clients. Many times, upon
request of an EBS account holder, sales executives give a client a junior suite at the same rate of
the EBS double or single room. This promotional practice is known as ‘upgrading’.

Avari management has also developed a mailing list which includes the names of all hotel
clients, as well as people who have previously visited or dined at Avari. Promotional literature
such as leaflets and newsletters are sent to this list of clients to keep them informed about the
monthly activities at the hotel.
Avari Lahore Ramada Renaissance Hotel M-314 p. 7

MARKET ENVIRONMENT

Competition

The main competitor is the Pearl which is a five star hotel chain in Pakistan. It is a subsidiary of
Hashoo Group which is one of the largest conglomerates in Pakistan owning various businesses
such as oil and gas exploration, minerals, pharmaceuticals, IT, real estate, travel and tourism or
hospitability.

In Lahore, Pearl Continental Hotel is situated on the Mall opposite the Governor’s House and
near Jinnah Gardens. It is a kilometer away from Avari, hence it is not as close to the
commercial zone. Pearl has 190 rooms which are divided into suites, single, and double rooms
in roughly the same proportion as at Avari. However, according to Raza, the rooms at Pearl are
more spacious than those at Avari, and each room has a large window which gives the hotel a
fresher look. The lawns at Pearl is also larger than Avari’s.

Pearl has pricing policies similar to those at Avari. The rate structure is the same, and the review
and re-assessment of contracted room rates takes place twice a year. However, the rooms at
Pearl are priced between Rs 100-200 below the prices at Avari (see Exhibit 3). In 2015, the first
price increase came in the beginning of the year and the second in September. Pearl also offers a
summer package every year. In fact, Avari’s management considers Pearl’s summer package of
2015 to have been a greater success than Avari’s. They believe this is due to people’s personal
preferences for Pearl’s more spacious rooms and extensive lawns. In the area of service, Avari
considers itself at par or even superior to Pearl. Still, the management at Avari is aware that it
has yet to establish a name for itself in the market, as its image, unlike the image of Pearl or the
former Hilton, has not yet been formed in the minds of potential customers.

For many years, Avari has always maintained a higher average room rate than Pearl. According
to Raza, the difference has typically been around Rs 120-130 (the average room rates of Pearl
and Avari in 2015 are given in Exhibit 4). Management believes this higher average room rate
is achieved because of Avari’s superior service, which attracts more customers. However, in
October 2015 the average room rate at Pearl was higher than that at Avari  Rs 1065 per room
at Pearl versus Rs 1000 at Avari. The occupancy rates at Pearl for the months of October and
November 2015 were 78 percent and 80 percent respectively, compared to 79 percent and 70
percent at Avari (see Exhibit 2). For the breakdown of Avari’s clientele mix in November 2015,
see Exhibit 5. The approximate clientele mix at Pearl follows a similar pattern.

Market Trends

New hotels are emerging in anticipation of the increased business activity at Chunnian, and the
ever rising demand for hotel rooms in Lahore.

It is expected that by 2018 more five star hotels such as The Ritz-Carlton or Shangri-La might
enter the market. Their location is expected to be either in the city center or near the airport,
which is six to seven kilometers from Avari and Pearl.
Avari Lahore Ramada Renaissance Hotel M-314 p. 8

Also four star hotels are expected to open in Lahore soon too. For example, the Holiday Inn has
scheduled to open a second hotel in close proximity to Avari in Lahore shortly. It has a good
image in Pakistan, and is an imminent threat to the existing five-star hotels in Lahore.

CURRENT SITUATION

The Avari hotel expects an increase in demand which is indicated by the fact that the hotel’s
occupancy and average room rate targets have so far been met without encountering any major
hurdles. These targets are set by the marketing department for each month, as well as for the
whole year. Every year, the target for the average room rate has been increased by 10 percent.
In 2015, the target for the average room rate was Rs 1200 per month and was Rs 1320 per month
in 2016. For 2016, the targeted average occupancy rate was 72 percent and in 2017 was
expected to increase to 75 percent. The annual bonus of employees in the marketing department
was dependent on achieving these targets. Hence, to keep themselves abreast of the hotel’s
performance, the marketing team calculated the occupancy and the average room rate figures
every day and compared the results with those of their closest competitor, Pearl Continental
Hotel.

At the Avari, room rates were usually increased twice a year. In 2015, the first price increase
was made in January, and the second in September. Occupancy figures remain unaffected by
these escalations in price.

According to Avari management, variable costs were 15 percent of the room revenues alone. If
food or beverage costs were included, then the total variable costs ranged from 35 to 38 percent
of total revenues. Raza estimated that 65 to 70 percent of the food and beverage revenue were
accounted for by room guests at the hotel (see Exhibits 6 and 7 for further information on costs
and revenues).

Avari has been constantly trying to expand its guest base. Emphasis was placed on getting
business accounts from their main competitor Pearl, because Avari was aware of the capability
of Pearl’s clientele to pay for rooms utilized in a year, and their reputation in providing the hotel
with the required number of room nights. But Avari also tried to get business accounts from the
The Nishat Hotel and the Heritage Luxury Suites as well.

In his role as the Assistant Sales and Marketing Manager at Avari (see Exhibit 8), Raza has been
perturbed since mid-January when it became evident that Avari’s average room rate has falling
below Pearl’s. He was of the opinion that Avari’s pricing policy needed to be reviewed, and he
has considering different alternatives for how to proceed. First, he could raise the prices of all
the rooms by 10 percent, even though Avari has already increased the prices twice in that year.
Second, he could increase all rates other than the EBS and VEBS rates. Third, he could
introduce another type of rate which bridged the vast differential between the group rate and the
least expensive individual rate. Finally, he could also try to increase occupancy by targeting price
sensitive segments with special rates during off season.

Since Raza knew that he will be evaluated for promotion soon, he wanted to formulate a pricing
plan to rectify the situation by December 2016.
Avari Lahore Ramada Renaissance Hotel M-314 p. 9

Exhibit 1
Avari Clientele

Clientele Occupancy (%)4
Frequent Individual Traveler (FIT) 11
Executive Business Service (EBS) 30
Volume Executive Business Service (VEBS) 31
Tour 3
Special 9
Summer Package 3
Conventions 2
Airline 7
Other5 4

Source: Information provided by the Avari Lahore Hotel.

4
Average over October 2014 to November 2015.
5
This included journalists, diplomats, government officials and all other guests who did not fall in my category.
Avari Lahore Ramada Renaissance Hotel M-314 p. 10

Exhibit 2
Occupancy Chart of Avari and Pearl

Hilton Avari Pearl
Months 2014 (%) 2015 (%) 2015 (%)
January 70 72 80
February 90 94 94
March 88 93 92
April6 70 71 73
May 60 50 52
June 55 65 70
July 60 62 50
August 62 63 75
September 68 70 68
October 72 79 78
November 90 70 80
December 70 - -

Source: Information provided by the Avari Lahore Hotel.

6
In 2014, the holy month of Ramadan started on 28 June and ended on 27 of July. In 2015, Ramadan came 10 days
earlier. Muslims all over the world are required to fast from dawn to dusk during this month.
Avari Lahore Ramada Renaissance Hotel M-314 p. 11

Exhibit 3
Rate Structure at Hotel Pearl Continental
(November 2015)

Room Rates Single Room Double Room
(Rs) (Rs)
Rack Rate 1786 2086
Commercial Rate 1680 1980
Preferential Rate 1350 1650
Executive Rate 1150 1450
Volume Executive Business
Service 1000 1300

Suites
Junior Suite 3300
Executive Suite 5500
Presidential Suite 7150
Bridal Suite Complimentary7

Source: Information provided by the Avari Lahore Hotel.

7
This suite was complimentary only if the marriage function was held at the hotel.
Avari Lahore Ramada Renaissance Hotel M-314 p. 12

Exhibit 4
Average Room Rate for 2015
(Rs)

Month Avari Pearl
January 1,020 930
February 1,015 1,009
March 1,051 991
April 1,011 955
May 983 896
June 973 899
July 992 889
August 983 873
September 1,007 893
October 1,003 902
November 1,000 1,065
December - -

Source: Information provided by the Avari Lahore Hotel.
Avari Lahore Ramada Renaissance Hotel M-314 p. 13

Exhibit 5
Avari Clientele in November 2015

Clientele Occupancy (%)
FIT 8
Business (EBS and VEBS) 30
Special 45
Tours 5
Airlines 10
Other8 2

Source: Information provided by the Avari Lahore Hotel.

8
This included all other customers such as journalists, diplomats, government officials, convention guests, and all
other categories that did not individually form a significant percentage.
Avari Lahore Ramada Renaissance Hotel M-314 p. 14

Exhibit 6
Avari Annual Income Statement for 20159

Rs. (‘000) Rs. (‘000)
Revenue Overheads
Room Sales 50,407 General & Admin 4,653
Food Sales 39,793 Marketing Dept 2,298
Beverage Sales 14,771 Property Operating
Other 11,585 & Maintenance and
116,556 Energy Costs 11,731
18,682

Cost of Goods Sold Gross Operating Profit. 50,093

Food 16,835
Beverage 5,834 Department Profit
Others 5,419
28,088 Rooms 43,248
Food & Beverage 2,859
Expenses Others 3,469
Payroll related expenses: Other Income 517

Rooms 3,494
Food & Beverage 6,639

Other expenses:

Rooms10 4,664
Food & Beverage 4,896

Gross Operating Income 68,775

Source: Information provided by the Avari Lahore Hotel.

9
Includes expected revenues for December.
10
Includes cost of laundry, cleaning, and guest supplies.
Avari Lahore Ramada Renaissance Hotel M-314 p. 15

Exhibit 7
Breakdown of Revenues for Last 3 Months of 2015
(Rs ‘000)

October November December11

Room Revenue 4,664 3,990 5,301
Food Revenue 3,920 2,998 4,726
Beverage Sales 1,254 1,172 1,486
Other12 842 988 1,000

Source: Information provided by the Avari Lahore Hotel.

11
Expected revenues.
12
This included operating revenues from telephone, laundry, etc.
Avari Lahore Ramada Renaissance Hotel M-314 p. 16

Exhibit 8
Organizational Chart (Marketing) of Avari Lahore

Sales & Marketing Manager

Assistant Sales/Marketing
Sales Manager Sales Manager Manager Lahore (Tahir
Islamabad Office Karachi Office Raza Mian)

Senior Sales Senior Sales Executive
Executive Banquet

Sales Executive Sales Executive Sales Executive

Source: Information provided by the Avari Lahore Hotel.