CASE STUDY 9
HomeInn Limited
HomeInn Limited is a well established company that runs chains of hotels and resorts across
different locations in India.
“HomeInn Budget” hotels
The hotels operate as budget hotels and operate under the brand “HomeInn Budget”. It provides
accommodation for cost-conscious travellers visiting the city for short stay lasting a day or two.
Typically a room in “HomeInn Budget” hotels would provide comfortable beds, high speed
internet connection, air conditioning facility, coffee machine, fridge and free television service.
Food service based on a limited menu is provided on the premises. It has few conference rooms
that provide space for guests to hold business meetings. This saves them precious time
otherwise wasted in travelling on congested city roads. The hotel provides free shuttle service
to and from the airport at specific times during the entire day. Proximity to the airport, the free
shuttle service and convenience of conducting work at the conference rooms have been
marketed to attract guests to stay here. The guests also comprise of people who are in transit
between airports. Also when there are long-duration delays in flight operations due to which
passengers need to be provided overnight accommodation, few airline operators host their
guests here. Like all other guests, these airline operators are also interested in for its location
and low-cost room rental.
In all, HomeInn Limited has 15 hotel properties spread over 15 cities. All of them function under
the “HomeInn Budget” brand catering to cost-conscious travellers. In all these establishments,
since the location of the hotel is near the city airport, the real estate cost, both for ownership
and rental is very high. Hence, instead of having an in-house establishment for cleaning and
food service, the company has outsourced these services to specialized vendors. This will
reduce the additional space requirement needed to maintain the facilities to provide these
services. This will help to keep its costs of operations within control. Since the hotel property is
in the city, there is ample availability of vendors providing this service. Cleaning service includes
cleaning of kitchen crockery, bedding, laundry and housekeeping of premises. Similarly, the
entire set of activities related to preparation of food has been outsourced. Vendor service has
been satisfactory, barring few instances where guests have complained of unhygienic rooms or
non-palatable food service. However, due to high guest volume and quick turnover of guests
due to short stay periods, this has never been a hindrance to business.
This business model has been profitable since its establishment. HomeInn Limited has a
sizeable market share in this segment. Competition has increased in the recent past. Price wars
have put pressure on profit margins of the budget hotel segment. Room rates are increasingly
being determined by the prevailing market rates in the respective locations.
9.2 INTEGRATED BUSINESS SOLUTIONS
“HomeInn Comfort” Resorts
The management plans to continue to operate in the budget hotel to maintain its market
presence. At the same time, to sustain business in the long term, the management
of HomeInn Limited has forayed into developing properties for luxury resorts under a separate
new brand called “HomeInn Comfort”. Target guest segment are vacationing tourists interested
in a enjoying a laid-back time in scenic places. These guests would not mind paying premium
for availing good quality service. Maintaining cleanliness of premises and food service are
critical activities in the operation of luxury hotels. Unlike cities, the location of these resorts is in
more sparsely populated areas. While there are vendors providing cleaning and food services,
there are limited options to choose from.
Customer satisfaction is paramount to sustain and grow business in the luxury resort segment.
With the ability to post reviews online on booking portals, any negative review (whether justified
or not) can reach very easily to a large number of potential guests. This can negatively impact
future business.
HomeInn Limited is developing a “HomeInn Comfort” property in Goa. The construction involves
several key expenditures essential for acquiring land, preparing the site, procuring materials,
labor costs, safety measures, and other associated expenses. The company has invested ` 15
crores in land acquisition and ` 2 crores for site preparation, including dismantling existing
structures. The cost of direct materials amounts to ` 8 crores, while labour expenses total ` 3
crores, including `20 lakh paid during a labour strike. Structural safety testing has been
conducted at ` 0.5 crores, and legal and architectural consultation fees stand at ` 1.5 crores.
Additionally, ` 0.10 crores has been spent on relocating the resort manager from Mangalore to
Goa, and ` 0.50 crores has been allocated for administrative and overhead costs. These
expenses collectively contribute to the successful development of the HomeInn Comfort resort,
ensuring quality construction and operational efficiency.
The property is being acquired from an unrelated party at arm’s length transaction value. Five
out of the six directors were present at the Board Meeting to consider and pass the resolution
to acquire the property.
The operations at the Goa resort started as per the expected timeline. It is in its 3rd year of
operations. In a recent management meeting, key financial data was reviewed. The resort
reported a Net Operating Profit Before Interest and Tax (NOPBIT) of ` 5 crores, with a
depreciation expense of ` 3 crores. The change in working capital amounted to ` 4 crores, while
capital expenditure stood at ` 5 crores. The total invested capital in the resort is ` 20 crores,
with a Weighted Average Cost of Capital (WACC) of 8% and a tax rate of 30%.
HomeInn is a renowned hospitality chain with a nationwide presence, providing top-tier
accommodations in key metropolitan cities. With a commitment to providing a seamless and
comfortable stay experience, HomeInn operates a diverse portfolio of hotels that cater to both
business and leisure travellers. One of the key offerings of HomeInn is its combined stay
CASE STUDIES 9.3
package, which allows guests to book accommodations in multiple locations under a single
consolidated plan. This package is particularly beneficial for travellers with multi-city itineraries,
such as business professionals, tourists, and corporate delegations. By bundling stays across
its hotels in different states, HomeInn provides convenience, cost-effectiveness, and a hassle-
free booking experience. Mr. Vikash Kwatra, a businessman from Mumbai, undertakes a
business trip and chooses HomeInn for his accommodation. HomeInn charges a consolidated
sum of ` 60,000 from Mr. Vikash Kwatra for stay in its two hotels in Delhi and Jaipur, where the
stay in Delhi is for 4 nights and the stay in Jaipur is for 2 nights.
I. Multiple Choice Questions
1. For the “HomeInn Budget” properties, identify the listed activities to the five primary
activities of Michael Porter’s value chain model.
Sr. Listed Activity Sr. Primary activity as
No. No. per value chain model
A Storing vendor delivered freshly laundered I Operations
crockery, bedding and laundry for future use
as per guest requirements
B Ensuring cleanliness and safety of rooms, II Marketing and Sales
working order of facilities offered like TV and
internet service, coffee machines.
C The review of food items to remove the ones III Inbound Logistics
past expiry to ensure customer satisfaction
and safety
D Free shuttle service to attract guests to stay IV Service
at the hotel
E Front desk activities handling complaints, V Outbound Logistics
customer support
Options
(a) A – I, B – III, C – IV, D – II, E – V
(b) A – III, B – I, C – V, D – II, E – IV
(c) A – I, B – IV, C – V, D – II, E – IV
(d) A – III, B – I, C – II, D – IV, E – V
9.4 INTEGRATED BUSINESS SOLUTIONS
2. As regards “HomeInn Comfort” resorts, the parameters relating to high quality cleanliness
and food service can be classified under which attribute of the following under the Kano
Model?
(a) Performance attribute
(b) Delight attribute
(c) Threshold attribute
(d) Indifferent attribute
3. Which of the following statements is true as regards to the resolution taken at the Board
Meeting to acquire the property in Goa?
(a) When all five directors of HomeInn Limited attending the meeting consent to the
acquisition of property
(b) When any four directors of HomeInn Limited out of the five attending the meeting
consent to the acquisition of property
(c) When any three directors of HomeInn Limited out of the five attending the meeting
consent to the acquisition of property
(d) When all six directors, representing the total strength of directors at HomeInn
Limited should consent to the acquisition of property
4. Calculate the Economic Value Added (EVA) of the “HomeInn Comfort” Goa.
(a) ` 1.60 crores
(b) ` 4.60 crores
(c) ` 0.40 crores
(d) ` 1.90 crores
5. Which of the following statements would most likely to be true?
(a) HomeInn Limited should outsource all its cleaning and food service operations in
all its properties ignoring the risks of outsourcing, if the cost of outsourcing is less
than the cost of providing this service in-house. This is because the Economic
Value Added (EVA) of the company will be positively impacted despite the risk of
outsourcing. (The risk is moderate and within company’s risk appetited, as
assessed by management).
CASE STUDIES 9.5
(b) HomeInn Limited make an absolute comparison of Economic Value Added (EVA)
of one property with that of another irrespective of the difference in scale of their
respective operations.
(c) HomeInn Limited should reconsider the feasibility of operating properties
irrespective the Economic Value Added (EVA).
(d) Economic Value Added (EVA) as a measure takes into account the current
purchasing power and adjusts for inflationary trends. Hence, it is a more
appropriate measure to track as compared to book profit.
II. Descriptive Questions
6. (a) Explain the risks of outsourcing cleaning and food services for the “HomeInn
Comfort” luxury resort properties.
(b) What would your suggestion be, if the management of HomeInn Limited
determines that guests experience (primarily influenced by cleanliness of facilities
and food service) is a very important critical success factor (CSF)?
(c) How is this risk different from outsourcing cleaning and food services for the
“HomeInn Budget” hotel properties with that for “HomeInn Comfort” resorts?
(d) What benefit does HomeInn Limited derive by operating different properties under
two separate brands?
7. Identify the total costs to be capitalized under Ind AS 16, Property, Plant and Equipment
for the “HomeInn Comfort” resort being developed in Goa.
8. Determine the place of supply and value of supply in respect of accommodation provided
to Mr. Vikash under the GST provisions.
ANSWERS TO THE CASE STUDY 9
I. Answers to the Multiple Choice Questions
1. (b) A – III, B – I, C – V, D – II, E – IV
Reason:
A Storing vendor delivered freshly laundered crockery, bedding and laundry
for future use as per guest requirements – Inbound Logistics as it relates
9.6 INTEGRATED BUSINESS SOLUTIONS
to activities of receiving, handling of materials from the supplier and their
storage until further use later in operations.
B Ensuring cleanliness and safety of rooms, working order of facilities offered
like TV and internet service, coffee machines – Operations as these are
activities related to converting inputs into production of output or service.
C The review of food items to remove the ones past expiry to ensure
customer satisfaction and safety – Outbound Logistics as it relates to
storage and movement of the end product from the production line to the
customer.
D Free shuttle service to attract guests to stay at the hotel – Marketing and
sales as these are activities related to communicating, selling and
delivering the product or service to the customer.
E Front desk activities handling complaints, customer support – Service
includes after sale service, handling customer complaints, customer
support, training etc. It is one of the most important activities in their value
chain model. Good service ensures happy guests.
2. (c) Threshold attribute
Reason:
Threshold attribute as this is feature that is taken for granted by the guests at the
resort. However, if the required quality is not met it would cause dissatisfaction.
3. (a) When all five directors of HomeInn Limited attending the meeting consent to the
acquisition of property
Reason:
The resolution will be taken as passed when all five directors of HomeInn Limited
attending the meeting consent to the acquisition of property
4. (d) ` 1.90 crores. EVA = NOPAT less capital charge on invested capital
Reason:
Net Operating Profit After Tax (NOPAT) = Net Operating Profit before Interest and
Tax Less Taxes
= `5 crores less 30% of `5 crores = `3.50 crores.
Capital charge on invested capital = WACC * Invested capital = 8% * `20 crores
= `1.60 crores.
Therefore, EVA = `3.50 crores less `1.60 crores = `1.90 crores.
CASE STUDIES 9.7
5. (a) HomeInn Limited should outsource all its cleaning and food service operations in
all its properties ignoring the risks of outsourcing, if the cost of outsourcing is less
than the cost of providing this service in-house. This is because the Economic
Value Added (EVA) of the company will be positively impacted despite the risk of
outsourcing.
Reason:
HomeInn Limited should reconsider the feasibility of operating properties where
the Economic Value Added (EVA) is negative. Negative EVA implies that the
profits from the property does not cover the cost of invested capital.
II. Answers to the Descriptive Questions
6. (a) Risks of outsourcing cleaning and food service under the luxury resort
model:
In the luxury resort business under the brand “HomeInn Comfort”, the target
guests are travellers on leisure. The primary feature of this model would be "good
quality of service". Maintaining cleanliness of premises and food service are
critical activities in the operation of luxury hotels. Therefore, customer satisfaction
on these metrics is paramount to sustain and grow business. With the ability to
post reviews online on booking portals, any negative review (whether justified or
not) can reach very easily to a large number of potential guests. This can
negatively impact future business. Hence, “HomeInn Comfort” brand has to
deliver the quality of service that it provides in terms of cleanliness and food that
should meet and beat the guests' expectation.
Outsourcing these services to well established vendors is advantageous since the
focus can remain on improving guest experience. It may also be cost
advantageous in many cases. However, there a number of risks in this model.
(1) The required quality of service for “HomeInn Comfort” resort properties
should be delivered by these vendors. Detailed service level agreements
need to drawn up to ensure this. HomeInn Limited should be able to
monitor the performance of these vendors. In cases of non-delivery of the
required level of service, the agreement should provide for means of
redressal. This could vary from compensation for any loss in business to
immediate termination of service.
(2) HomeInn Limited should ensure that it can easily and economically switch
service providers if required. For this it has to identify alternate vendors
who can provide the same level of service as the current ones. At the same
time, since the resorts are in locations where the number of vendors
providing these services is limited, it increases the risk of outsourcing these
9.8 INTEGRATED BUSINESS SOLUTIONS
services. The other risk in outsourcing could be of instances
where well performing vendors could go bankrupt and shut shop. In such
cases, resort operations could be immediately impacted since such
services can no longer be availed from these vendors. Again, list of
alternate service providers is a necessary back-up that the hotel should
have.
(b) Where the management of HomeInn Limited determines that guests experience
(primarily influenced by cleanliness of facilities and food service) is a very
important critical success factor (CSF) it may choose not to outsource these
activities to outside vendors. Quality control issues and poor customer service
may wipe out any cost savings attributed to lower expenses from the outsourcing
model. HomeInn Limited would then have to consider developing in-house
departments that cater to cleanliness and food service. Control over factors such
as input material used, the performance of service, equipment used, training of
staff and other essential activities can ensure that the required service quality can
be achieved. Better service enhances guest experience through these critical
activities. Compared to outsourcing, this might be a costlier option. However,
since the guests are ready to pay a premium for service quality, HomeInn Limited
could choose to charge higher rates for its resort properties.
(c) The difference between the risk of outsourcing for “HomeInn Comfort” and
“HomeInn Budget” driven by the difference in the focus and target customer
segment of their respective business models. “HomeInn Budget” focuses on
providing value for money to the cost conscious short stay guests while “HomeInn
Comfort” focuses on customer experience through quality of service provided to
the guests staying on longer vacations.
As regards “HomeInn Budget” due to high real estate cost, both for ownership and
rental, the cleaning and food service has been outsourced. This enables HomeInn
Hotels to keep the costs of operation low, which is very critical for the business
model of “HomeInn Budget”. Hence, instances of dis-satisfaction among guests
as regards quality of cleaning and food service, within certain limits will not
negatively impact business. These activities are non-core and hence can be
considered for outsourcing. For “HomeInn Budget”, the critical success factor
(CSF) is low cost of operations in order to be able to offer guests rooms at
reasonable rates.
As regards “HomeInn Comfort” where CSF is guests experience, which is primarily
influenced by cleanliness of facilities and food service, these activities become
core activities, hence the risks of outsourcing are higher. Therefore, there may
need to be a consideration whether to outsource these activities at all. Pricing for
CASE STUDIES 9.9
rooms at these resorts can factor any additional costs to be incurred to ensure the
delivery of the required quality of service in these resorts.
(d) Branding of properties under either “HomeInn Budget” and “HomeInn Comfort”
makes helps potential customers determine their expectations from each of such
properties. Based on these expectations the customer appeal can be distinctly
determined for each of these properties. This will help them choose which property
could potentially satisfy their expectations better. Thus by operating different
properties under either “HomeInn Budget” or “HomeInn Comfort” brand, HomeInn
Limited has created a brand strategy that can effectively communicate their
product and service offering to potential customers.
7. Computation of total cost of construction of HomeInn Comfort” resort being
developed in Goa as per Indian Accounting Standard 16, “Property, Plant and
Equipment”
Particulars Amount (`)
Purchase of land 15 crores
Site preparation costs including cost of dismantling existing structures 2 crores
on site
Direct Material costs 8 crores
Direct Labour costs (including ` 20 lakh that was incurred during a 2.8 crores
labour strike)
Testing the safety of construction at the resort site 0.5 crores
Consultation fee (Legal and architect) related to construction of resort 1.5 crores
Total cost to be capitalized HomeInn Comfort” resort being developed 29.80 crores
in Goa as per Indian Accounting Standard 16.
As per Para 20 (c) of Ind AS 16, “Property Plant and Equipment” recognition of costs in
the carrying amount of an item of property, plant and equipment ceases when the item
is in the location and condition necessary for it to be capable of operating in the manner
intended by management. Costs incurred in using or redeploying an item are not included
in the carrying amount of that item. Therefore, Costs of relocating or reorganising part or
all of an entity’s operations are not included in the carrying amount of an item of property,
plant and equipment.
Relocation expense of hotel manager from Mangalore to Goa and administrative and
general overheads allocated to the project by corporate office are not capitalized under
Indian Accounting Standard 16. Direct labour costs incurred during a labour strike is not
attributable to construction of resort and hence not capitalized. All other costs are directly
attributable to the construction of the resort.
9.10 INTEGRATED BUSINESS SOLUTIONS
8. As per Section 12(3) of the IGST Act, 2017, the place of supply of services by way of
lodging accommodation service by a hotel, inn, guest house, home stay, club or
campsite, by whatever name called, and including a house boat or any other vessel shall
be the location at which the immovable property or boat or vessel, as the case may be,
is located or intended to be located provided that if the location of the immovable property
or boat or vessel is located or intended to be located outside India, the place of supply
shall be the location of the recipient. In case Immovable property related service
attributable to different States/ Union territories – where the immovable property/ boat/
vessel is located, value shall be proportionate in the ration of number of nights stayed in
each such property.
The place of supply in this case is both in the Union territory of Delhi and in the State of
Rajasthan and the service shall be deemed to have been provided in the Union territory
of Delhi and in the State of Rajasthan in the ratio 4:2 respectively. The value of services
provided will thus be apportioned as ` 40,000/- in the Union territory of Delhi and
` 20,000/- in the State of Rajasthan.