Industry-Analysis:
Boutique Hotel-Victoria, BC
Written by
YiNan Wang, Fan Gao, Hanzhi Wang,
Lingran Zhou, Ni Cai, & Qilin Lv
Nov. 23rd, 2011
Project’s Purposes
Located at the West Coast of Canada with the most enjoyable climate and charming
natural resources, Victoria, has become world’s travelers’ and immigrants’ favourite destination.
As the most popular international resort within Canada, Victoria has attracted an average of 3.5
million overnight tourists per year excluding business groups and other private organizations.
Because of that Victoria’s geographic location has limited the size of the city, accommodation
for tourists is mainly provided by the competitive hotel industry. For instance, Hotel Grand
Pacific hotel and Fairmont Empress are both widely recognized as the largest hotel-service
providers of high-quality services. This project mainly focuses the discussion on the cost
structure, demand drivers and profitability of the main players within Victoria’s boutique hotel
industry.
Cost Structure
In the industry of boutique hotel, hotel rooms are rented mostly attaching various types of
services such as food, spa, and business activities’ space provision. Some regular hotels can only
provide their clients with basic room services. Hotels are service providers as well as consumers
of human labor, service supplies, and other essentials to ensure spontaneous provision of good
hotel services.
The main cost structure for hotels can be broken down into sunk costs, fixed costs,
variable costs, scale economies and scope economies. Hotel’s sunk costs are the construction
cost and attainment of business certificate’s cost. Hotel owners tend to be very cautious about
expansion in the hotel industry, so the cost of construction is indeed sunk. Fixed costs include 24
hours per day, 7 days a week front desk services, frequent equipment warranty check (for
example, fire alarm), competitors information searching expense and workers’ insurance. Direct
wages of employees and expenses related to occupancy volume (soap, shampoo and laundry
costs for the rooms) are variable costs. In large boutique hotels like Hotel Grand Pacific and
Fairmont Empress, labor costs share almost 26% of the expenses while regular hotels spend 32%
on the labor costs. Such number indicates that main players in the industry has the general
incentive to improve their service quality by largely investing in other services sectors in order to
improve their reputation in the hotel industry. For larger boutique hotels, variable costs also
include the cost of sales (for example hotel spa, massage, restaurant and items sold inside the
hotels).
“Scale economies” is effective when the scale of production increases, the costs will go
down. In hotel industry, scale economies are mostly depending on the rate of room occupancy.
Once the occupancy rate increases, the average costs will decrease. However, in boutique hotels,
economics of scale also rely on other services. For example, the Hotel Grand Pacific is a 5 star
boutique hotel in Victoria. Except the room occupancy rate, the hotel has accessorial restaurant
and SPA services. The hotel can hold business meeting and events. The optional services
increase the efficiency of production.
“Economies of scope” specify that the total cost of production is lower when two
products are produced together than that of producing separately if there is a joint cost. In the
case of Hotel Grand Pacific, consumers are not only purchasing the comfortable room services,
but also likely experiencing other qualified services inside the hotel. The joint cost would be the
expense of location. One location with various types of enjoyments, both customers and service
provider are benefited. For instance, the Empress Hotel lists a number of choices for their clients.
There are bed-addition, breakfast-provision, celebration-management, cultural events
management, family-party, golf program, and SPA. All the high quality services and packages
attract more customers to their hotel, and hotel itself can lower its average costs.
Demand Drivers
Factors affecting short term demand for the boutique hotel in Victoria
According to Victoria Tourism Bulletins and Statistics in 2010 and 2011, the demand of
the boutique hotel in Victoria has two groups: high seasons and low season, which is from the
beginning of May to in the middle of September and the rest of whole year respectively.
Generally speaking, the demand of high season is 70% of average occupancy with the highest
demand in August. Otherwise, the low season demand was 40%-60% of average occupancy
approximately. Although Victoria of Canada is a year round destination that offers a friendly,
safe haven for all visitors, demand for the boutique hotel depends highly on the changes from
low season to high season.
Factors affecting long term demand for the boutique hotel in Victoria

The visitors to Victoria are divided into:
domestic and international market segments.
A couple of positive announcements were made that it might boost international
visitations. BC Government announced that the Province will introduce legislation to eliminate
provincial aviation fuel tax for transporter and international flights. Therefore, it must have an
increase in international traveling in Victoria and then there are more international visitors in
boutique hotels. In addition, according to the Conference Board of Canada, the number of
visitors from China is estimated to increase by 50% by 2015. At the same time, the World
Tourism Organization is projecting that China will have 100 million international travelers by
2020. In short, the demand of boutique hotels in Victoria should have the increase in the aspects
of Chinese traveling market.

For the domestic market in Victoria boutique hotel industry, there are two groups:
corporate and leisure market.
Both of these two segments are sensitive to price and the demand of leisure group is
relatively more elastic than that of corporate. 2011 Portrait of American Traveler by
YPARTNERSHIP reports that 13% of leisure travelers stayed at a B&B or inn at least once
during the previous year. Furthermore, 79% of leisure travelers express interest in staying at
B&B in the future. Portrait of American Travelers and travel horizons surveys of corporate and
association meeting planners indicate that 43% of corporate and 21% of association meeting
planners expect to book more off-site meetings in 2011 versus 2009. In addition, leisure travelers
may not travel is reasons that the increase price anticipated for the BC ferry to get to the Island
and the strength of the Canadian dollars compared to the American dollars.
Future Profitability and Attractiveness of the Industry
The industry of hotel can operate a wide range of business including accommodation,
catering and entertainment. It is easy to enter the hotel market, for the barrier of structure entry,
such as technology, service brand and selling network is not very big; however, the huge capital
investment, fixed cost, sunk cost and the settlement of labor can lead to the difficulty of exiting
the market. For example, construction cost, salary and welfare of employees, land rents can all
cause high exit barrier.
Price competition is an efficient and direct way to use among industry competition.
Different customers have different preferences, so they maybe choose hotels based on their need
and taste. Price war with competitors will not bring profits and benefits to hotels and hotels must
set customer experience as their first important mission to do. Instead of taking the price
competition, the quantities of products and services that each hotel offers to differentiate from
others are relatively important. For example, covering high-speed network, providing free
parking lot and using brand products can all increase the interest of customers. Grand Pacific
Hotel can be a good example. With the development of economy and the growth of population,
the development of the suburban area in Victoria weakens the demand of hotels at downtown.
As a result, the marketing share of Hotel Grand Pacific has decreased. Even Victoria is in
tourist season, there are still some empty rooms not being booked. In order to solve this problem,
hotels should not only improve product differentiation, but also expand new market.
Conclusion and Discussion
Boutique hotel industries nowadays are developing very fast, the large players close to
popular locations are extremly competitive to each other. By discussing the cost structure of the
hotels like Hotel Grand Pacific and Fairmont Empree, it is quite clear that their cost structure are
very similar on the senses of fixed cost, variable costs, and sunk costs. However, such boutique
hotels are always changing their price policies according to different expectations to demand at
distinct time period and possible competitors’ strategic price changes. However, it should be
agreed with that as long as the market structure is in good shape, it is not hard for Victoria’s
hotel owners to generate profits. While the size of the gain depends their strategies adopted and
the flexible clients’ incentives.
Reference&Notes:
1.
HARRIS CONSULTING CORPORATION INC, City of Victoria, Downtown and
Downtown Fringe Retail Commercial and Hotel Demand Forecast. (2007, February)
WWW.HARRISCONSULTS.COM
2.
Mint Global - company report of HOTEL GRAND PACIFIC (2011.10.11)
https://mintglobal.bvdep.com/
3.
http://proquest.umi.com.ezproxy.library.uvic.ca/pqdweb?did=2498564421&Fmt=3&clientI
d=3916&RQT=309&VName=PQD
4.
Victoria Tourism Bulletins and Statistics (2010-2011)
http://www.tourismvictoria.com/content.aspx?f=General&p=Research+Centre+Tourism+B
ulletins.html
5.
Summary statistics for hotels, motor hotels and motels, Canada, by province and territory,
2007 to 2010
http://www.statcan.gc.ca/pub/63-253-x/2011001/t002-eng.htm
http://www.tourismvictoria.com/content.aspx?f=General&p=Research+Centre+Tourism+B
ulletins.html
6.
7.
8.
Wikipedia, “Victoria BC”
a) http://en.wikipedia.org/wiki/Victoria,_British_Columbia