COLLEGE OF BUSINESS AND ECONOMICS

DIPARTMENT OF ECONOMICS
FACTORS AFFECTING THE PROFITABILITY OF HOTEL INDUSTRY IN CASE OF BORE
TOWN.
A RESEARCH PROPOSAL SUMMITED TO DEPARTMENT OF ECONOMICS IN
PARTIALFULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF BACHELOR OF ART
[BA]IN ECONOMICS.

BY
1. BIRHANU ASEFA
2. BUZE WONDIMU

ADVISOR: GIRJA B.

MAY, 2022

BULE HORA, ETHIOPIA

1
 Chapter One
Introduction
1.1. Background of the study
The primary purpose of hotels is to provide travelers with shelter, food, refreshment, and similar
services and goods, offering on a commercial basis things that are customarily furnished within
households but unavailable to people on a journey away from home. Historically hotels have also taken
on many other functions, serving as business exchanges, centers of sociability, places of public
assembly and deliberation, decorative showcases, political headquarters, vacation spots, and permanent
residences. The hotel as an institution, and hotels as an industry, transformed travel in America,
hastened the settlement of the continent, and extended the influence of urban culture.
Hotel industry is one of the lucrative ventures which provide a lot of services to people. It has globally
aided many countries in terms of revenue generation. A country's revenue system can work effectively
if the hotel industry pays their tax rate allocated to them. The hotel industry provides services like
accommodation, food, entertainment and health and fitness to people.
In developed countries, service in general is highly heterogeneous and includes a great variety of
interesting, complex, and often highly innovative activities. Over the past few decades, their importance
has steadily grown compared to that of tangible goods. Hotel industry is a very competitive business in
which customers place great emphasis on reliability and timely service delivery.
The vision of all such businesses is to provide quality high class services to customers in order to
successfully thrive and achieve their mission (OECD, 2012). Profitability refers to measure of financial
performance; it is one of the main aims of Hotel Industry or Hotel sector. Profit is an essential
precondition for an increasing attractiveness of a company. In addition, profit attracts investors and
improves the level of solvency, and thus, strengthens consumers’ confidence. The financial performance
of Hotel Industry is also appropriate within the macroeconomic framework since the Hotel industry is
one of the financial system components, development economic growth and stability. Hence, the
determinants of Profitability have attracted the interest of academician and, practitioners
Review of Related Studies and Research Gap Dissimilarity of profit among Hotels Industries
over the years in a given city would result to suggest that internal factors or firm specific factors and
external factors play a vital role in influencing their factors affecting financial performance. It is

2
 therefore imperative to identify what are these factors as it can help Hotels Industries to take action on
what was increase their factors affecting financial performance and investors to prediction the factors
determining profitability of Hotel Industry in Bre town Administration, lChen in 2010 originates a
consensual relationship between tourism and hotel industry. In other words, the ability of hotels in

expanding the economic situations and the performance of tourism related firms make it one of the most major
segments of the hotel industry. Success is based on the organization’s ability to rely (Anderson and Vincze,
2000).Competition is at the core of the success or failure of firms (porter, 2009). Competition determines the
appropriateness of a firm’s activities that can contribute to its performance, such as innovations, a cohesive
culture, or good implementation.
Thus the central intent of this study was identifying factors affecting the profitability of hotel
Industry :the case of Bore town.

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 .

1.2. Statement of the problem

Efficient composition of assets and liabilities of hotels is crucial for their sound financial performance. In fact,
economic theory suggests that hotels attempt to produce to maximize profits while minimizing cost. This
means most profitable hotels have become efficient hotels while maximizing profits (Goldberg and Rai 1996,
Berger 1993). As hoteling firms may attempt to maximize profit by many ways, assets and liability
management activities are the most probable methods. In developed countries, a variety of sources and use of
funds are available for hotels allowing them to diversify asset and liability portfolios. But in developing
economy, holes are constrained with low breadth and depth of financial market and as such their asset and
liability base are narrower than those of their counterparts in developed countries. For example, hotels in
developed countries, such as USA and Australia, can invest their excess cash reserve in short-term trading and
investment securities unlike Ethiopia where there is no short-term trading securities but limited existence
short-term investment securities, such as government bills and bonds. Constrained by the lack of vibrant
money market, Ethiopia’s private hotel shave not been able to invest their excess cash reserve for adequate
return. Due to the competition in the financial markets, hotels seek out greater efficiency in the management
of their assets and liabilities.
Accurately evaluating and measuring the performance hotel industry in Bore town is not an easy task. Hotels
differ in their sizes and this could have an effect on responsibilities of management, liquidity, debt level and
profitability. A hotel” assets and liabilities can affect its valuation in the market, its ability to acquire other
hotels or to be acquired at a good price. Therefore, a complete picture of the hotel, in the form of its financial
position, i.e. its balance sheet, should be studied and evaluated to be able to acceptably prediction of its future
performance. Therefore, investigation of factors affecting hotels profitability of hotel industry in Bore town
was he central intent of the researchers study. Considering that hotels are the most important tourist facilities
as they are the drivers of investment, employment and innovation in tourism, the aim of this paper is to
analyze the profitability of hotel companies in four Mediterranean countries: Croatia, Greece, Spain, and
Portugal over the period from 2007 to 2015. The results are obtained using panel data analysis and are
presented for each country separately in order to detect similarities and differences in profitability
determinants of hotel companies.
The impact of tourism, especially hotel companies, as an essential segment in the selected town is observed

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 Through the number of tourist accommodation providers and share of hotels and similar
accommodation in the total accommodation. Furthermore, hotel size and statistics for hotels and similar
accommodation is observed in order to determine their impact on the national economy.
The development of the hotel industry is important for new job opportunities and stimulation of the
local economy. Existence of a hotel company can improve the quality of life as well as reduce
unemployment in local communities (Bohdanowicz & Zientara, 2009). Hotels are, among other things,
different from other tourist accommodations since they can accommodate a larger number of guests due
to a large number of rooms. Smaller and medium-sized hotels and similar accommodation are
predominant in the observed countries

1.3. Objectives of the study

1.3.1. General objective of the study
The main objective of this study will be identifying factors affecting profitability hotel industry in
the town.
1.3.2. Specific objective of the study
The study will be addressed the following objectives;
 To determine the relationship between equity and profitability of hotel industry in the
town
 To determine the relationship between hotel age and profitability of hotel industry in the town
 To determine the relationship between firm size and profitability of hotel industry in the town
 To identify factors affecting the profitability of hotel industry in the town

1.4 Basic Research Questions

In line with the broad purpose statement the following basic questions will be also formulated for
investigation. and to address the specific objectives.
1. What are the major relationship between equity and profitability of hotel industry in the town?
2. What are the major relationship between the hotel age and profitability of hotel industry in the
town hotel?
3. What are the major relationship between the firm size and profitability of hotel industry in the
town hotel?
4. What are factors affecting profitability hotel industry in the town?

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 1.6. Significance of the Study
The significance of this research includes the following:
First, it expected to contribute to the hotel owners of Bore town to take measures to protect their hotels
from different risks, and maintain sound and healthy financial system through an efficient and effective
balance sheet management. Second, it helps other researchers as a source of reference for those who
want to make further study on the area afterwards. Finally, it gives all stake holders in the area the
opportunity to gain deep knowledge about the relationship of balance sheet, external factors and
profitability.
1.7. Scope of the Study
The theoretical aspect of hotel profit goes across several disciplines and it is, therefore, a
multidisciplinary. study. The concept of hotel profitability includes broad elements like assets
profitability, liability values and assumptions of the concerned organizations. For the purpose of this
study, hotel profitability is defined as how incomes are generated around the concerned hotel
organization in relation to service provisions. As a result, this paper is delimited to investigate factors
affecting the profitability of hotel industry in case study of Bore town. The study is also delimited only to
Bore town in case of its geographical delimitation.

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 CHAPTER TWO

2. Review of Related Literature

2.1 Theoretical Literature Review
A hotel is an establishment that provides lodging paid on a short-term basis. The provision of
basic accommodation, in times past, consisting only of a room with a bed, a cupboard, a small
table and a washstand has largely been replaced by rooms with modern facilities, including en-
suite bathrooms and air conditioning or climate control. Additional common features found in
hotel rooms are a telephone, an alarm clock, a television, a safe, a mini-bar with snack foods and
drinks, and facilities for making tea and coffee. Luxury features include bathrobes and slippers, a
pillow menu, twin-sink vanities, and jacuzzi bathtubs. Larger hotels may provide additional
guest facilities such as a swimming pool, fitness center, business center, childcare, conference
facilities and social function services. Hotel rooms are usually numbered to allow guests to
identify their room. Some hotels offer meals as part of a room and board arrangement. In the
United Kingdom, a hotel is required by law to serve food and drinks to all guests within certain
stated hours. In Japan, capsule hotels provide a minimized amount of room space and shared
facilities.

The competitiveness of a country derives from the performance of its enterprise (Barros, 2005),
which certainly include the hotel industry. While a community’s growth stimulates hotel
performances, in turn hotels contribute to the community ‘economic, social, and cultural
development (Go, Pine, &Yu, 1994). The hotel industry benefits from a destination’s economic
growth and stability and community developments, such as office buildings, retail malls, and
entertainment facilities, which draw both business and leisure travelers and help create demand
for hotel rooms. There are many other factors (e.g., input, process, output, and outcome) that
determine hotel industry’s competitiveness. Indeed, hotels utilize input factors and produce a
variety of products and services (outputs), and the nature of these outputs depends very much on
hotels’ strategic and competitive positions in the region. The impact of these measures in terms
of tangible outcomes is reflected by the market share of the hotel industry and by the price
competitiveness of the hotel industry in the regional market.

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The available studies and literature that discuss the Profitability of the hotel industry usually
examine a limited number of factors, but fail to develop a model/framework that captures the
relationships among those factors. Fortunately, there are a few exceptions that attempted to
develop more comprehensive frameworks and models.

2.2 Empirical Literature Review

Profitability determinants in hotel companies have been studied from different perspectives and in
different economies. These studies examined external determinants, as well as internal determinants
and characteristics associated with the management policy in the hotel industry.

Some studies confirmed that external factors such as economic crisis, government policies,
economic growth, political situation, terrorist attacks and other economic and non-economic
factors influence performance and profitability of hotel companies. Agiomirgianakis, Magoutas,
and Sfakianakis (2013) and Menicucci (2018) confirmed that economic crisis strongly and
negatively affects the tourism sector. Hotel business is highly sensitive on economic turbulences
as it lowers demand and prices for their services. After the global financial crises, hotels
experienced decreased revenue per room, room occupancy and average daily rate (ADR)
(KapiKi, 2012). Same authors address the negative effects of political crises on hotel profitability
in Greece due to a combination of economic and political crisis consequences. Ben Aissa and
Goaied (2014) found that terrorist attacks strongly and negatively affected the Tunisian tourism.
On the other hand, gross domestic product (GDP) growth positively affects the profitability in
the tourism sector. Growth in GDP encourages hotels to undertake new investments, which can
consequently improve their future profitability (Arikan, 2017; Malec & Abrhám, 2016;
Tan, 2017).

Other studies analysed the impact of internal factors on hotel profitability, such as, size, age,
financial structure, innovation, managers’ education, location, etc. Agiomirgianakis, Magoutas,
and Sfakianakis (2012) found that age, size and leverage have positive and significant effect on
profitability of firms in the tourism sector. Besides confirming that crisis affects hotel
profitability, Ben Aissa and Goaied (2014) found that hotel profitability is negatively influenced
by hotel size and indebtedness level. On the other hand, higher level of managers' education have
positive impact on financial performance of hotels. Arikan (2017) analysed hospitality firms

8
from the U.S. and confirmed negative impact of firm size and leverage on profitability, while
firm age and liquidity shown positive effect. Alarcón and Maspera (2015) investigated the
differences in financial structure, size and profitability of hotels located in three main Spanish
coastal areas: Costa Brava, Costa Dorada and Costa del Sol. They found that hotels in Costa del
Sol are largest and most indebted and, accordingly, have higher interest payments that negatively
affects their profitability. Marco-Lajara, Claver-Cortés, and Úbeda-García (2014) analysed effect
of business agglomeration in tourist districts on the performance of hotels located in Spanish
Mediterranean and Canary coast. They found that, due to the higher competition, hotels situated
at destinations with a higher degree of agglomeration are less profitable.

Beside aforementioned approaches, in the last few decades, a new approach that addresses cross-
cultural related issues emerged. Globalization, technology innovation and culture heritage
influence travel preferences, habits and tourist behavior. However, culture is not easy to explain
or analyze as it can be observed from different hierarchy levels, such as, national culture,
industry culture, occupational culture, corporate culture as well as organizational structure,
managerial practices and work attitudes (Pizam, 1993). Most of cross-cultural studies deal with
comparison between national cultures. Cultural differences (legal, economic, religion, etc.)
should be taken into account when making tourism strategies and offers. For example, laws of a
certain country may affect ownership structure, means of operation or size of a hotel company.
In addition, different financial systems and economic structure can affect availability of capital
necessary for investments (Chan, Cheung, & Law, 2012). This results in challenges and
opportunities for tourism sector, which at the same time has to adapt to consumer behavior and
needs that differ considering their cultural background. Analyzing cultural differences helps to
distinguish and understand which of them have the strongest impact. Most attention in cross-
cultural tourist behavior is focused on service quality that became a necessity to make touristic
offers tailored to specific customers (Li, 2012).

This paper follows resource-based approach based on the research of Jovanovic (1982) and
Wernerfelt (1984). According to this approach, fundamental determinants of performance and
success of a certain company relies on its internal resources and unique capabilities. These
characteristics include financial resources (sources of funding), natural resources (capitalization

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and size) and intangible resources (intellectual capital and innovation) (Agiomirgianakis
et al., 2012, 2013).

In order to survive, companies have to continuously adapt to a turbulent business environment by

developing different internal knowledge and skills, which affect their profitability. Internal
determinants of profitability depend on the activities and management quality, quality of the
organizational structure and human resources. The most common internal determinants include
company size, level of indebtedness, labor productivity, research and development expenditure,
profitability in previous years, level of investments, liquidity, and solvency (Škuflić &
Mlinarić, 2015). The main characteristics of the hotel companies are high share of fixed costs in
total costs and high capital costs. High capital costs require management that will lead to cost-
effective use of resources. To benefit from the economy of scale, hotels are built to an optimal
size (approximately 500 rooms). To achieve high levels of profitability, they must take into
account room occupancy and room average daily rates (ADR) (Cheng, 2013; Kim, Cho, &
Brymer, 2013). Hotel companies follow heterogeneous historical development paths and, as a
result, generate different sets of skills and competences, which are expected to affect their
performance more than the characteristics of the environment within which they operate. Since
the aim of this paper is to explain the determinants of hotel profitability in selected
Mediterranean countries, main internal predictors determining the profitability of the hotel
companies are discussed.

Return on Assets (ROA) is often used as a measure of profitability, as it is an indicator of the

company's ability to generate profit. Investors prefer companies with high ROA (Kang &
Stulz, 1997). ROA is a commonly used measure of companies’ profitability (Ben Aissa &
Goaied, 2014; Maçãs Nunes, Serrasqueiro, & Sequeira, 2009; Škuflić & Mlinarić, 2015) and, in
this paper, the ROA will be used as a dependent variable, i.e. proxy for hotel profitability.

The potential factors (predictors) affecting the profitability of hotels in the selected
Mediterranean countries refer to company size, age, lagged profitability, cash flow in relation to
operating revenues, labour productivity, asset turnover and solvency ratio. Regarding the impact
of hotel size on profitability, empirical studies ambiguously explain how hotel size affects its
profitability. According to several empirical studies (Agiomirgianakis et al., 2012; Barbosa &

10
Louri, 2005; Claver-Cortés, Molina-Azorín, & Pereira-Moliner, 2007; Maçãs Nunes et al., 2009;
Tan, 2017), large companies, due to economies of scale, achieve higher profitability levels
compared to smaller ones. Larger companies also have cheaper access to funding, which
positively affects their profitability (Agiomirgianakis et al., 2013). Additionally, large firms can
make substantial investments that smaller firms cannot afford (Baumol, 1959). They provide
more services, have enough revenues to set-off their expenses and reduce their risk by
diversifying loans (Moaveni, 2014). Although in most research, the size of the company has
found to have a positive effect on hotel profitability, for some specific type of hotels like resorts
or airport hotels, this effect is negative (PricewaterhouseCoopers, 2000). In this research, total
sales is used as a measure of the hotel size which is in line with Hirschey ( 2008) and Škuflić and
Mlinarić (2015). As we consider hotel companies, a positive effect of economies of scale is
expected (Dwyer, Forsyth, & Dwyer, 2010; Enz, 2011).

There are many studies investigating the impact of hotel age on their profitability. Same as for
the hotel size variable, these findings are also mixed. Several research suggested that hotel
profitability increases with its age due to the impact of accumulated ‘learning by doing’,
reputation and loyalty (Agiomirgianakis et al., 2012; Assaf & Cvelbar, 2011). However, there are
studies that found a negative effect of hotel age on its profitability (Baum & Mezias, 1992; Ben
Aissa & Goaied, 2014, Ben Aissa & Goaied, 2016; Chen, 2009; 2010; Škuflić &
Mlinarić, 2015). Younger hotels are usually more modern and prone to implementation of new
technologies and services with which they can easily attract more guests, especially those of
higher purchase power. Due to the mixed impact of hotel age on hotel profitability, we do not
have a priori expectation regarding this effect.

Relevant literature highlights the return on assets from the previous period (lagged ROA) as a
necessary determinant, as it is expected that the profitability from the previous period affects the
profitability in the current period (Maçãs Nunes et al., 2009; Schmidt, 2014; Stierwald, 2010;
Škuflić & Mlinarić, 2015; Tan, 2017 ). According to the previous research, a positive relation is
expected.

Cash flow is another factor for which a positive effect on hotel profitability is expected.
Dimitrić, Tomas Žiković, and Matejčić (2018) and Muthusi (2014) found a positive and

11
significant effect of cash flow on hotel profitability. Hotel companies with higher cash flow
reserves have a higher level of security. This is particularly important in the recession period
when a large number of companies have problems with claims collection. Cash flow is also
related to the firms’ profitability through its impact on the systematic risk. Logue and Merville
(1972) and Scherrer and Mathison (1996) argue that there is a negative relationship between
profitability and systematic risk and that the stability of the cash flow from operations reduces
systematic risk.

The solvency ratio indicates the proportion of the assets financed by shareholders. Hotels with
higher equity ratio have higher flexibility in accessing financing and better negotiating position
in arranging credit terms due to a higher creditworthiness. This gives them greater security in
times of crisis and lower risk of distress. Highly indebted firms bear higher financial risks
compared to those with less borrowed capital as they have to compensate shareholders with
higher profits (Tang & Jang, 2007). Increase in the debt level will increase the costs of
borrowing (i.e. interest expenses) and will consequently lead to a decline in hotel profitability
(Tan, 2017). Therefore, it is expected that hotels with higher solvency ratio will achieve higher
return on asset.Most research investigating the relationship between firm profitability and its
productivity found a strong positive relationship between these determinants. Firms that achieve
higher levels of total productivity are more likely to earn higher profits. Studies like Jovanovic
(1982) and Stierwald (2010) support this hypothesis by showing that more productive firms tend
to be more profitable as they manage their costs better. In this paper, productivity is observed
through labour productivity (operating revenue/number of employees) and net asset
turnover that measures the productivity of assets (operating revenue/total assets). Labour
productivity represents a basic indicator of the productive efficiency and the economic strength
of any firm. It has a great economic importance in the hotel industry since tourism is one of the
strategic branches in economic development in the Mediterranean countries (Avelini
Holjevac, 2001). On the other hand, net asset turnover provides information about the firms’
ability to use its assets to generate revenues. It is expected that profitability will rise with asset
utilisation growth (Pervan & Višić, 2012). In line with previous research that found productivity
to be one of the key determinants that positively affects profitability, a positive impact is of
productivity is expected.

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 CHAPTER THREE
3. Research Methodology

3.1 Introduction

This chapter reviews the research methodology will be employed to gather and analyze the data
will be used in the research study and this includes discussions on the research methods and
instruments used in this study for data gathering, capturing, validation and analysis.

3.1.1. Description of the Study area

Guji zone is one of the zones of Oromia Administrative Region, located in the southern part of
the region. It is bordered by Borena zone of Oromia in the south, West Guji Zone of Oromia in
the West, Sidama Region and Gedeo Zone in the North.. The zone has 15 districts and three
administrative towns which is nearly 610 Km away from Addis Ababa. Bore town is found in
the Guji Zone which is bounded by Bore Woredas rural kebeles such as Bore Bidika in the
West by Ano Keransa kebele in the North, by Abay Kuture kebele in the East and Ano Wate
kebele in the south.

3...1.2. Research design

The study will be conducted descriptive research designs to gather data from large number of
population.

3.2.2. Research approach.

Quantitative approach will be used because the study was on assessing factors affecting the
profitability of hotel industry a case of Bore town . The quantitative method measures
variables, investigate relationships between variables, tests methods, and examine concerns for
large groups of individuals executing the method suitable for the research problem. The
Qualitative approach will be used to strength the quantitative.

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 3.2.3 Target population

The target population of this study will be 60 workers of the five hotels, and 9 mangers of the
five hotels. 25 respondents will be chosen from the total population of the five hotels. The
selection method for the survey participant sample will be compatible with the research question
because the selection procedure will be directly targeted workers and customers

3.2.4 Sampling Techniques

It will be difficult to include the whole hotels of the town and the group of participants in all
these hotels due to resource and time constraints. Therefore, it will be logical to involve the
representative sample of the study population.

In selecting hotel from which sample subjects was selected as well as in selecting sample
workers and customers from 60 workers and 6 managers of the selected hotel by simple random
sampling method of probability technique will be employed. As a result, five (5) hotels such as:
Mulu hotel, Samu hotel, Degitu hotel, Zewditu and Dessibel hotel will be selected for the study
using simple random sampling method. Similarly 25 workers 25 (41.66%) 6 managers (66.66%
will be selected from selected hotels using simple random sampling method.

Table 3.3.2 Summary of Sample Frame, Sample size and Sample techniques

N Types of respondents Sample Sample % Sampling techniques

o Frame size

1 Workers 60 25 41.66 Random Sampling

2 Managers 9 6 66.66 Random Sampling

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3.3.3 .Data collection instrument and technique

Data collection instruments will be questionnaires and document analysis and interview for the
purpose of cross-check the quantitative data. The questionnaire will be prepared for workers, the
interview will be conducted with hotel managers as well as the documents of daily income will
be analyzed.

3.4.5. Data analysis and presentation

Data will be analyzed in accordance with the nature of data that is qualitative and quantitative.

3.4. Validity and Reliability of Instruments

To assure the quality and minimize the feebleness in a study, using different data collection
methods is more advantageous. Through triangulation technique, the validity of the study was
maintained. In the study, data collection instruments; questionnaire and interview were supported
by document analysis check-list to confirm the validity of the data. Triangulation is a qualitative
cross validation that assesses the sufficiency of the data according to the convergence of the
multiple data collection procedures (Wiersman, 1995)

To assure the reliability of the data, the data will be collected by the researcher using different
source of data at the right time and place to achieve the desired level of accuracy. In addition, all
interview questions, questions for discussants and data analysis check-list have been seen by the
advisor and colleagues.

3.4.1 .Ethical consideration

To guarantee confidentiality and voluntary partaking of respondents a covering letter was

prepared to clarifying the purpose of the research, the discretion of the replies and directions for
completion. The questionnaire was drawn up comprising questions on the variables and
demographic data both to the workers as well as managers and they was requested to fill the
questionnaire in disguise and return back them straight to the researchers.

15
Work plan and budget break down

4.1 Time

No Activities Time activities to be Responsible person

done for the activities to
be done

1 Title selection June 2021 The researchers

2 Proposal development July 15th to 20th 2021 The researchers

3 Data gathering August 2021 The researchers

4 Data presentation analysis August 20th to 30 2021 The researchers

5 Showing first draft August 2021 The researchers and

advisor

6 Summiting the research Sep 2021 The researchers

7 Presentation of the Sep 2021 The researchers and

research committed

Budget Break down

No Items description Cost Total

1 Transportation 1500birr 1500birr

2 Stationaries 2000birr 2000birr

3 Tea and Lunch 2000 birr 2000 birr

4 Total 5500 birr 5500 birr

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