Report No.

CONFIDENTIAL

A proposal for starting up a hotel in Chile

Submitted to: Dr. R. Raghunathan Prof. Sudhir Sachdev Submitted By Ms. Veena Rani Chairman S. Venkateswaran CEO Sumit Raj - CFO Hemant Khosla CMSO

MBA C424: International Business

Birla Institute of Technology and Science, Pilani 333031 Class Year 2012

INTRODUCTION
We, Green Park Hotel, are a conglomerate of Peninsular Corporation founded in the year 1986. The businesses include hotels, consumer goods, restaurants, pharmaceuticals and retail chain in India. The worth of the group was 1987.11 Cr as on March 2011. Our hotel business is growing at 20% in terms of revenue for the last two consecutive years and at this time we are planning to expand our operations to increase our revenue, and to reduce risk through diversification. Among the prospective countries, we found Chile as a favourable destination for investment. Hence, we are planning to expand our operations in Chile. Chile is a coastal country in South America between Andes Mountains in the east and Pacific Ocean in the West. Chile has an area of 756,950 square kilometres and a total coastline of 6,435 kilometres. It shares its border with Peru in the north, Bolivia and Argentina in the east. The political and economic stability of Chile makes it a highly attractive destination for foreign direct investment (FDI). The legal structure is also favourable to FDI. The national language in Chile is Spanish - the second most spoken language in the world [1]. The labour force work hard to meet the deadlines.

BUSINESS ENVIRONMENT ANALYSIS

The Mode of entry into Chile can be decided based upon the analysis of the cultural, economic, political and legal environment prevailing in Chile. These are the major factors governing the foreign trade.

Culture in Chile: The Republic of Chile has considerably homogenous culture throughout the country. The official language of Chile is Spanish. German and English are also spoken in Chile. Several steps are taken by the government to impart English language among the public to make them employable under foreign firms. Majority of Chileans are Catholics (80%) and few are Protestants (11%). In Chile the family framework plays a central role. It is common to classify people based on their income and religion. Religion also played a key role in Chilean politics. These factors are similar to that of India. Though these factors are a formidable advantage for us there is a language problem. Even though literacy level in Chile is at 96%, only 8% of graduates speak English. Economy of Chile: Chile is being considered as one of the most stable economies in the world. GDP growth was 1.5% in 2009 and 5.2% in 2010; the economy is expected to grow around 6% in 2011. Unemployment averaged at 7% in 2010. Wages have risen faster than inflation as a result

of higher productivity, boosting national living standards. Since 2006, the percentage of Chileans below the poverty level had been between 13% and 14%. Chileans have the highest per capita disposable income in Latin America ($6864) in 2010. They also spend an average 7% of their disposable income in Hotel and Tourism. Chile's economic policies have created significant opportunities for foreign investors to participate in the country's steady economic growth. Foreign investors receive treatment similar to Chilean nationals in nearly all sectors (Except in areas of mining and agriculture). In 2007, inflation inched toward 8%--the first time inflation had exceeded 5% since 1998. In 2008, inflation increased further, hitting a high of 9.9% in October 2008, before moving lower again at the end of the year. In 2009 and 2010, inflation in Chile decreased to between 2% and 2.7% [2].

Political System: Chile has a stable democratic system. Chile changed from an authoritarian political system to a more of Democratic system in early 1990s [3]. Chile is now run by an elected president. The rules governing transfer of legislative and executive powers are clearly established in the constitution, are accepted by all political parties. Constitutional reforms passed in 2005, end the right of each branch of the armed forces to express political opinions to the authorities through the National Security Council and hence armed forces intervention in governance is eliminated. Labour organisations have been strengthened as a result of labour reforms, but there is little risk of violent demonstrations. International relations are peaceful, although relations with neighbouring Bolivia, Peru and Argentina have been strained at times in recent years. The country also has very low corruption. According to corruption perception index, Chile was ranked 25th out of 178 countries as the least corrupt nation [3]. An open climate ensuring competition among departments and performance based incentives were the reason for less corruption.

Legal Framework for FDI: The foreign investors are protected by a foreign investment statute (D.L.600). Under this statute, any foreign investor gets the right for the following: Right to repatriate abroad the invested capital after one year, and profits derived there from at any time, Right that no discrimination will be made by the Chilean Government or its agencies against the foreign investor or the company in which the investment was made, Right that the capital invested (calculated in its original non-Chilean currency equivalency) will not be taxed when the assets purchased with the investment are sold or the Chilean business is liquidated, Right to freeze all income taxes affecting the investment at a fixed rate of 42% for a period of 10 years from the operations start-up, Right to freeze custom duties and value added taxes affecting the

import of the machinery and equipment (with certain limitations) needed to implement the relevant project. The procedure for foreign Investment in Chile is simplified. The investor should send an application to Foreign Investment Committee (FIC). As soon as an investment application has been filed with the FIC, the investor may carry out the investment in Chile. In the event that the application is approved, the corresponding investment shall be governed by D.L. 600 and entitled to the rights granted therein. In the event that the application is rejected, or the investor withdraws it, the investment already made can be, repatriated within a term of 90 days. The legal costs other procedures involved in making a FDI in Chile is much less when compared to that of other countries. In Chile, the entire investment process will be completed within 22 days and at 4 times less cheaply than other regional countries. The overall income tax burden affecting the income of an enterprise owned by a foreign entity will amount to 17% payable by the enterprise plus 35% payable by the foreign owner, less 17% of distributed amounts, which is accepted as a credit against the 35%. But he has the right to exercise an option for fixing the tax at 42% for initial 10 years. In line with Chiles policy to minimize tax barriers to foreign investors, the reform means that foreign investors do not have to pay Chilean taxes on earnings which are obtained from investments in other countries.

TRADE AGREEMENTS OTHER COUNTRIES

Chilean governments have actively pursued trade-liberalizing agreements. During the 1990s, Chile signed free trade agreements (FTA) with Canada, Mexico, and Central America. Chile also concluded preferential trade agreements with Venezuela, Colombia, and Ecuador. An association agreement with MERCOSURArgentina, Brazil, Paraguay, and Uruguaywent into effect in October 1996. Chile completed free trade agreements in 2002 with the European Union and South Korea. Chile, as a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. To that end, it has signed trade agreements in recent years with New Zealand, Singapore, Brunei, India, China, and most recently Japan. In 2007, Chile held trade negotiations with Australia, Thailand, Malaysia, and China. In 2008, Chile signed an FTA with Australia, and expanded agreement (covering trade in services and investment) with China. The P4 (Chile, Singapore, New Zealand, and Brunei) also plan to expand ties through adding a finance and investment chapter to the existing P4 agreement. Chile's trade talks with Malaysia and Thailand are also scheduled to continue in 2011. Based on the above facts, we can say that the environment for making a direct investment in Chile is safer when compared with other countries. Hence, we chose to start business in the

country by buying an existing Eco luxury hotel in Patagonia, Chile (Through a Direct Investment). The prospective returns that we can get from the business, its potential and our business strategy will be discussed hereafter.

SWOT ANALYSIS OF THE COMPANY

A SWOT analysis of our firm and environment in Chile is given below. STRENGTHS WEAKNESS

Diverse portfolio serving multiple customer segments Hotel already in operation, recruitment expenses can be reduced to a large extent. Prior experience in hospitality sector THREATS

Lack of global presence. Lack of well established brand name in Hotel industry.

OPPORTUNITIES High per capita disposable income. High growth potential in tourism industry (20% in the 2009-10). The country (Chile) has highly stable & supportive political conditions. Increase in flow of international tourists every year.

Growing recession which affects global economy. Presence of global competitors like Marriott, Sheraton and also from local players. The place near the border of Chile & Argentina. The border issues are a special concern. English Speaking Population is less.

MARKET ANALYSIS
Market Potential: The total market for tourism in Chile was 9522.2 billion CLP (Chilean Pesos). It is expected to grow to 14761 billion CLP in 2019. The Patagonia region alone contributes to around 30% of this income. The international tourists mainly come from neighbouring countries like Argentina, Brazil, United States, Mexico and from some European countries. The domestic tourists come from all over Chile to Patagonia. Competition: There is a stiff competition for Hotels in Patagonia. There are a number of domestic players with a few international players. The facilities in the hotels vary based on the price they charge. A few basic amenities are common to all hotels and they include restaurants, honeymoon suites, Safari services etc. But few players are providing additional facilities like Golf courses, Spa, etc. Some Famous luxury hotels in Patagonia are Cabo de hornos, Diego de

almagro, Finis terrae, Isla rey jorge, Jose Nogueira, Los Navegantes. The international Players include Marriot and Sheraton. Price: The price of hotels range from $100 to $1400 per day depending on the facilities offered at the hotels. We have planned to price the room at $549 for normal rooms and $999 for Suites. The major facilities provided at the hotel are wi-fi access, fitness and spa, laundry/ dry cleaning, casino, swimming pool, artificial beach, night clubs and meditation centre. The discussion of income and expenses are shown in the P&L account in the appendix. We have planned to provide low price compared to other hotels in the category and our customers will be tourists who wish to spend vacation together as a family. Our Mission: To strive for delighting our guests every time by creating engaging experiences straight from our hearts.

INVESTMENT PLAN
We are provided with an initial capital of 50 Crores (Equivalent to 50 billion Chilean pesos or 11Mn US$). This investment is considered sufficient for starting the business in Chile. We are purchasing a running hotel in Patagonia for $4,000,000. We have planned to invest additional $2,000,000 in renovation work, $1,000,000 is reserved for the relocation expenses of the four executives and remaining fund will be used as working capital. From the third year onwards, we are making profit and we do not need to pay taxes for five years as an incentive from the Chilean government. The details of expenses and investment are provided in the appendix.

MARKETING STRATEGY
Segment:- We are focusing on the tourists from Chile and neighbouring countries like Mexico, Argentina, Canada etc Target:- Our target customers will be affluent young families without or with kids and singles who come from Chile as well as neighbouring countries. Our customers will be adventure seekers, outdoor lovers and skiers. Positioning:- We want to position ourselves as the hotel providing the value for money. We want to communicate a message that get immersed in Patagonia its not just about visiting

ADVERTISING & PROMOTION

We need to invest heavily in promotion activity for the initial two years. We have kept a separate budget of $4 million during our first year of operation. Television The advertisement would be given in major news channel and national entertainment channel. The advertisement will be broadcasted between 7 to 9 PM during weekdays and 7 11 PM during weekends. Print Media The advertisement would be given in national newspaper and magazine. The national newspaper which we are be targeting is the Santiago times and the national magazine is Chile Pepper. Film Ads - The advertisement made can also be shown in the movie theatres as filler. Radio Channels Radio Bio-Bio is having a broad coverage in Chile. We would be putting an advertisement in Radio Bio-Bio. In the major cities of Chile, billboards would be used to spread the awareness among the population. We are also keeping a separate budget for the sponsoring the major television show. Discounts will be provided during the festival season like Columbus Day and Christmas. Reward for the regular customer The regular customer will be given a card in which they can collect the reward points and can redeem it later. We are looking for a tie-up with some of the major travel agents. The commission based travel agent service will be taken.

HUMAN RESOURCE PLANNING

According to the recommendations of the World Tourist Organization, the optimum number of staff per 10 rooms in a 3 star hotel is 8 persons, in a 4-star hotel it is 12 persons and in a 5-star hotel, 20 persons. The hotel which we are buying is having about 130 employees including housekeeping staff. For our continuous and unhindered operation, we need about 50 employees. We will be hiring the professionals from the market with an attractive offer, which would be beneficial for both the employees and our company. We have contacted with the Chile branch of Les Roches International School of Hotel Management, which ranks within the top three hotel management institutes in the world, for fresh graduates. For the first year of operation, part of workers will be hired on the temporary basis. However, the management team will be hired on the full time basis. All the employees and the workers will be given a proper training as per the culture of our hotel. They will also be given motivational training.

The members of the management team from India on deputation will be given a relocation expenses. An additional $1 million is assigned for relocation of the four employees.

CONTINGENCY PLANS:
If the hotel industry by any cause does not work out properly, we have these few other options which can be further worked upon: 1. Give off the place as some villas (Holiday Homes) by structuring them accordingly. 2. Artificial tourist attractions like Theme parks, Water Park, Ski Grounds, etc. 3. Yoga Ashram.

CONCLUSION
Chile is a growing economy with high middle class population. The tendency to spend on tourism and other recreational activities are increasing every year. Moreover the business environment in Chile is more investor friendly and EIU (Economic Intelligence Unit, a part of The Economist) ranked Chile as 20th most favourable nation to start a Business. Hence we firmly believe that expanding our Hotel Business in Chile will be more profitable. We also hope to expand our business to other countries and establish our hotels all over the world.

BIBLIOGRAPHY

1. A world travel and tourism council report on "Travel & Tourism Economic Impact" 2. "Chile - A land of opportunities 2011" a report by Foreign investment committee, Goverment of Chile 3. Doing business in chile,2006 by CariolaDez Prez-Cotapos&Ca Ltda. 4. Legal environment for investments in chile by Figueroa & Valenzuela, Abogados, 2008. 5. "Doing Business in Chile 2011" a report by The World Bank and the International Finance Corporation. 6. Risk and foreign direct investment in emerging economies: lessons from the former soviet union by James P. LewandowskiDepartment of Geography and Planning, West Chester University. 7. http://www.nationsonline.org/oneworld/chile.htmOne world Nation Retrieved on 22 Aug 2011 8. http://www.bcentral.cl/eng/publications/statistics/integrated/pdf/mi_quarterIV2010.pdf Microeconomic indicators Central Bank of Chile accessed on 22 Aug. 11 9. http://en.wikipedia.org/wiki/United_States_Department_of_State US Department of State accessed on 22 Aug 2011. 10. http://www.btinternet.com/~vrota/hotelstaffing.htm Hotel Staffing accessed on 22 Aug 2011.

APPENDIX
Table 1: Profit and Loss Statement
Year I Revenue from Deluxe Room Revenue from Suite Revenue from Others Total sales Revenue Cost of Sale of Deluxe Room Cost of Sale of Suite Cost of sale of others Total Cost of Sale Gross Margin Operating Expenses Depreciation Sales Expenses: Commission Sales Expenses: Salary Promotion Maintenance Expenses General and Admin Expenses Management Salaries Overhead Costs Total Expenses Profit Before Tax Tax @ 42 % Profit After tax 80,15,400 36,46,350 50,00,000 1,66,61,750 24,04,620 10,93,905 25,00,000 59,98,525 1,06,63,225 3,00,000 16,66,175 13,32,940 41,65,438 33,32,350 8,33,088 3,33,235 1,19,63,225 -13,00,000 0 -13,00,000 Year II Year III 1,00,19,250 1,20,23,100 54,69,525 72,92,700 60,00,000 65,00,000 2,14,88,775 2,58,15,800 30,05,775 36,06,930 16,40,858 21,87,810 30,00,000 35,00,000 76,46,633 92,94,740 1,38,42,143 1,65,21,060 3,00,000 21,48,878 15,04,214 47,27,531 42,97,755 8,59,551 4,29,776 1,42,67,704 -4,25,561 0 -4,25,561 3,00,000 25,81,580 15,48,948 54,21,318 51,63,160 9,03,553 5,16,316 1,64,34,875 86,185 0 86,185

Table 2: Economic and Current Account of Chile

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Fig 1: Stock Market in Chile

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