Private equity cleans up
Grant Hearn ought to be a pin-up for the private equity industry.
For the past four years, this product of a family of hoteliers has been chief executive of the distinctly unglamorous budget hotel chain, . Since taking the helm, he has transformed it from a lacklustre number two in the market, to a fast growing company that is shaking up the hotel industry.
He has opened thousands of new rooms and expanded employment. Along the way, a fat profit has been generated for its first private-equity owner, Permira, which sold out in August of last year. And its new owner, Dubai International Capital, is backing him in a second three-year growth spurt.
And he’s done it not by asset stripping or by squeezing working capital to unsustainable levels – which are the charges most commonly levelled against private equity – but by improving working practices, passing some of the productivity gains on to customers in the form of lower prices and improved marketing.
I interviewed him for a short item on private equity that’s being broadcast today or tomorrow on Radio 4's PM Programme. What impressed me is that his private equity owners gave him the resources and freedom to revitalise a business that was drifting when owned by the giant catering conglomerate, Compass.
Among his innovations was to adopt the pricing policies and internet-booking approach of the low-cost airlines, Ryanair and Easyjet. Travelodge's rooms are often cheaper for early bookers than those airlines' giveaway deals, when tax is included.
There are two statistics which explain both how Travelodge can cut prices and also make substantial returns for its owners. The time taken to clean a room has been cut from 40 minutes to 25 minutes and will come down to 20 minutes in the coming year. And the number of staff employed per hotel has roughly halved.
Those are massive productivity gains. In the case of room cleaning, they have been achieved by studying working patterns and sharing best practice. This year, the company is showing all its cleaners a DVD which demonstrates how a room can be prepared for occupancy in just 20 minutes. And on the basis of a Google search, customers don’t appear to believe that cleanliness has been sacrificed.
But here's what bothers me, and will prompt many of you to accuse me of being a soft-in-the head, bleeding heart something-or-other. The allocation of risk and reward in this business, after it was acquired by private equity, has been unevenly shared – as it is in most private-equity deals.
The managers of this business took risks, as did the executives in the relevant private equity firms and the investors in their funds. Hearn’s prescription to revive Travelodge might have been a disaster. He might not have been able to boost cashflows sufficiently to meet the increased debt-financing costs incurred after the takeover.
But their rewards have been huge, millions of pounds each for a small number of individuals.
However junior employees incurred the same risk of disaster – though one difference is that they didn’t choose to take on the risk of the private-equity deal, it was foisted on them. And they’ve had no opportunity to participate in the investment rewards of the private-equity deal.
Their pay has probably gone up a bit. But have they captured a significant proportion of a staggering 100% improvement in their productivity, a doubling in their individual output? What do you think?
Just to be clear, I am not singling out Travelodge for special criticism. I would imagine that compared with many businesses in its industry, it treats its staff pretty well: otherwise it probably wouldn’t be thriving.
But it is the nature of our globalising world that the top prize for those with the fewest skills – even if they improve their output exponentially – is that they get to keep their low-paying jobs. Next time my boy moans about going to school, I’ll probably feel compelled to tell him about Travelodge’s super-productive cleaners.
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Knowingly since dot com era started, private equity (i.e. VC and Business Angels) had done well for small and start up companies but after Debenham's fiasco, Market and Experts have doubts, if Private Equities are good for big companies.
Nice pick Robert, we need these kind of private equities success stories to get confidence in them.
Was it the cleaners themselves who innovated their working practices to so dramatically increase their productivity?
Their output may have doubled, but has their effort? They are simply employing a different working practice in which they were instructed by their employers.
Of course what may eventually drive up their wages will be competition. These cleaners are now armed with better training. They can now clean rooms far more quickly than other cleaners in the industry. If I was a competitor to Travelodge, I would be tempted to out bid the wage currently offered their cleaners in order to attract them to my employment.
This is the way markets work and explains how productivity gains eventually translate into higher wages.
Surely it would be fairer to say the the staff at Travelodge had been underperforming in the first place? This may not have been down to a lack of effort, but poor training/equipment/support from their previous management. The new regime should be commended for improving productivity.
But was life any different under Compass? Did Compass run a save as you earn scheme - or similar - that allowed Travelodge cleaners to invest in the group's shares and benefit from any share price rise?
40 minutes to clean a travellodge room? What were they doing? French polishing the furniture?
It seems Travelodge have used a 'stick' (quick replacement by minimum wage immigrants) to oblige their staff to clean faster by applying good old Tailorism.
However the current advantage is easily replicated by competitors (watch the DVD).
Would the management have build stronger foundations by allowing all the staff a share in the bonanza?
In the race to the bottom on price, the next step is a chain offering discounts for cleaning your own room on departure.
I do enjoy reading your blogs, but I would not want you to run one of my businesses. You do not have a clue. Working your assets as efficiently as possible and generating cash is what it is all about.
I'm not quite sure that you are not creating a false impression that private equity, per se, is the driving force behind the Travelodge improvement story. Are you seeking to suggest that such an improvement is ONLY possible through the strictures and insights of private equity investors? It seems to me that the fundamental requirement would be for management to be able to identify and impose improved efficiencies, and that whether or not this is done under a private equity régime is purely incidental.
Of course, if you maintain that such efficiencies are not possible under conventional corporate structures, this indeed raises the question whether we should seek to modify such structures to facilitate industrial progress, but it does not mean that private equity is either the only solution, or necessarily the best one.
The fact senior management needed to show a DVD on how to clean a room efficiently is compelling evidence that the cleaning staff deserve a kick in the posterior rather than a share in the windfall once their unbelievable inefficiencies had been uncovered and remedied!
Why not go the whole hog and ask Private Equity to contribute to trades unions?!?
I stayed in a travellodge a couple of weeks ago. Worst service i've ever received. Weren't allowed to check in until 4pm and if you weren't back by 4am they told me they would be entitled to sell my room to someone else, despite my having paid. No shampoo or soap in my bathroom. Militant cost saving is soul less, and I know they will always fill their rooms but the private b&b will always be my choice.
I have heard Robert Preston so many times talk about Primera the owners of Travel Lodge and AA. I would really like to know any other examples.
Also what percentage of "Private Equity Takeovers" are actually this successful as the examples stated.
Also as the businesses are highly leveraged, they have to make more money just to pay the bills(interest). Which in turn makes it prone to go bust earlier in the life cycle of an economic slowdown. They might not be able to survive the down turn of the economic cycle. Also the money so made is not left in the company, it goes out to pay the few bosses.
For all this extra risk the employees get nothing in return.
You can apply the same principle to highly leveraged housing market in the UK now. Fine till the time house prices are rising and there is capital growth, What happens when people taking 5 times their salary or (8-9 times their Net salary) survive the down turn of the economy. If they loose their jobs.
I find all the reports by ³ÉÈËÂÛ̳, although they state both sides of the opinion but what they don't tell you what percentage hold what side of the opinion. It would be stupid of us to assume that both sides are equally balanced.
Shay, that’s just the kind of attitude that leaves our world haunted by disparity, an ever-expanding gulf between the working classes and capitalists that think of nothing but cash and themselves. Whatever happened to emancipation, or even the simple moral obligation to help those less fortunate?
Good blog, the ³ÉÈËÂÛ̳ could do with taking a more ethical stance on the world we live in.
Excellent point on profit increases rarely benefit the staff that helped earn them. Sadly it was ever thus, the top echelons of any company reward themselves handsomely while the average worker is to be expected to count themselves lucky if they get an inflationary pay rise.
I'd love to see some legislation that states that top people in the company can only earn 20 times what their lowest paid employee made. That would soon shake things up :-)
Not a word about room occupancy! I trust they are able to run at 95% or better for about 358 days a year. No motorway room provider seems to make any serous attempt to sell rooms. It only does marketing. I am not even sure they know the difference between the two terms. Selling is locating a prospect, offering and persuading a buyer to buy --- marketing is a mere order-taker, I have it, my order-book is open, anybody interested, if so I'll graciously permit you to buy. Motorway room-providers never actually sell, don't know the meaning of the word. I speak from experience +++
In assessing whether the cleaners are feeling the sharp end of Travelodge's increased productivity - or whether they are simply better trained or less idle now - it's worth consulting the appropriate chapter in Barbara Ehrenreich's Nickel and Dimed. The instructional DVD on cleaning hotel rooms (in this case in the US) is commented on extensively. Better still, find some facts of your own, rather than reason a priori about cleaners you've never met and a DVD you've never watched.
I have stopped using Travelodge. Not because they're owned by private equity but because the quality has dropped so much. The last four stays I had involved bathrooms where the extractor fan simply didn't work. They have cut the leads to the heated towel rails so they cannot be used. The reductions in service are fine when you get a room for £26. But when you don't you are paying circa £55 for a £26 room. Which is why now, I prefer to give my money to Premier Travel Inns, all £55 or thereabouts of it, knowing I'll get a decent room with a working bathroom. No I don't work for PTI or have shares in them, or have relatives working there, I just think Travelodge have gone badly downhill and saved money by cutting maintenance.
Paul Bird