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Key risks and opportunities

RISKS OVERVIEW 2021

Most of the risks that could significantly impact CLHG’s ability to create value in the short, medium and long term originate from the external environment. While these external risk factors are largely beyond our control, we constantly monitor and take steps to manage their actual or potential impacts. Where we can play a role in improving the status quo, such as in regulatory processes that may impact hospitality and/or tourism as a whole, we participate energetically and purposefully.

Needless to say, the uncertainty of how the post-lockdown environment will impact our markets and influence consumer spend, makes planning and forecasting challenging in the current environment.

Rank Risk Impact/ Severity Likelihood/ Probability
1 Covid-19 pandemic and regulations 9 9
2 Travel demand and accommodation oversupply 8 8
3 Funding constraints 8 7
4 Socio-economic environment 7 7
5 Loss of market share 7 6
Rank Risk Impact/ Severity Likelihood/ Probability
6 Transformation 5 9
7 Pricing strategy 5 7
8 IT security 5 7
9 Compliance 5 6
10 Essential municipal services 4 7

OUR TOP RISKS 2021

Rank and
movement
from the
previous year
Risk   Description   Mitigating measures
1
  Covid-19 pandemic and regulations  

The Covid-19 pandemic led to travel restrictions, border closures, business suspension and closures, quarantines, isolation, and social distancing measures. These factors significantly reduced global travel and consumer demand for hotels.

Uncertainty prevails around Covid-19’s continued impact on revenue generation. The third wave of infections in South Africa, our main market, led to stricter lockdown measures being reinstated in 2021.

In addition, the group needs to ensure that it prepares for and adapts to the new normal in terms of how hotels operate. These include increased guest technology expectations, the importance of hygiene and social distancing, how hotel public spaces will be used, and an increased emphasis on sustainability.

 
  • Implementing crisis management plans and survival strategies
  • Enforcing and monitoring strict and disciplined Covid-19 protocols to mitigate the risk of employees, guests and other key stakeholders contracting the virus
  • Continuing to update operating requirements as the Covid-19 levels change
  • Closing and reopening hotels based on demand
  • Repackaging our hotel services to make them safe and attractive in the post-Covid-19 era
  • Evaluating every hotel’s performance, both before and during the pandemic, and proactively implementing turnaround strategies where necessary.
2
  Travel demand and accommodation oversupply  

Almost without exception, our local and international markets were subject to travel restrictions as governments attempted to curb the spread of Covid-19. Countries like South Africa closed their borders and at times limited domestic travel. Some of our key international markets listed South Africa as a Covid-19 hotspot, bringing travel from those countries to a near-standstill.

Following the steep decline in travel and tourism, many hotels and smaller accommodation providers exited the market. Those who remain are competing to retain or gain market share, but they may stand to benefit once demand returns. Although CLHG is proving resilient in the face of the pandemic, we are subject to funding and liquidity restraints.

 
  • Encouraging and capitalising on domestic travel
  • Contributing to and participating in TBSCA initiatives and lobbying for governments to open international travel to the region
  • Building internal capabilities and capacity to capitalise on returning travel demand, while maintaining business resilience and strictly managing working capital
  • Phased reopening of hotels to actively manage the oversupply of hotel stock in the market
  • Launching new offerings aimed at attracting the local market
3
  Funding constraints  

Current trading conditions hamper revenue generation and profitability, an arduous journey that limits the group’s ability to invest in its properties. Failure to manage funding constraints may impact commercial performance, lead to financial loss and undermine stakeholder confidence.

 
  • Focusing on improving operational and resource efficiencies
  • Concluding a rights issue (R1.2 billion) to strengthen the group’s liquidity position
  • Implementation of a cost containment programme which included salary reductions, freeze on discretionary capital expenditure, reduced maintenance programme and other operational cost reduction measures
  • Continuous communication with the group’s funders, robust management of our covenants, and negotiating additional facilities as required
  • Aligning our appetite for disposals and/or acquisitions to the performance of our existing portfolio, which is monitored by the board.
4
  Socio-economic environment  

Economic volatility impacts business confidence, with a knock-on effect on business travel, while also affecting discretionary expenditure on leisure travel. In the wake of Covid-19, almost all our markets saw a decline in GDP. Increased unemployment is likely to affect us in the near and medium term.

Many African countries are subject to geo-political volatility, which not only hurts local business confidence but also dissuades international investors and travellers. The riots seen in South Africa during July 2021 are one example of a major event that causes international uncertainty.

 
  • Hosting attractive marketing campaigns, including the WKND special and WOZA Friday
  • Exploring alternative revenue products, such as #YourPrivateOffice
  • Enhancing the food and beverage offering, giving guests more reason to stay in the hotel as opposed to dining out.
5
  Loss of market share  

International competitors may have access to greater commercial, financial and marketing resources and more efficient technology platforms than CLHG. They could potentially expand and improve their presence in our geographies, thereby adversely affect our ability to maintain or increase our market share and/or occupancy rates.

 
  • Expanding our weekend and leisure market share through attractive promotional offers
  • Investing in quality properties, ensuring that we have a diversified portfolio across geographic locations and hotel gradings
  • Investigating and identifying refurbishment projects across our portfolio
  • Improving our customer experience and engagement.
  • Utilising more online travel agents (OTAs) to reach non-traditional markets
  • Make use of social media to reach non-traditional domestic market segments
6
  Transformation  

In South Africa, transformation is a critical issue. CLHG’s transformation initiatives are not just about compliance – it is a moral and business imperative to help root out racial inequality.

Our 2020 rating maintained a Level 4 B-BBEE rating, the indirect share repurchase and debt settlement that formed part of the rights offer process resulted in the unwinding of our previous B-BBEE structure and the loss of some equity ownership.

 
  • Strategising around B-BBEE and exploring ways of regaining our equity ownership, including optimising the share register credentials
  • Creating new programmes to provide employment opportunities and training for youth.
7
  Pricing strategy  

Several new market entrants led to an oversupply in the market, especially in high-density areas. We are currently operating in an exceptionally low occupancy environment that is shifting the competition towards pricing and promotions. Coupled with the discounting already prevalent throughout the hospitality industry, pricing cuts exert downward pressure on the group’s revenue and profitability.

 
  • Shifting from fixed room rates to a BAR philosophy
  • Introducing an AI function to improve demand prediction and inform pricing strategy
  • Working with tourism forums to find solutions and ways to attract international markets.
8
  IT security  

Data is a valuable asset for CLHG, providing insight into customer behaviour so that the business can provide a more customised, competitive service to our clients. Data breaches could lead to system unavailability, business disruption and reputational damage.

Over the last year, there was a significant rise in ransomware attacks across all industries. Remote working due to lockdown has increased the risk of cyber threats.

 
  • Complying with the POPI Act, which came into effect on 1 July 2021
  • Evaluating and refining our cyber infrastructure and security protocols, especially in light of the remote office trend
  • Ensuring that we have adequate insurance.
9
  Compliance  

We face increasingly complex compliance requirements, as well as policy uncertainty, including the possibility of land expropriation. At the same time, the cost of compliance is increasing while share prices are low.

Any breach of compliance with legislation, regulations, best practice, industry standards and licensing requirements could result in fines or sanctions that affect our profitability and may have adverse reputational consequences.

 
  • Supporting the principles of sound corporate governance and continuously reviewing covenants
  • Maintaining effective compliance controls throughout the organisation
  • Monitoring government’s plans fortransformation
  • Providing our management team and employees with regular training on amendments to legislation and policy.
10
  Essential municipal services  

Poor service delivery, limited infrastructure investment and funding challenges hamstrung South African municipalities’ capacity to supply water and electricity to ratepayers. Inconsistent water supply and unreliable electricity provision affect hotel operations and guest relations.

Shareholder returns are also impaired by additional rates and property taxes increases in conjunction with above-inflation growth in the cost of water and electricity.

 
  • Reducing our dependency on the national energy grid with solar installations at 25 of our hotels
  • Installing backup diesel generators at our hotels
  • Investigating alternative water and energy supply options
  • Maintaining sustainable energy management programmes at each hotel that focus on operational and technical efficiencies
  • Using borehole water for property maintenance at some of our South African hotels
  • Encouraging guests to help reduce water consumption, without minimising the guest experience.

OUR TOP OPPORTUNITIES

While Covid-19 proved disastrous for the hospitality industry and the past year featured liquidity and revenue shortfalls, it was also a golden opportunity to prepare for a surge of customers once the pent-up demand for travel is released. CLHG used the quiet time to innovate, explore efficiencies, and brainstorm improvements.

Revenue growth and yielding  

Before Covid-19 struck, we were already driving major technological shifts within the group as a competitive disruptor in our markets. Our bespoke Lodgix hotel management platform includes a guest interaction and relationship management system that enables customised services.

By far the most significant efficiency introduced in this period was our new revenue management model, which flexibly adapts room rates per demand. The data from CLHG’s new AI feeds into our BAR methodology, enabling each hotel to respond to market trends.

 

Food and beverage offerings also provide an opportunity to increase the spend per guest. Guests are more reluctant than before the pandemic to leave their rooms, preferring the safety of the hotel to the risks of exploring other venues and restaurants. The group is enhancing this revenue stream by adding new food and beverage options.

Sale of East African assets  

In July 2021, we agreed to dispose of our entire East African portfolio (three hotels in Nairobi, Kenya and one hotel in Dar es Salaam, Tanzania). The sale is expected to be completed within 22 weeks of signing date. The proceeds from disposal will be used to reduce debt levels, increase liquidity and support the working capital requirements of the group.

Acquisition of distressed assets  

As other hotels and lodges experience pandemic-related financial distress, CLHG may acquire assets that will likely be profitable down the line. The board examines these opportunities within the constraints of our current liquidity position.

Evaluating our hotels’ performance  

While we wait for the Covid-19 storm to abate, we can evaluate every hotel in our stable. In cases where some were underperforming before the pandemic, we are exploring ways to turn them around. This may be through sales and marketing strategies, rebranding, repurposing, or even divestment.

Efficiencies and cost reductions  

Our WOW campaign is instrumental in enabling staff members to suggest efficiencies and cost cutting ideas, based on their hands-on experiences in their working roles. We continually seek ways to reduce our consumption of natural and scarce resources, particularly water and electricity, as evidenced by the introduction and installation of solar panel installations at 25 of the group’s hotels.

People caring for people – Guest Feedback

People caring for people – Guest Feedback